On November 28, 2013, the Toronto Stock Exchange published proposed amendments to the TSX Company Manual that would permit a listed issuer to adopt new security-based compensation arrangements for employees of a target company in the context of an M&A transaction without the need to obtain shareholder approval provided that certain conditions are met.

The TSX Company Manual provides that a listed issuer must obtain shareholder approval to adopt a security-based compensation arrangement unless the arrangement is provided as an inducement for employment to an officer of the listed issuer or the listed issuer assumes the compensation arrangement of a target company in the context of an acquisition (in each case, provided certain conditions are met).  The proposed changes to the TSX Company Manual would create an additional exemption from the shareholder approval requirement where the securities issuable under a new compensation arrangement adopted for employees of a target company in conjunction with an acquisition do not exceed 2% of the number of issued and outstanding securities and the securities issuable under the acquisition (including any related compensation arrangement) do not exceed 25% of the number of issued and outstanding securities.  The proposed exemption would only be available for compensation arrangements adopted for persons who are employees of the target company (and not for employees of the listed issuer).  The TSX notes that it has permitted listed issuers to adopt these sorts of compensation arrangements without shareholder approval in the past on a discretionary basis and that it is now simply formalizing the exemption.

If the proposed rules are ultimately adopted (the comment period expires on January 13, 2014), the TSX Company Manual will expressly permit a listed issuer acquiring a target company to offer up new equity incentives to employees of the target company as a retention tool without being required to obtain approval of the listed issuer’s shareholders.

It is also worthy to note that a listed issuer should pay close attention to the restrictions under applicable securities laws on collateral agreements in a take-over bid and collateral benefits in a business combination transaction if it wishes to adopt a new security-based compensation arrangement for employees of a target company in the context of an acquisition.