The challenging financing environment in the first three quarters of 2009 generally has been characterized by illiquid credit markets (although there have recently been signs of improvement in this regard). Consequently, several Toronto Stock Exchange (TSX)-listed companies have sought alternative sources of financing, including by issuing shares and raising equity capital from strategic investors, significant shareholders, company founders and directors and officers.
In certain circumstances, these types of share issuances cannot be completed without shareholder approval mandated by the TSX rules. Generally speaking, the TSX will require shareholder approval as a condition of acceptance of any transaction involving a share issuance if:
- the transaction materially affects the control profile of the issuer;
- the transaction is not at arm’s length and provides consideration to insiders in aggregate of 10% or greater of the issuer’s market capitalization; or
- the transaction is a private placement and the shares issuable represent greater than 25% of the outstanding shares and the price per share is less than market, or the shares are issuable to insiders and represent greater than 10% of the outstanding shares.
“Financial Hardship” Exemption
However, an exemption from the shareholder approval requirement exists in circumstances where the TSX-listed issuer may be said to be experiencing “financial hardship” for the purposes of the TSX rules. To rely on this exemption, a TSX-listed company historically has been required to make an application to the TSX for exemptive relief that is accompanied by a resolution of the board of directors concluding that:
- the company is in serious financial difficulty;
- the application is made upon the recommendation of independent members of the board of directors of the company (i.e., free from any interest in the transaction and unrelated to the parties to the transaction);
- the transaction is designed to improve the company’s financial situation; and
- the transaction is reasonable in the circumstances.
The term “serious financial difficulty” is not defined, but the TSX will generally defer to the company’s independent directors to make this determination. Advice from experienced counsel on the operation of this exemption is recommended to ensure a successful outcome.
The TSX requires companies using this exemption to issue a press release at least five business days in advance of the closing of the transaction, disclosing the material terms of the transaction and that the listed issuer has relied upon this exemption. This press release must be pre-cleared with the TSX and is designed to give the market a specific window of advance notice of the completion of the transaction.
Companies should also be aware that the TSX’s policy is to place a company relying on the financial hardship exemption on review as to continued listing and issue a press release to this effect. Accordingly, reliance on this exemption should not be taken lightly as it has very specific practical and public consequences.
Amended Exemption Procedure
In response to the increased use of this exemption by a significant number of companies and several criticisms expressed by shareholders about the dilutive nature of certain proposed equity financing transactions, on April 27, 2009 the TSX amended the procedure issuers must follow to rely on the financial hardship exemption to ensure that the exemption is being used appropriately. In addition to the board resolution described above, a company must now satisfy onerous informational requirements that support the appropriateness of its reliance on the financial hardship exemption.
These requirements include providing the TSX with the following information:
- a detailed description of the events and factors which led to and contributed to the company being in serious financial difficulty (e.g., breach or potential breach of debt covenants, inability to meet debt obligations, working capital deficiencies or inability to fund property payment) and whether such information has previously been disclosed;
- a detailed description of alternatives considered by management and the board to improve the company’s financial situation;
- an explanation as to why the proposed transaction is reasonable under the circumstances in light of alternatives considered by management and the board;
- if insiders are participating in the transaction, confirmation that no such insider was involved in the negotiations on behalf of the company, information about other parties who have been approached by the company to participate in the proposed transaction and what role, if any, such insider played in those negotiations on behalf of the company and any other contemplated transactions (as applicable);
- the manner in which the proposed transaction will remedy the financial problems of the company, including a six-month working capital budget and a description of how long the funds raised in the proposed transaction will sustain the company and how the company will address any anticipated capital deficiencies;
- details concerning why the company is unable to seek shareholder approval;
- names of financial and legal advisors retained by the company, its board or the committee of the board and the role such advisors, the board or the committee have played in considering alternatives and in structuring the transactions and, in particular, details as to any opinion they have arrived at in relation to the transaction and its fairness to securityholders; and
- any other material information in respect of the proposed transaction and the financial situation of the company which may be relevant to the TSX.
Significance of Amendments For Issuers
The new requirements have the effect of imposing a more rigorous standard of review on TSX-listed issuers proposing to rely on the financial hardship exemption. The detailed submissions required to be made concerning the board’s process could also have the effect of compounding the timing pressures faced by issuers seeking to avail themselves of the exemption (although any such additional time to prepare a TSX application would clearly be far less burdensome than the time required to call and hold a shareholder meeting for the purpose of conducting a shareholder vote). Moreover, since the TSX now requires a company to explain how the proposed transaction will “remedy the financial problems” of the company, together with a “description of how long the funds raised in the proposed transaction” will sustain the company, the current contemplation by the TSX appears to be that a transaction is expected to be a source of funding or liquidity. Such an expectation could have implications for issuers which might otherwise intend to rely on the financial hardship exemption without necessarily raising cash proceeds as a consequence of the transaction.
It is important for companies to be aware of these relatively new requirements and how to successfully rely on the financial hardship exemption when pursuing capital raising initiatives that are critical to their businesses and future survival.