Further to our January 30, 2009 Market Caps issue entitled "OSC Decision Requires Shareholder Vote on HudBay/Lundin Transaction - Implications for Dilutive Business Combinations in Canada", this is an update on where we are at in early April of 2009:

  1. the Ontario Securities Commission (OSC) has yet to issue its full reasons for its decision in the HudBay/Lundin transaction;
  2. the Toronto Stock Exchange (TSX) has published proposed changes to its requirements relating to dilutive business combinations; and
  3. in the interim, the TSX appears to have instituted new procedures when reviewing and approving dilutive business combinations.  

Proposed Changes to the TSX Company Manual

On April 3, 2009, the TSX published proposed changes to Part VI of the TSX Company Manual relating to security holder approval requirements for acquisitions. The TSX has published the proposed changes for a 30-day comment period ending on May 4, 2009. The TSX has advised that the changes will become effective upon approval by the OSC following public notice and comment.

  1. Current Requirements

Currently, the TSX requires security holder approval for the issuance of securities as full or partial consideration for an acquisition where such number of securities exceeds 25% of the issued and outstanding securities of the listed issuer (subsection 611(c)). However, this requirement does not apply where the listed issuer is acquiring a public company (a reporting issuer or issuer of equivalent status having 50 or more beneficial security holders, excluding insiders and employees) (subsection 611(d)).

  1. Proposed Changes

The TSX is proposing to require security holder approval for the issuance of securities in payment of the purchase price for an acquisition of a public company which exceeds 50% of the number of issued and outstanding securities of the listed issuer which are outstanding on a non-diluted basis.

To implement the proposed changes, the TSX is proposing to delete subsection 611(d) and amend subsection 611(c) to include reference to security holder approval requirements applicable to all acquisitions.

Subsection 611(c) would read as follows:

Security holder approval will be required in those instances where the number of securities issued or issuable in payment of the purchase price for an acquisition exceeds:

(i) 25% of the number of securities of the listed issuer which are outstanding, on a non-diluted basis, for an acquisition other than an acquisition of a reporting issuer (or equivalent status) having 50 or more beneficial security holders, excluding insiders and employees, or

(ii) 50% of the number of securities of the listed issuer which are outstanding, on a non-diluted basis, for an acquisition of a reporting issuer (or equivalent status) having 50 or more beneficial security holders, excluding insiders and employees.

Significant opposition to the proposed changes is already mounting, with the argument being made that a threshold of 50% dilution is too high. Whether the TSX will propose further changes remains to be seen.

New Procedures for Approval of Dilutive Business Combinations

Following the OSC's decision in the HudBay/Lundin transaction, it appears that the TSX has instituted new procedures when reviewing and approving dilutive business combinations where the parties are not seeking securityholder approval and have plans to rely on the current version of subsection 611(d).

In particular, the TSX has been asking for submissions on the following:

  1. why the TSX should not exercise its discretion in section 603 of the TSX Company Manual, including a description of the impact (if any) that the proposed transaction will have on the quality of the marketplace, together with each of the factors enumerated in 603(i) to 603(vi) of the TSX Company Manual1;
  2. the premium being paid for the acquisition (if any), the impact on the trading price of the securities after the announcement of the transaction for both companies and the composition of the board of directors post-transaction, highlighting similarities and differences from the HudBay/Lundin transaction2;
  3. whether there have been any securityholder complaints or other views with regard to the proposed transaction, and, if so, provide copies thereof to the TSX; and
  4. the reasonability of the transaction and the process by which the transaction was assessed by the board of directors of the issuer as being in the interests of the issuer's shareholders.  

In addition, it appears that all dilutive business combinations are being presented to the Listings Committee, which typically meets once a week, for approval.

These new procedures appear to be consistent with, and in response to, the OSC's decision in the HudBay/Lundin transaction which appeared to require the TSX to formally consider, in addition to the enumerated factors of sections 603 and 604 of the TSX Company Manual, the impact of transactions on the "quality of the marketplace" and to be able to explain how its decisions are arrived at. For now, the onus is now on each issuer to satisfy the TSX that its proposed business combination will not have a negative impact on the quality of the marketplace