On November 13, 2009 the Toronto Stock Exchange (the "TSX") published for comment proposed amendments to Part VI of the TSX Company Manual (tmx.complinet.com/en/display/display_main.html?rbid=2072&element_id=737) (the "Manual") relating to certain requirements and exemptions for acquisition of investment funds (the "Amendments"). The comment period ends on December 14, 2009. The Amendments are subject to approval by the Ontario Securities Commission.

Background

Earlier this year the TSX introduced amendments to Part VI of the Manual relating to security holder approval when securities are issued as payment for the acquisition of public companies (the "Public Company Amendments"). The Public Company Amendments came into force on November 24, 2009 and are discussed in a recent edition of MarketCaps@ Gowlings (www.gowlings.com/resources/enewsletters/MarketCaps/Htmfiles/V5N20_20090928.en.html).

In response to the Public Company Amendments, concerns were raised about the application of security holder approval requirements to investment funds. Prior to the Public Company Amendments, a listed issuer acquiring a public company (i.e. a reporting issuer or issuer of equivalent status having 50 or more beneficial security holders, excluding insiders and employees) was generally exempt from security holder approval requirements. As a result, investment funds engaged in permitted mergers were also generally exempt for such requirements.

Amendments

The Amendments would (a) require security holder approval for an investment fund that is an acquisition target unless certain conditions are met, and (b) provide an exemption from security holder approval for an acquirer investment fund, subject to certain conditions being met.

Approval by investment fund being acquired

It is proposed that a listed issuer that is an investment fund must obtain security holder approval for the acquisition, unless all of the following conditions are satisfied:

(i) the listed issuer has a permitted merger clause in its constating documents which permits the acquisition of the listed issuer without security holder approval;

(ii) the consideration offered to security holders of the listed issuer for the acquisition has a value that is not less than NAV;

(iii) the independent review committee of the listed issuer being acquired has: (A) determined that the investment objectives, valuation procedures and fee structure of the listed issuer and the acquiring issuer are substantially the same; and (B) approved the acquisition; and

(iv) the listed issuer is providing its security holders with a redemption right for cash proceeds which are not less than its NAV, together with adequate notice and description of such redemption right and the acquisition.

It has been TSX practice to require investment funds to offer security holders a redemption right for cash at NAV prior to being acquired when security holder approval is not sought. The Amendments would codify this practice.

Exemption for investment funds making acquisitions

It is proposed that listed investment funds intending to make an acquisition by the issuance of securities exceeding 25% of the fund's outstanding securities (on a non-diluted basis) be exempt from the security holder approval requirement if all of the following conditions are satisfied:

(i) the issuer being acquired is an investment fund that calculates and publishes its NAV at least once a month;

(ii) the consideration being offered for the acquisition does not exceed the NAV of the investment fund that is the subject of the acquisition; and

(iii) the independent review committee of the acquiring listed issuer has: (A) determined that the investment objectives of the listed issuer and the issuer being acquired are substantially the same; and (B) approved the acquisition; and

(iv) the number of securities issued or issuable in payment of the purchase price for the acquisition does not exceed 100% of the number of securities of the listed issuer which are outstanding, on a non-diluted basis.

Rationale and Questions

The TSX notice sets out the rationale for the Amendments and a number of specific issues on which the TSX wishes to receive comments.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.