• Proposed Amendments to the TSX Company Manual - Acquisitions and Backdoor Listings
  • December 6, 2013 | Authors: Gregory Hogan; Nicole Washington
  • Law Firm: Cassels Brock & Blackwell LLP - Toronto Office
  • Introduction

    Toronto Stock Exchange (“TSX”) has proposed amendments to Part VI - Changes in Capital Structure of Listed Issuers of the TSX Company Manual (the “Manual”). The proposed amendments relate to:

    1. the adoption of security based compensation arrangements in the context of acquisitions under Section 611 of the Manual; and
    2. when TSX will consider a transaction to be a backdoor listing under Section 626 of the Manual.

    TSX has provided a 45 day comment period. All comments should be submitted in writing by Monday, January 13, 2014.

    Amendments to Section 611 - New Security-Based Compensation Plans in Acquisitions

    The amendments to Section 611 of the Manual (the “611 Amendments”) are designed to formalize an exemption that the TSX currently provides on a discretionary basis to allow listed issuers, in the context of an acquisition, the flexibility to adopt new incentive security based compensation arrangements (“Arrangements”) for employees of a target issuer.

    Under the current regime, the Arrangements of a target issuer existing at the time of the acquisition may generally continue following completion of an acquisition without security holder approval. The 611 Amendments would permit TSX listed acquirers to implement Arrangements for employees of a target issuer without security holder approval, provided that:

    • the number of securities issuable under such Arrangements do not exceed 2% of the issued and outstanding securities of the listed issuer and such employees are not insiders or employees of the listed issuer prior to the acquisition; and
    • the number of securities issuable pursuant to the acquisition, including any related Arrangement, does not exceed 25% of the issued and outstanding securities of the listed issuer.

    Further, securities made issuable to insiders under such Arrangements would be included in determining whether security holder approval, on a disinterested basis, is required for the acquisition if the number of securities issued or issuable to insiders as a group, together with any securities issued or made issuable to insiders as a group for acquisitions during the preceding six months, in payment of the purchase price for an acquisition exceeds 10% of the number of securities of the listed issuer.

    The exemption provided by the 611 Amendments would only be available for Arrangements adopted for persons who are employees or insiders of a company being acquired by a listed issuer.

    Amendments to Section 626 - Clarifying Backdoor Listings

    The amendments to Section 626 of the Manual (the “626 Amendments”) are designed to better define backdoor listings (also referred to as reverse takeovers). The intent is to close a perceived gap that may allow unlisted entities to use TSX-listed issuers to “go public” without having to meet original listing requirements, thereby facilitating investor protection by preserving the integrity of the stock list and the stock market.  In particular, the 626 Amendments:

    1. clarify the definition of “backdoor listing” as occurring when a transaction, or series of transactions, results in the acquisition of a listed issuer by an entity not currently listed on TSX, including a merger, an amalgamation or an issuance of securities for assets. It will still be the case that a transaction resulting, or that could result, in the security holders of the listed issuer owning less than 50% of the securities or voting power of the entity resulting from the transaction, will generally be considered a backdoor listing;
    2. introduce the consideration of several factors to be used to assess whether a transaction results in an unlisted entity becoming listed by acquiring a listed issuer, including 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; and
    3. clarify the discretion of TSX to either: (i) exempt a transaction from the requirement to meet original listing requirements that may otherwise constitute a backdoor listing; or (ii) consider a transaction as a backdoor listing even if it may not otherwise constitute a backdoor listing.

    Concurrent financings, whether by way of private placement or public offering, that are contingent on or otherwise linked to the transaction will also be considered by TSX in the calculation of whether security holders of the listed issuer will or could own less than 50% of the securities or voting power of the entity resulting from the transaction.

    The TSX is seeking written responses to specific questions, all of which are set out in the notice of the proposed amendments.