On April 6, 2017, the Toronto Stock Exchange (TSX) published for comment a revised version of proposed amendments (Revised Amendments) to Part IV and Part VI of the TSX Company Manual (Manual) and certain other ancillary amendments to the Manual. The Revised Amendments are a revision to proposed amendments (May 2016 Proposal) that were originally published for comment by the TSX on May 26, 2016, in response to comments received on that previous proposal. For a summary of the original proposed amendments, please see our June 2016 Blakes Bulletin: TSX Proposes New Website and Equity Compensation Plan Disclosure.
The May 2016 Proposal would have introduced website disclosure requirements for all TSX listed issuers that were in addition to, and in some cases different than, the materials that must be filed with the Canadian Securities Administrators on the System for Electronic Document Analysis and Retrieval (SEDAR), including disclosure of the full text of all security based compensation plans such as stock option plans. In addition, the May 2016 Proposal proposed to amend the disclosure requirements for security based compensation arrangements in Part VI of the Manual, in particular by introducing a new disclosure form, Form 15 – Disclosure of Security Based Compensation Arrangements (Form 15) and new requirements for disclosure of “burn rate” under security based compensation arrangements.
The TSX received 15 letters from commenters on the May 2016 Proposal. Some commenters were generally supportive of the May 2016 Proposal, or certain aspects of it. Others expressed concerns with the May 2016 Proposal including an increase to the regulatory burden on listed issuers; disclosure requirements that were duplicative of, or in addition to, those under applicable Canadian securities laws; uncertainty over certain types of documents proposed to be required to be posted on a listed issuer’s website; and concerns regarding significant proposed changes to equity-based compensation plan disclosure.
The TSX has revised the May 2016 Proposal as a result of comments received and has published the Revised Amendments for comment.
REVISED PART IV AMENDMENTS
In the Revised Amendments, the TSX has proposed a new section 473 to the Manual with a more limited list of governance documents a listed issuer would be required to make available on its website (as compared to the May 2016 Proposal). The Revised Amendments would require listed issuers to make available current, effective versions of the following documents (or their equivalent), as applicable:
- Articles of incorporation, amalgamation, continuation or any other constating or establishing documents of the issuer and its bylaws
- If adopted, copies of:
- Majority voting policy
- Advance notice policy
- Position descriptions for the chairman of the board, the lead director and key officers
- Board mandate
- Board committee charters
The TSX stated in the request for comment that, following discussion with interested parties, including institutional investors who are members of the Canadian Coalition for Good Governance, it continues to believe that there is value in providing investors with a centralized location for a listed issuer’s corporate governance information. While it recognizes the concern that the Revised Amendments will result in an increased regulatory burden, the TSX states that it believes the “modest increase” in regulatory burden is outweighed by the benefits to investors.
These proposed requirements are scaled back somewhat from what would have been required by the May 2016 Proposal. In particular, security holder rights plans, security based compensation arrangements and various ethical, anti-corruption and “other environmental, social and governance policies” have been removed from the proposed list of required documents in the Revised Amendments. To the extent this removes some of the uncertainty in the May 2016 Proposals and somewhat reduces the regulatory burden, it will likely be a welcome change for listed issuers.
Exemption for Non-Corporate Issuers
The Revised Amendments would also amend Part XI of the Manual to provide that “Non-Corporate Issuers” (as defined in the Manual) would not be subject to the new section 473 requirements for website disclosure of security holder information. Non-Corporate Issuers include certain exchange-traded funds, issuers of exchange-traded notes, closed-end funds and issuers of certain structured products where an investor’s return is contingent on, or highly sensitive to, changes in the value of underlying assets, indices, interest rates or cash flows. Such a provision was not included in the May 2016 Proposal.
Specific Requests for Comment
The TSX has asked for comments on a number of specific questions relating to the Part IV Amendments, including:
- Should the proposed section 473 require an issuer to disclose, if adopted, its (a) code of business conduct and ethics, (b) diversity policy, (c) anti-corruption policy, (d) human rights policy, (e) environment policy or (f) health and safety policy?
