On January 22, 2015, the Toronto Stock Exchange (TSX) published proposals that would allow eligible interlisted issuers to apply to follow the rules of other stock exchanges or jurisdictions, instead of those of the TSX, for an expanded variety of transactions and for corporate governance compliance purposes. The TSX also published proposals that would generally require issuers without an alternative market or pending liquidity event to obtain shareholder approval in order to voluntarily delist from the TSX. The delisting proposal remains opens for public comment until February 23, 2015 and the interlisted issuer exemption proposal remains open for public comment until March 9, 2015.
Expanded Exemptions for Certain Interlisted Issuers
In its proposal to expand the transaction and corporate governance exemptions for interlisted issuers, the TSX noted that that interlisted issuers are generally subject to at least two sets of stock exchange requirements that may not be identical but often address the same policy objectives of protecting security holders and preserving the quality of the market. These stock exchange requirements may be duplicative and sometimes contradictory, creating an unnecessary regulatory burden for interlisted issuers. Most of the other major international stock exchanges have more comprehensive frameworks allowing interlisted issuers to be exempt from some of their equirements. As a result, the TSX is proposing to adopt exemptions that will defer more broadly to the rules of other stock exchanges in situations where other stock exchange and corporate laws impose appropriate requirements:
- New Transaction Exemptions: Eligible Interlisted Issuers (as defined below) would be able to apply on a transaction-by-transaction basis for new exemptions from the sections under the TSX Company Manual relating to:
- prospectus offerings;
- convertible securities;
- rights offerings;
- securities issued to registered charities; and
- special requirements for non-exempt issuers.
Eligible Interlisted Issuers would also be able to apply for the currently available exemptions relating to security holder approval; private placements; unlisted warrants; acquisitions; and security-based compensation arrangements. The availability of the exemptions would be premised on the proposed transaction being completed by the Eligible Interlisted Issuer according to the standards of a Recognized Exchange (which would include the New York Stock Exchange, NYSE MKT, NASDAQ Stock Market, London Stock Exchange Main Board, AIM, Australian Securities Exchange, Hong Kong Stock Exchange Main Board and other exchanges approved by the TSX from time to time).
The test to be an “Eligible Interlisted Issuer” would be modified from the existing concept of an interlisted issuer in the Listed Company Manual so as to be based on: (i) less than 25% of trading occurring in Canada (rather than 75% of trading outside of Canada); (ii) trading over a period of 12 months prior to the date of filing an application for the transaction exemption (rather than 6 months); and (iii) trading volume only (rather than value and volume). The requirement to apply for these exemptions on a transaction-by-transaction basis, with eligibility tested on the basis of relative trading volume on the TSX and one or more other exchanges during the immediately preceding 12-month period, may create significant uncertainty for some issuers close to the 25% threshold at the time they are planning transactions as to whether or not they will actually be eligible for an exemption.
- Corporate Governance Exemptions: Eligible International Interlisted Issuers would be permitted to apply, on an annual basis, for exemptions from TSX corporate governance requirements relating to:
- director elections; and
- annual meetings (which would be a new exemption).
An “Eligible International Interlisted Issuer” would be an Eligible Interlisted Issuer that is incorporated or organized in a Recognized Jurisdiction (which would include Australia, England, Delaware, jurisdictions with substantially similar corporate statutes, and other jurisdictions approved by the TSX from time to time). The TSX indicated that it generally would not permit Canadian-based interlisted issuers discretionary relief to use the corporate governance exemptions because doing so would run contrary to the expectations of market participants and would not promote the reputation of the TSX or Canada’s corporate governance practices. The TSX would also update an existing TSX Staff Notice to permit Other International Issuers that do not qualify as Eligible International Issuers to apply for the corporate governance exemptions under the criteria specified in that notice.
Interlisted issuers would be required to apply to the TSX to use a transaction and/or corporate governance exemption.An application for a corporate governance exemption would have to be approved by the TSX at least 5 business days and not more than 30 business days before materials are finalized for a meeting at which directors will be elected.As applications for exemption must be filed annually, and eligibility for the exemption would be based on the relative trading volume on the TSX and one or more other exchanges during the 12-month period immediately preceding the filing of the application, some issuers close to the 25% threshold may face uncertainty on an annual basis regarding whether or not they would be eligible for the exemption in a given year until at least 30 business days before their meeting materials are finalized. Further, as the date for finalizing materials will only be an expected or target date at the time an application is approved, it appears that a delay in finalizing the materials could result in the loss of a previously granted exemption, with the resulting requirement for a new application, a new testing date and the possible loss of eligibility for the exemption.
Proposed Shareholder Approval Requirement for Voluntary Delisting
Currently, an issuer seeking to voluntarily delist from the TSX must apply to the TSX, outlining the reasons for the request; however, no shareholder approval is required. In its proposal, the TSX notes that delisting can prejudice shareholders because in the absence of another marketplace or near term liquidity event, they may be unable to sell their securities and they will no longer have the additional protection of the TSX’s oversight of the issuer for dilutive and other capital transactions. In its proposal, the TSX also noted that issuers could potentially seek a delisting on the eve of a particular transaction in order to avoid TSX oversight, including the application of shareholder approval requirements. As a result, the TSX is proposing to generally require the approval of shareholders of principal classes of listed equity securities for the voluntary delisting of those securities unless the TSX is satisfied that:
- an acceptable alternative market exists or will exist for the listed securities on or about the proposed delisting date;
- shareholders have a near term liquidity event, such as a going private transaction, for which all material conditions have been satisfied and the likelihood of non-completion is remote; or
- the listed issuer is under delisting review and it is unlikely that the deficiencies will be cured.
The shareholder approval requirement would likely have no impact on interlisted issuers given the existence of an alternative market for their securities.
If any insider has an interest which differs materially from other shareholders, the insider will not be eligible to participate in the approval vote. In addition, a shareholder controlling 50% or more of the applicable securities will generally not be eligible to vote.
A draft copy of the information circular or written consent used to obtain security holder approval would have to be submitted to the TSX for pre-clearance at least 5 business days before being finalized. The delisting date would not be earlier than the 10th business day following the later of (i) dissemination of a press release pre-cleared by the TSX announcing the voluntary delisting; and (ii) the issuer having obtained shareholder approval for the delisting, if applicable.