In a departure from its previously proposed position on the subject, on September 25, 2009 the TSX announced that shareholder approval will be required in connection with public company acquisitions at a dilution threshold of 25% rather than 50% as was originally proposed. The new rule will be effective for transactions announced on or after November 24, 2009.
As reported by us in our April 2009 Bulletin (http://www.fasken.com/sma_bulletin_tsx_april_2009/), on April 3, 2009, the Toronto Stock Exchange (the “TSX”) published for comment draft amendments to the TSX Company Manual in connection with share exchange transactions. In particular, the TSX proposed to amend its rules to require shareholder approval for the issuance of securities by a listed issuer 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.
Following a comment period that ended in early May, the TSX on September 25, 2009 published its final rule. The most significant change from the proposed amendment is that the requirement for shareholder approval will be triggered at a dilution threshold of 25% rather than 50%.
Prior to publication of the final rule, the TSX required shareholder approval only for the acquisition of a private company where the level of dilution exceeded 25%. The TSX had, and continues to have, the general discretion to require shareholder approval of any transaction, whether of a public company or private company, that materially affects control of a listed issuer.
In its recent decision in Re HudBay Minerals Inc. (“Re HudBay”), the OSC ordered that HudBay Minerals Inc. (“HudBay”), which was proposing to issue in excess of 100% of its outstanding share to acquire Lundin Mining Corporation, must obtain shareholder approval notwithstanding that the TSX had ruled originally that no shareholder approval was required. The OSC stated that allowing the proposed acquisition to proceed without the approval of HudBay shareholders would have a negative impact on the quality of the marketplace and would be contrary to the public interest. See our June 2009 Bulletin (http://www.fasken.com/sma_hudbay_bulletin_june2009).
Certain market participants criticized the proposed 50% dilution threshold as being too high, expressing concern that shareholders in Canada would have fewer rights to oppose a dilutive transaction than those in other major markets, which could deter foreign buyers from investing in Canada or make Canadians more likely to invest abroad. In adopting the final rule, the TSX responded to these criticisms. The TSX had earlier stated that it believed it would be unduly burdensome and unnecessary to set a requirement based on exchanges whose issuers are generally of a very different size and nature. In publishing the final rule, the TSX reported that a vast majority of commenters had submitted that the threshold dilution level should be lower than 50%.
It may be that the OSC’s decision in Re HudBay requiring HudBay to obtain shareholder approval was also a factor in the TSX’s electing a 25% threshold, but it should not be forgotten that underlying the OSC’s decision were serious concerns regarding the fair treatment of HudBay shareholders given the tactics adopted by HudBay’s board of directors in respect of the transaction after the TSX approval had been granted.
The implementation of the new rule could lead to a dampening of Canadian M&A activity, at least in the near term. In addition, while transactions announced prior to the November 24, 2009 effective date are not subject to the new rule, certain institutional investors have stated publicly that they expect issuers to abide by the new rule even before it becomes effective.