In May 2022, the Toronto Stock Exchange ("TSX") issued Staff Notice 2022-0001 (the "Staff Notice")1 on normal course issuer bids ("NCIBs"), "providing guidance on Sections 628 and 629 of the TSX Company Manual ... for frequently asked questions in respect of normal course issuer bids". Of the 35 FAQs in the Staff Notice, one question in particular has important implications for listed issuers carrying out NCIBs on TSX.
Annual Limit for NCIB Purchases
By way of background, Sections 628 and 6292 of the TSX Company Manual3 set out the rules for an NCIB on TSX. In short, a listed issuer can buy back, during a twelve-month period, a maximum number of shares equal to the greater of (i) 5% of the issuer's issued and outstanding shares, and (ii) 10% of its "public float", that is, the issued and outstanding shares less shares held by the issuer's directors and senior officers and the holders of more than 10% of its outstanding shares. For example, if a listed company has 100 million shares outstanding, of which 80 million shares comprise the "public float", the company will be able to purchase up to 8 million shares under its NCIB, representing 10% of the "public float", if that is the "present intention" of the company. That figure will be the "annual limit" for the NCIB, to use TSX terminology.
Daily Limit for NCIB Purchases
The TSX Company Manual also sets out a daily limit for purchases under an NCIB, that is, 25% of the listed issuer's "average daily trading volume" ("ADTV"), in effect, the average daily number of shares of the issuer traded on TSX during the six months prior to acceptance by TSX of the NCIB. For example, if a listed issuer's ADTV is 100,000 shares, the TSX daily limit for purchases under an NCIB will be 25,000 shares.
Block Purchase Exception
There is an exception to the TSX daily limit under which a listed issuer may make one "block purchase" per calendar week which exceeds the daily limit. The TSX Company Manual defines "block" as a quantity of securities that either (i) has a purchase price of $200,000 or more, or (ii) is at least 5,000 securities and has a purchase price of at least $50,000, or (iii) is at least 20 board lots of the security and totals 150% or more of the ADTV for that security. For example, if the TSX daily limit is 25,000 shares and an issuer has repurchased 20,000 shares during a trading day, the issuer can make a "block purchase" from one seller of 100,000 additional shares for $1 million and thereby surpass the TSX daily limit of 25,000 shares. However, once the block purchase exception has been used, the listed issuer cannot make any further purchases under its NCIB for the remainder of that trading day and cannot use the "block purchase" exception again during that calendar week.
Detailed NCIB Rules
Section 629.(l) of the TSX Company Manual contains other detailed rules relating to NCIBs. Under these rules, a listed issuer cannot make any purchases pursuant to its NCIB at the opening or during the 30 minutes before the scheduled close of a trading session. Also, purchases made pursuant to an NCIB cannot be made at a price which is higher than the last independent trade of a board lot of the class of securities which is the subject of the NCIB. In other words, if the last independent trade was at $25, a purchase under the NCIB cannot be at a price greater than $25. As a result, an NCIB can be used to keep a stock price from falling, but cannot be used to push up the stock price.
Purchases on an ATS
Question #15 of the Staff Notice confirms that an issuer effecting an NCIB on TSX can also make purchases on an alternative trading system ("ATS") in Canada, of which there are several, subject to such purchases being disclosed in a press release issued at the commencement of the NCIB, as in "The shares may be purchased through the facilities of TSX and on alternative trading systems in Canada".
Do TSX NCIB Requirements Apply to Purchases Made on Other Marketplaces?
Question #16 of the Staff Notice then asks the following: "Do TSX NCIB requirements apply to purchases made on other marketplaces?", to which the answer is no, except for purposes of the TSX annual limit. Specifically, the answer to question #16 sets out that "Purchases made on other marketplaces are not subject to the TSX trading restrictions such as upticks, trading prohibition at the opening or the close and the Daily Limit" (i.e., 25% of ADTV). To use the example above, if the TSX daily limit is 25,000 shares, once an issuer buys that number of shares on TSX on any given day, it must stop buying unless it relies on the block purchase exception, which can be used only once per calendar week. However, the Staff Notice confirms that purchases beyond the TSX daily limit can be made on an ATS or another stock exchange and will not infringe TSX rules. Further, purchases made on an ATS or another stock exchange can be made at the opening of trading or during the last 30 minutes of trading, and the TSX rule against "upticks" (buying at a price greater than the last independent trade price) does not apply to purchases on an ATS or another stock exchange. However, purchases made on an ATS or another stock exchange must be included in determining whether the listed issuer has reached the TSX annual limit for its NCIB (8 million shares in the example above).
The clarification provided by the Staff Notice means, in a practical sense, that issuers can exceed the TSX daily limit by repurchasing shares on an ATS or another stock exchange, effect multiple block purchases during a calendar week on an ATS or another stock exchange, and, after making a block purchase on TSX, continue buying shares for the remainder of that trading day on an ATS or another stock exchange, subject to the condition that all shares purchased on an ATS or another stock exchange be included for purposes of the TSX annual limit. The likely rationale for the position in the Staff Notice is that TSX does not have jurisdiction over trades made on an ATS or another stock exchange.
