On May 21, 2015, the TSX announced one set of amendments and one request for comment on proposed amendments to the TSX Company Manual (Manual), both respecting physical certificate requirements for securities. The amendments should not have a noticeable impact for many listed issuers or industry participants, but they do highlight a few trends to be aware of.
The amendments and proposed amendments were promulgated in response to the trend of increasing dematerialization of physical securities the securities industry has experienced over approximately the last decade, initiated on the part of industry participants such as transfer agents, exchanges, brokers, and especially, clearing agencies and depositories, like the Canadian Depository for Securities (CDS). Legal practitioners, transfer agents, issuers and underwriters should all be familiar with the effects of the trend, noting the continual increase in electronic closings in recent years, for both financing and M&A transactions. Topically, this trend is reflected in the increasing number of electronic issuances of securities to even United States purchasers by Canadian listed issuers, which until very recently would have required physical certificates to be delivered to those purchasers, mainly for legending and transfer restriction purposes.
The dematerialization of evidence of securities ownership is itself an industry response to mitigate the costs and risks associated with the physical evidence of security ownership, including the costs of printing, storing, transferring, and physical handling of certificates, and the risk of theft and loss. CDS especially, through its rules, has been at the fore of implementing the shift for participants to embrace dematerialization to reduce such costs and risks, as CDS was often the entity with the responsibility to securely store physical certificates, and maintain facilities, staff and processes for their handling and transfer.
The published amendments to the Manual are characterized by TSX as being of a “housekeeping” nature, which characterization the Ontario Securities Commission did not disagree with. The amendments have been in force since May 21, 2015. The amendments update the language of the Manual to contemplate additional forms of evidence of security ownership other than physical certificates, such as holding securities through CDSX, the electronic deposit system of CDS, and direct registration systems, (commonly referred to as “DRS”). The amendments otherwise update the Manual to codify or clarify existing practices and dematerialization trends as they apply to transactions for TSX listed issuers, including amendments to, among other things, the listing agreement, and the rules for supplemental listings, stock splits, and consolidations. One practical change in the amendments to highlight is that the Manual now codifies that TSX listed issuers may have a transfer agent with a principal office in one or more of each of Vancouver, Calgary, Toronto, Montreal, or Halifax, whereas the Manual previously required that issuers have a transfer agent with a principal office in Toronto.
TSX has also requested public comments on potential related amendments to the Manual. The comment period is open until June 22, 2015. Industry participants who have ever had need to refer to Appendix D of the Manual regarding security certificate printing requirements may recall finding them of an extremely technical and detailed nature – referring to requirements for printing methods, specific line widths, multiple colours and inks, etc., that are most relevant to and comprehensible by printers of security certificates. These requirements are security features of certificates to identify them from one another and minimize the risk of fraud. Currently two different sets of requirements apply – one for all issuers categorized by TSX as “exempt industrial” issuers, and another set of requirements for every other category of issuer (i.e., all non-exempt issuers, and exempt mining and oil and gas issuers). The Manual currently stipulates that listed issuers in the exempt industrial category have more onerous requirements to use customized security certificates, including detailed customized vignettes, which certificates are costly and time-consuming to produce.
The request for comment is with respect to amendments that would amend the Manual so that one set of requirements would apply to all TSX listed issuers regardless of their categorization, and consequently reduce costs currently associated with printing certificates for exempt industrial issuers. “Generic” certificates are currently approved for use by all TSX issuers other than exempt industrial issuers (subject to approval of a specimen by TSX), as well as all issuers listed on the TSX Venture Exchange (TSXV), and the rationale for the amendments is that if the standardized security features on generic certificates as promulgated by the Securities Transfer Association of Canada are satisfactory for all other TSX and TSXV issuers, they should provide adequate security features for TSX listed issuers in the exempt industrial category as well. If the considered amendments are made, certificates for exempt industrial issuers listed on TSX would be permitted to resemble the generic certificates participants in the industry are more likely used to seeing, without any vignette, and hopefully will have the effect of easing the administrative and monetary burden of printing customized certificates on that category of issuers and the printers of their certificates.