The Toronto Stock Exchange (TSX) recently announced changes to its rules that require TSX-listed companies to obtain shareholder approval of certain public company acquisitions. Effective November 24, 2009, shareholder approval is required when the number of securities issued as payment for an acquisition of a public company exceeds 25 per cent of the total number of outstanding securities of the buyer on a non-diluted basis. Previously, shareholder approval was generally only required in the case of an acquisition of a private company resulting in dilution of more than 25 per cent.
The TSX's changes follow the decision of the Ontario Securities Commission (OSC) earlier this year in respect of a proposed acquisition by HudBay Minerals Inc. (HudBay) of Lundin Mining Corporation that would have resulted in HudBay's shareholders being diluted by just over 100 per cent without their approval. The OSC found that the TSX's failure to require approval of the transaction by HudBay's shareholders significantly undermined the quality of the Canadian marketplace. In response, the TSX proposed a bright-line test requiring shareholder approval where the securities to be issued as payment for an acquisition of a public company would result in dilution of more than 50 per cent.
For a discussion of the facts and ruling in the Hudbay decision, please see our Legal Update, published May 6, 2009, and the article in our May 2009 issue.
In light of the uncertainty created by the OSC's decision in HudBay, the TSX's changes provide guidance to directors of Canadian public companies proposing to acquire a public company using the buyer's securities as consideration. The new requirement is intended as a bright-line test as to when a TSX-listed company may issue shares in an acquisition without seeking the approval of its shareholders, and is generally consistent with the existing rules of the New York and London stock exchanges. The TSX will retain the discretion to require shareholder approval in transactions that will result in dilution of less than 25 per cent where the transaction could materially affect control or involves insiders.
This new requirement for shareholder approval will factor into the assessment of the completion risk associated with acquisitions of publicly traded entities in Canada as buyers and targets consider the likelihood of obtaining shareholder approval of the transaction where the 25 per cent dilution threshold is exceeded. The requirement is not likely to impact materially the time required to complete an acquisition of a public company by way of a plan of arrangement or other transaction requiring the approval of the target's shareholders so long as the shareholder meetings of the buyer and the target to approve the transaction are held within the same time period. However, acquisitions by way of a take-over bid will be impacted, as Canadian take-over bid rules require that an offer be open for acceptance for a period of 35 days, whereas a shareholders' meeting typically involves a period of 40 to 50 days. It remains to be seen what impact this change to the TSX's rules will have on Canadian public M&A activity.
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