National Instrument 62-104 Take-over Bids and Issuer Bids
Question #16 includes the following important caveat: "TSX reminds issuers and buying brokers making purchases on other marketplaces to satisfy themselves that the issuer bid is compliant with applicable securities laws and the requirements of the other marketplaces." The "applicable securities laws" in Canada is National Instrument 62-104 Take-over Bids and Issuer Bids ("NI 62-104")4.
Exempt Issuer Bids – NCIB on TSX
Under NI 62-104, an issuer bid (e.g., an offer by a listed issuer to repurchase its shares) must as a general rule be made to all shareholders for "identical consideration" or an "identical choice of consideration" and follow the detailed procedures set out in Part 2, Division 2 thereof, including preparation and delivery to shareholders of an issuer bid circular (Form 62-104F2). Under section 4.8(2) of NI 62-104, an issuer bid is exempt from Part 2 if it is made through the facilities of a "designated exchange" (which includes TSX, TSX Venture Exchange and any other exchange recognized by the Canadian securities regulatory authorities for the purpose of NI 62-104) and is made in accordance with the bylaws, rules, regulations and policies of that "designated exchange". In other words, an issuer carrying out an NCIB through the facilities of TSX and in accordance with TSX's detailed rules for NCIBs is exempt from the requirement that its offer be made to all shareholders by way of an issuer bid circular and that all shareholders receive identical consideration or identical choice of consideration for their shares.
Exempt Issuer Bids – Purchases on an ATS
What then of purchases made on an ATS in Canada? Section 4.8(3) of NI 62-104 sets out that such purchases will be exempt from Part 2 if the four following conditions are met: (i) if the purchase is not made on a "designated exchange", it is made in the normal course on a "published market", which means a market in Canada or outside of Canada if the prices at which securities are traded on such market are "regularly disseminated electronically"; (ii) the bid is for not more than 5% of the outstanding securities of a class of securities of the issuer; (iii) the aggregate number of securities acquired in reliance on the exemption within any twelve-month period does not exceed 5% of the securities of that class outstanding at the beginning of the twelve-month period; and (iv) the value of the consideration paid for any of the securities is not in excess of the "market price" at the date of acquisition as determined in accordance with section 1.11 of NI 62-104, plus reasonable brokerage fees or commissions actually paid. Under section 1.11(3), "market price" is defined in effect as the price of the last standard trading unit of securities of that class purchased independently.
In light of the conditions described above, purchases on an ATS over a twelve-month period cannot exceed 5% of the number of shares outstanding at the beginning of the twelve-month period, and the price paid cannot be greater than the price for the last independent trade, which is a pricing rule similar to that of the TSX for NCIBs.
Interplay of TSX/ATS Purchases
The combination of purchases under the NCIB on TSX and on an ATS or another stock exchange can create a bookkeeping challenge for the listed issuer and the securities dealer effecting purchases under the NCIB. All purchases on TSX are subject to the daily limit (with the exception of a block purchase) and the annual limit. All purchases on an ATS or other stock exchange must be included for purposes of the TSX annual limit. In addition, purchases on an ATS or other stock exchange over any twelve-month period cannot exceed 5% of the number of shares outstanding at the start of the twelve-month period. If an issuer renews its NCIB, this 5% calculation must be made on a "rolling" twelve-month basis, another bookkeeping challenge.
To use the example above (100 million shares outstanding; NCIB approved by TSX for a maximum of 8 million shares), the issuer can repurchase up to 5 million of the 8 million shares on an ATS or other stock exchange over the twelve-month period of the NCIB, representing 5% of the 100 million shares outstanding at the beginning of the period. As noted above, such purchases will not be subject to TSX's detailed rules on NCIBs (other than the annual limit), but must comply with NI 62-104. The balance of the 8 million shares can be purchased on TSX. If an issuer does not respect the 5% maximum rule of NI 62-104 regarding purchases on an ATS, the issuer will have effected an illegal or irregular issuer bid, with the possibility of serious sanctions from the provincial securities commissions. As well, if purchases are made on a stock exchange in the United States (e.g., in the case of an interlisted issuer), they will have to be made in compliance with applicable U.S. securities laws, notably the United States Securities Exchange Act of 1934, and the policies of the U.S. stock exchange.
Importance of the Staff Notice
The Staff Notice is important in that it clarifies that certain TSX restrictions applicable to NCIBs can be circumvented via purchases on an ATS or another stock exchange, including the daily limit tied to 25% of ADTV, the once-a-calendar week limit on block purchases, and the prohibition against further purchases for the remainder of a trading day after a block purchase. However, issuers must ensure that all purchases on an ATS or other stock exchange respect the "rolling" 5% twelve-month limit set out in NI 62-104 in order for such purchases to be exempt from the stringent issuer bid rules of NI 62-104.
Footnotes
1. TSX Staff Notice 2022-00001:
https://decisia.lexum.com/tsx/sn/en/item/520899/index.do
2. Sections 628 and 629 of the TSX Company Manual:
3. TSX Company Manual:
https://decisia.lexum.com/tsx/m/en/nav_date.do
4. National Instrument 62-104 Take-over Bids and Issuer Bids:
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