The TSX Venture Exchange's (TSXV) incentive stock option policy was amended in late 2021 to cover a variety of security based compensation commonly used as compensation tools, including deferred share units, performance share units, restricted share units and stock appreciation rights.
- Issuers with existing security based compensation plans that do not comply with the new policy will need to amend such plans the next time they are placed before shareholders for approval.
- New categories of security based compensation plans are now permitted by the TSXV, including a hybrid category where a portion of the plan maximum is fixed and a portion is rolling, and a fixed stock option plan that does not require shareholder approval.
- Security based compensation can no longer be granted under a plan that has not received the requisite annual shareholder approval.
- Cashless and net exercise of security based awards are now permitted by the TSXV.
On November 24, 2021, the TSXV overhauled its policy concerning security based compensation plans. In addition to stock options, the new Policy 4.4 – Security Based Compensation (Policy 4.4), formerly entitled "Incentive Stock Options" (the Former Policy), now explicitly refers to additional forms of security based compensation, including deferred share units, performance share units, restricted share units and stock appreciation rights.
Plans and Calculation
The Former Policy permitted only two types of stock option plans:
- a "rolling" plan pursuant to which the maximum number of stock options issuable under the plan is limited to 10% of the listed (i.e. issued and outstanding, undiluted) shares of the issuer at the time of any stock option grant (a Rolling 10% Plan); or
- a "fixed" plan pursuant to which the maximum number of stock options issuable under the plan was a specified number of shares, but limited to a maximum 20% of the listed shares of the issuer as of the date of the implementation of such plan (a Fixed 20% Plan and together with the Rolling 10% Plan, the Previous Plans).
Under the Former Policy, the TSXV discouraged issuers from employing more than one plan.
Policy 4.4 now affords issuers the opportunity to utilize "security based compensation plans" fitting into one of four categories. In addition to the Previous Plans, issuers are now also permitted to employ:
- a hybrid plan with both a rolling and fixed component pursuant to which stock options equaling up to 10% of the listed shares of the issuer at the time of any stock option grant may be granted and grants of all other security based compensation, excluding stock options, is fixed at a specified number of shares but limited to a maximum of 10% of the listed shares of the issuer as of the date of the implementation of such plan (a Hybrid Plan); and/or
- a fixed plan pursuant to which only stock options may be granted and under which the maximum number of stock options issuable under the plan is limited to 10% of the listed shares of the issuer as of the date of the implementation of such plan (a Fixed 10% Stock Option Plan).
Rather than discouraging an issuer's use of multiple security based compensation plans, the TSXV now permits issuers to implement plans as they see fit. If the issuer complies with all the provisions of Policy 4.4, an issuer may now implement a stock option plan, a DSU plan, a PSU plan, an RSU plan, an SAR plan, a stock purchase plan and/or any other security based compensation plan that is acceptable to the Exchange and that, in the aggregate, fall within one of the four foregoing categories. However, capital pool companies and NEX issuers can still only grant stock options, and investor relations services providers can also only receive stock options with specified vesting requirements.
Provided that the requirements of Policy 4.4 are met (including the absence of a cashless exercise provision), the Fixed 10% Stock Option Plan is the only category for which shareholder approval may not be required for implementation (however, this may require disinterested shareholder approval in certain cases). Issuers are not permitted to increase the number of listed shares issuable under a Fixed 10% Stock Option Plan more than once in a 24-month period.
Any amendments to a security based compensation plan, including when the number of shares issuable under such plan is modified, require shareholder approval. Policy 4.4 also requires shareholder approval on an annual basis for a Rolling 10% Plan (much like the Former Policy) and for the rolling portion of a Hybrid Plan.
Policy 4.4 now also includes calculation guidance regarding the upper limits for each category of plan. Policy 4.4 states that where a plan provides for a payout multiplier, where the number of shares that may be issued on exercise of the security based compensation is increased based on performance measures, and/or where a plan provides for participants to receive additional security based compensation in lieu of dividends, then the maximum aggregate number of listed shares that might possibly be issued must be included in calculating the applicable plan limits.
Cashless Exercise or Net Exercise
While under the Former Policy, the exercise price of stock options was required to be paid to the issuer in cash, Policy 4.4 now permits stock options to be exercised by way of either a "net exercise" or "cash exercise".
The TSXV will permit a cashless exercise where an issuer has an arrangement with a brokerage firm pursuant to which the brokerage firm promises to advance funds to an optionholder enabling it to exercise its stock options. The brokerage firm then sells a sufficient number of shares that were subject to the option to repay the loan with the optionholder receiving either the balance of shares after the sale or cash proceeds from the balance of the shares.
