The Toronto Stock Exchange (TSX) recently published for comment certain proposed amendments to the TSX Company Manual (the Manual), which regulates issuers listed on the TSX. The comment period closed yesterday, on January 13, 2014.

The proposed amendments target two aspects of mergers and acquisitions involving TSX issuers. Firstly, the changes seek to modify the Manual’s rules dealing with the creation of security-based compensation schemes in the context of acquisitions by TSX listed companies. Secondly, the amendments seek to clarify and codify the rules that apply to reverse takeovers (“backdoor listings”) of issuers listed on the exchange.

Security based compensation schemes

The amendments provide an exemption from the requirement for a listed issuer to seek the approval of its shareholders to adopt a security-based compensation scheme for the employees of a target in the context of an acquisition of that target company.

Currently, no exemption from the general securityholder approval requirement is available in respect of such security-based compensation schemes. The TSX has in the past permitted such schemes to be adopted on a discretionary exception basis and subject to certain conditions. The new exemption provides that general securityholder approval will not be required where a security-based compensation arrangement is created by an issuer for the benefit of an acquisition target’s employees, provided (i) that the securities issuable under such an arrangement do not exceed 2% of the outstanding securities of the acquiror prior to the acquisition, and (ii) that securities issuable under the acquisition do not exceed 25% of the issued and outstanding securities of the acquiror. In applying the tests, securities issuable under the compensation arrangement are included in the total securities issuable in connection with the acquisition. Insiders and employees of the listed acquiror are prohibited from participating in a plan created pursuant to the exemption.

Reverse Takeovers

The amendments will clarify when a transaction that effectively results in the listed issuer being acquired by an unlisted entity will be considered by the TSX to be a backdoor listing.

Currently, in order for an acquisition to constitute a backdoor listing under the Manual, it must involve significant dilution (over 100%) and a change in the effective control of the TSX listed acquiror. If the transaction constitutes a backdoor listing, the post-acquisition entity must meet the original listing requirements of the TSX.

The proposed amendments to the Manual set out the criteria the TSX will apply in determining whether a transaction will be considered a backdoor listing. These factors include, but are not limited to:

  • the business of the listed issuer and the unlisted entity;
  • changes in management (including the board of directors);
  • voting power;
  • ownership;
  • name changes; and
  • the financial structure of the listed issuer.

The amendments clarify that the TSX will retain the discretion to determine that a transaction is or is not a back door listing and to provide an exemption from the requirement that the resulting entity must meet the original listing requirements.

The author wishes to thank Nikolai Kovtouchenko, articling student, for his valuable assistance in preparing this legal update.