The Toronto Stock Exchange (TSX) recently published new guidance which enhances a TSX-listed issuer’s ability to increase the number of securities that it can offer and issue in connection with the acquisition of a public company. The guidance is intended to improve flexibility for listed issuers competing for public company acquisitions, and to be responsive to the new public M&A regime introduced by the Canadian Securities Regulators in 2016.
The guidance is published in Staff Notice 2018-0005 (2018 Notice), and follows the TSX’s Consultation Paper on Public Company Acquisitions (the Consultation Paper). Although the 2018 Notice replaces Staff Notice 2012-2003 in its entirety, the only change to Staff Notice 2012-2003 is the inclusion of the “Permitted Top Up” described below.
Security Holder Approval for Public Company Acquisitions
Since 2009, the TSX has required security holder approval for securities issued or made issuable pursuant to an acquisition where dilution of existing security holders would exceed 25% of the TSX-issuer’s outstanding securities. Under the TSX’s prior guidance, an issuer was required to obtain security holder approval for the issuance of a fixed number of additional securities and could not exceed that number without the issuer obtaining further approval from its security holders. In response, issuers have historically only sought security holder approval from its security holders for the number of securities required to complete a public M&A transaction as announced. This is because requesting pre-approval for the ability to exceed that number could signal to the market (including the target company’s board and shareholders) that the issuer is willing to increase the share consideration offered.
Superior Proposals and Other Market Forces
The difficulty with this practice is that it limits an acquiror’s ability to act quickly and unconditionally to increase the share consideration offered in a competitive or contested situation, and increases transaction costs.
Under Canada’s public M&A regime, a hostile take-over bid must remain open for at least 105 days, and all take-over bids must be supported by holders of more than 50% of the target company’s securities (not including securities owned by the bidder). As noted in the Consultation Paper, these changes potentially facilitate competing offers for the target and may also “expose a bidder offering its own securities to fluctuations tied to commodity prices, volatility in the target’s securities, general volatility in the market place, as well as changes in the target’s business and other general environmental changes”. A bidder may also wish to increase its offer in the face of target shareholder resistance to its offer or in response to a superior proposal announced in connection with a negotiated transaction.
The Permitted Top Up
This is where the new guidance comes in. Pursuant to the 2018 Notice, once a TSX-listed issuer has obtained security holder approval to exceed the 25% dilution threshold, the TSX will not generally require further security holder approval for the issuance of up to an additional 25% of the number of securities approved by the issuer’s security holders (the Permitted Top Up), so long as:
- the transaction involves the acquisition of widely held securities of a reporting issuer (or equivalent) pursuant to a formal take-over bid, plan of arrangement, amalgamation or similar transaction (and not for any other purpose);
- the securities are issued or made issuable to target security holders pursuant to an increase in the consideration under the transaction; and
- the issuer includes in the materials provided for the initial security holder approval, the following statement: “TSX will generally not require further security holder approval for the issuance of up to an additional [x] securities, such number being 25% of the number of securities approved by security holders for the transaction.” Note that notwithstanding this statement, the listed issuer will not be required to disclose in its security holder materials whether it intends to increase the share consideration under its offer.
The TSX’s thinking behind the mandatory statement in #3 above is that it provides security holders with sufficient information to make an informed decision, while at the same time not impeding the issuer in the M&A process by forcing it to reveal its willingness or intention to increase the share consideration offered.
The required disclosure that the TSX otherwise expects to see in an issuer’s security holder approval materials remains unchanged in the 2018 Notice.
In the Consultation Paper, and in its response to comments received on the Consultation Paper, the TSX indicated that it would consider whether the Permitted Top Up should be extended to other security holder approval requirements under the TSX rules, such as private placements and acquisitions more generally.