For example, an optionholder holding stock options to purchase 100 listed shares exercisable at a price of $10 could be loaned $1000 to exercise such stock options. Assuming a market price of $15, and excluding the effect of commissions and taxes, the broker would receive 67 listed shares from the exercise and will sell the 67 shares in order to repay the loan made to the participant who then receives either 33 listed shares or $495 (33x$15).
A net exercise of stock options, where no cash payment is made to the issuer, is now permitted where on exercise of the stock options the optionholder receives only the number of underlying listed shares equal to the quotient of: (i) the product of the number of stock options being exercised multiplied by the difference between 5 trading day volume weighted average price (the VWAP) of the underlying listed shares and the exercise price of the stock options; divided by (ii) the VWAP of the underlying shares.
For example, an optionholder fully exercising stock options to purchase 100 shares exercisable at a price of $10 with a current VWAP of $15 would not pay the issuer any cash and instead of receiving 100 shares would receive only 33 shares.
Limits and Vesting
As in the Former Policy, the updated Policy 4.4 confirms that, absent disinterested shareholder approval in the case of individual limits, the maximum number of listed shares issuable pursuant to all grants and issuances of security based compensation to an individual or consultant in a 12-month period remains limited to 5% and 2% of the listed shares of an issuer, respectively, calculated as at the date such security based compensation is issued or granted. Persons providing investor relations activities are subject to the same 2% cap as consultants.
Where security based compensation is permitted by the TSXV to be granted or issued outside of a security based compensation plan, as discussed below, the grant or issuance of such security based compensation is not included in calculating the 5% and 2% upper limits for individuals and consultants, respectively.
Policy 4.4 now specifically sets out that, subject to certain exceptions and notwithstanding acceleration related to death or the grantee ceasing to be an "eligible participant", no security based compensation issued pursuant to a security based compensation plan may vest before the date that is one year following the date it is granted or issued.
Security Based Compensation Outside of a Plan
Under Policy 4.4, the TSXV may permit, on application by an issuer, grants or issuances of security based compensation outside of a security based compensation plan in certain enumerated circumstances (a Non-Plan Grant), including applications:
- to compensate a person providing ongoing services (excluding services for investor relations activities, promotional and market-making activities) to the issuer in listed shares and/or warrants, rather than cash;
- to issue listed shares in settlement of outstanding obligations (excluding reimbursement of out-of-pocket expenses, cash advances and obligations related to investor relations activities, promotional and market-making activities) owing to a person who is or has been a non-arm's length party to the issuer at any time within the immediately preceding 12 months;
- to grant or issue listed shares as an inducement for a person to enter into a contract of full-time employment with the issuer or in the context of a severance package or termination of employment; and
- from an issuer proposing to lend funds to a person for the purposes of acquiring securities.
Unless otherwise stated in Policy 4.4, each such Non-Plan Grant must be subject to disinterested shareholder approval. Shareholder approval required in connection with a Non-Plan Grant may be obtained either at a shareholders' meeting or by obtaining the written consent of shareholders holding more than 50% of the listed shares of the issuer.
Reporting and Disclosure
The former Form 4G has been expanded to address the additional types of security based compensation that issuers may issue, and to include "snapshot" summaries of outstanding security based compensation plans and outstanding security-based compensation. It now also includes the former Form 4F (Certification and Undertaking Required from a Company Granted an Incentive Stock Option) as its Schedule "A". Further, the new Form 4G (Summary Form - Security Based Compensation) is now simply a reporting form and it will no longer be used to apply to the TSXV for acceptance of a proposed amendment to a grant of security based compensation (rather, a letter application will be required in relation to the latter).
The Form 4F certification and undertaking required from an issuer granting an incentive stock option has been repealed, as the revised Form 4G includes the substantive contents of Form 4F.
Policy 4.4 requires that every security based compensation plan and every agreement to grant or issue security based compensation to a director or officer of an issuer or to any investor relations service provider (or any amendments thereto) be disclosed to the public by way of a news release that describes, as applicable, the number of listed shares issuable under the plan, the terms of the security based compensation issued or granted and the shareholder and/or TSXV approvals that may be required in connection therewith.
All security based compensation plans filed with the TSXV prior to November 24, 2021 (each, an Existing Plan) and all security based compensation conditionally approved, granted, issued or amended prior to November 24, 2021 remain in force in accordance with their existing terms.
Any Existing Plan that is to be put before an issuer's shareholders for approval (including the annual approval of a Rolling 10% Plan or the approval of an amendment) must comply with the new Policy 4.4.
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.