The Toronto Stock Exchange ("TSX") has announced proposed changes to the TSX Company Manual (the "Manual") to allow for the adoption of certain security-based compensation arrangements in connection with acquisitions without obtaining security holder approval, and to clarify the circumstances in which listed issuers will need to meet original listing requirements in the context of reverse takeovers, also known as "backdoor listings". The proposed amendments have been published for a 45-day comment period which expires on January 13, 2014.
Compensation Arrangements Adopted in Connection with Acquisitions
The proposed amendments to the Manual will allow listed issuers to adopt a security-based compensation arrangement for employees of a target issuer in the context of an acquisition, without obtaining security holder approval, provided that the number of securities of the listed issuer issuable under the compensation arrangement and the acquisition does not exceed 2% and 25% of the issued and outstanding securities, respectively.
Historically, the TSX has not required security holder approval for security-based compensation arrangements that are assumed by an acquirer in the context of an acquisition, on the condition that no new awards are granted under the assumed arrangements.Under the proposed amendments, the TSX will extend this practice to security-based compensation arrangements that are newly created in connection with an acquisition and are intended for employees of the target issuer only.
The proposal recognizes the importance of security-based compensation plans as a retention tool for employees of target companies while balancing the potential dilutive effect of these plans. The proposed amendments formalize discretionary relief granted by the TSX in the past.
Meeting Original Listing Requirements After RTOs
The Manual currently requires that a formerly unlisted entity that obtains a TSX listing as a result of a reverse takeover or "backdoor listing" must meet the TSX original listing requirements.A transaction generally constitutes a "backdoor listing" if it meets two requirements: (a) existing security holders of the listed issuer end up holding less than 50% of the securities or voting power in the entity resulting from the transaction; and (b) the transaction "materially affects control" of the listed issuer.
The TSX is proposing to expand the list of factors considered in the determination of a backdoor listing to include changes in the business or management (including board members) of the listed issuer, as well as changes in voting power, security ownership, name and capital structure and other factors that may be relevant in the particular circumstances. There will be no bright line tests and the TSX will have the discretion not only to exempt a backdoor listing transaction from original listing requirements, but also to consider a transaction as a backdoor listing even if it does not otherwise qualify.
The TSX has specifically asked for comment on whether any special consideration should be given to circumstances where the listed issuer party to the backdoor listing transaction will develop a significant connection to an emerging market jurisdiction as a result of such transaction.Many emerging market issuers have accessed Canadian markets through backdoor listings.As we reported in our 2013 Canadian Capital Markets Report – Looking Back, Looking Forward, Canadian securities regulators have been grappling with how to regulate emerging market issuers.In 2012, the TSX and the TSX Venture Exchange issued a consultation paper seeking input on whether new guidelines should be implemented for the listing of emerging market issuers.The proposed amendments appear, in part, to address concerns raised by and in response to the consultation paper.
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