The Toronto Stock Exchange (TSX) has proposed amendments to its rules that would require a listed company to obtain shareholder approval when issuing more than 50% of its shares (on a non-diluted basis) in connection with the acquisition of a public company. If implemented, the amendments will have a significant impact on M&A transactions for TSX-listed companies and mining companies in particular.
Under the current TSX rules, there is no general requirement for shareholder approval in connection with the acquisition of a public company based solely on the level of dilution. (However, the TSX does currently require shareholder approval if more than 10% of the acquiror’s shares are issuable to insiders of the acquiror.) The TSX has the discretion to (and generally will) require shareholder approval for any proposed issuance that would materially affect control of the acquiror. In addition, the TSX has the discretion to require shareholder approval if necessary to protect “the quality of the marketplace.”
By contrast, many of the world's major stock exchanges have a prescribed dilution threshold above which a shareholder vote is required. For example, both the New York Stock Exchange (NYSE) and Nasdaq require shareholder approval at or above 20% dilution, while the London Stock Exchange threshold is 25%.
The current rules have been the subject of considerable debate. Proponents of the current rules argue that they facilitate deal making by providing for greater deal certainty. On the other hand, opponents have generally been critical of them since they deprive shareholders of the right to vote on transactions that could significantly alter their investment.
Uncertainty About Shareholder Approval Requirement
In October 2007, the TSX published a request for comments on its shareholder approval requirements for acquisitions. The TSX review was inspired, in part, by the contested all-stock acquisition of Glamis Gold Ltd. by Goldcorp Inc. (Goldcorp) in November 2006. This acquisition resulted in an approximately 67% dilution to Goldcorp. The TSX did not require Goldcorp shareholder approval of the share issuance. Robert McEwen, Goldcorp’s former CEO and largest individual shareholder, commenced litigation to compel Goldcorp to hold a shareholders meeting. The Ontario Superior Court held that the approval of Goldcorp’s shareholders was not required.
In November 2008, HudBay Minerals Inc. (HudBay) agreed to acquire Lundin Mining Corporation (Lundin) in an all-stock arrangement that would have resulted in just over 100% dilution to HudBay. As in the Goldcorp case, and consistent with its past practice, the TSX did not require HudBay shareholder approval of the proposed share issuance. Jaguar Financial Corporation, a HudBay shareholder, appealed the TSX’s decision to the Ontario Securities Commission (OSC).
On January 23, 2009 the OSC overturned the TSX’s decision on the grounds that permitting the transaction to proceed without a HudBay shareholder vote would undermine the quality of the marketplace and be contrary to the public interest. The OSC characterized the proposed level of dilution as “extreme.” The OSC’s decision has led to considerable uncertainty as to the level of dilution at which shareholder approval will be required in future transactions.
Proposed Bright Line Test for Required Shareholder Approval
The proposed TSX amendments would provide a bright line test for shareholder approval based on dilution, which is consistent with the approach taken by many other stock exchanges. In setting the dilution at a level which exceeds 50% – as opposed to, for example, the 20% level on the NYSE and Nasdaq – the TSX took into consideration the size and nature of TSX-listed issuers and, in particular, the significant number of resource issuers. As at December 31, 2008, 474 resource issuers (both mining and oil and gas) were listed on the TSX, representing 30% of all listed issuers.
The TSX noted that resource issuers tend to be more active in M&A and generally offer securities as consideration, rather than cash, to preserve cash for exploration and development. On a combined basis, in 2007 and 2008, 85% of the 106 public company acquisitions where securities were offered by TSX-listed issuers were completed by resource issuers. Based on the historical 2007 and 2008 data, the proposed amendments would have required security holder approval in 24% of all public company acquisitions offering securities as all or part of the purchase price.
Although the TSX believes that its proposed dilution level is appropriate, a number of Canada's largest institutional investors have criticized the TSX's proposal and support a lower dilution threshold.
Comments on Proposed Amendments
Comments on the proposed amendments are due by May 4, 2009. A copy of the proposed amendments can be obtained here.
* Osler acted for Glamis in its combination with Goldcorp and for Lundin in connection with its proposed combination with HudBay.