- Should certain types of issuers (e.g., Eligible Interlisted Issuers or Eligible International Interlisted Issuers) be exempt from the requirements of proposed section 473? If so, please provide an explanation of why they should be exempt.
- Are there other modifications TSX should make to the list of documents proposed to be made available?
REVISED PART VI AMENDMENTS
The TSX stated that a significant number of commenters to the May 2016 Proposals were not supportive of the proposed introduction of a new Form 15 disclosure for security based compensation plans. Accordingly, the proposed Form 15 disclosure has been deleted from the Revised Amendments. The existing disclosure requirements for security based compensation arrangements (in section 613 of the Manual) are proposed to remain in place largely in their current form, but with new requirements for burn rate disclosure and amended disclosure for the maximum number of awards issuable, the number of outstanding awards and the number of awards available for grant.
The change from the May 2016 Proposals, to largely revert back to the existing disclosure requirements for security based compensation arrangements, reflects in part that the Revised Amendments relating to website disclosure no longer propose required disclosure of the text of security based compensation arrangements on the issuer’s website.
In the April 6 request for comment, TSX stated that there was support for “burn rate” disclosure, with certain modifications and that the proposal for such disclosure in the Revised Amendments is derived from the comments received.
Under the Revised Amendments, disclosure of the annual burn rate of each security based compensation arrangement would be required. Under a new section 613(p) of the Manual, the burn rate would be expressed as a percentage and calculated by dividing the number of awards granted under the arrangement during the applicable fiscal year, by the weighted average number of securities outstanding for the applicable fiscal year (calculated in accordance with the CPA Canada Handbook).
If the award includes a multiplier, a listed issuer would be expected to provide details in respect to such multiplier.
Under the Revised Amendments, for security holder meetings where security holder approval will be sought at a meeting for a matter relating to a security based compensation arrangement (Approval Meeting), listed issuers would be expected to disclose the annual burn rate for each of the listed issuer’s three most recently completed fiscal years for the relevant arrangement. Where the arrangement has not existed for a listed issuer’s last three fiscal years (including predecessor security based compensation arrangements which were similar) or where the arrangement was approved by security holders within a listed issuer’s last three fiscal years, listed issuers would be expected to disclose the annual burn rate for each of the listed issuer’s fiscal years completed since adoption or the most recent security holder approval.
For annual security holder meetings where security holder approval will not be sought for a security based compensation arrangement matter, listed issuers would be expected to disclose the annual burn rate for the listed issuer’s most recently completed fiscal year.
Disclosure of Awards Issuable, Outstanding and Available for Grant
The Revised Amendments propose to amend section 613(d) of the Manual to clarify the type of disclosure required in respect of the maximum number of awards issuable, the number of outstanding awards and the number of awards available for grant. Specifically, if implemented, the Revised Amendments would require disclosure in shareholder meeting materials of:
- Plan Maximum: the maximum number of securities issuable under each security based compensation arrangement expressed as a fixed number (together with the percentage this number represents relative to the number of issued and outstanding securities of the listed issuer) or fixed percentage of the number of issued and outstanding securities of the listed issuer
- Outstanding Securities Awarded: the number of outstanding securities awarded under each security based compensation arrangement, together with the percentage this number represents relative to the number of issued and outstanding securities of the listed issuer
- Remaining Securities Available for Grant: the number of securities under each security based compensation arrangement that are available for grant, together with the percentage this number represents relative to the number of issued and outstanding securities of the listed issuer
Timing of Disclosure
As was the case in the May 2016 Proposal, the Revised Amendments would amend section 613 to state that for annual meetings (including Approval Meetings), the required disclosure about security based compensation arrangements would be required to be prepared as at the end of the listed issuer’s most recently completed fiscal year. For Approval Meetings, other than annual meetings, the information (other than annual burn rate) would continue to be provided as at the date of the shareholder meeting materials.
Specific Requests for Comment
The TSX has asked for comments on specific questions relating to the Part VI Amendments, including:
- Should the requirement to disclose static terms of a security based compensation arrangement (e.g., financial assistance, vesting, etc.) be limited to Approval Meetings?
- Is the burn rate and the formula for calculating it useful and appropriate disclosure?
The Revised Amendments are open for comment until May 8, 2017.