On April 27, 2009, the Toronto Stock Exchange (the "TSX") issued a staff notice providing guidance on the submissions it expects to receive when a listed issuer proposes to rely on the "financial hardship exemption" from the requirement to seek security holder approval for certain types of transactions.
Many companies are currently structuring transactions to remedy their financial circumstances and are planning to rely on this exemption from the requirement to seek security holder approval in order to avoid the delay associated with holding a shareholder meeting and the uncertainty of a shareholder vote. Given the staff notice, increasing focus needs to be given to the people and process behind such transactions, as it appears that the TSX is proposing to review these matters in more detail prior to providing conditional approval.
Background on the Financial Hardship Exemption
Subsection 604(e) of the TSX Company Manual provides that upon written application, and other than in respect of the "Securities Issued to Registered Charities" and "Security Based Compensation Arrangements" sections of the TSX Company Manual, a listed issuer meeting continued listing requirements will be exempted from security holder approval requirements if the application is accompanied by a resolution of the listed issuer's board of directors stating that:
- the listed issuer is in serious financial difficulty;
- the application is made upon the recommendation of a committee of the board of directors, whose members are free from any interest in the transaction and unrelated to the parties involved in the transaction;
- the transaction is designed to improve the listed issuer's financial situation; and
- based on the determination of the committee referred to above, the transaction is reasonable for the listed issuer in the circumstances.
The TSX Company Manual further provides that listed issuers using this exemption are required to issue a press release at least five (5) business days in advance of the closing of the transaction disclosing the material terms of the transaction and that the listed issuer has relied upon the financial hardship exemption. The press release must be pre-cleared with the TSX.
Clarifying Points from the Staff Notice
In the staff notice, the TSX has clarified that it will not provide conditional approval of the transaction until five days after issuance of the press release. This means that any opponents to the proposed transaction will have time to make their concerns known to the TSX before conditional approval is given.
In the staff notice, the TSX notes that its practice is to place a listed issuer relying on the financial hardship exemption under review for continued listing. Many listed issuers currently proposing to use the exemption are already under delisting review. We have confirmed with the TSX that, notwithstanding Subsection 604(e) of the TSX Company Manual, generally, listed issuers who are already under delisting review may rely on the exemption. However, this should be confirmed in each individual circumstance.
Finally, the staff notice confirms that the TSX expects that listed issuers will use the financial hardship exemption only for transactions which improve their financial situation. The TSX has indicated that it will generally not accept listed issuers using the financial hardship exemption for transactions that do not lead to an inflow of cash or reduction of a financial liability.
New Information Requirements from the Staff Notice
The staff notice indicates that certain additional information (aside from what is articulated in Subsection 604(e) of the TSX Company Manual) must accompany an application to the TSX to support reliance on use of the financial hardship exemption. The additional information is as follows:
- a detailed description of the events and factors which led to and contributed to the listed issuer being in serious financial difficulty (e.g. breach or potential breach of debt covenants, inability to meet debt obligations, working capital deficiencies, inability to fund property payment, etc.) and whether such information has previously been publicly disclosed;
- a detailed description of alternatives considered by management and the board of the listed issuer to improve the listed issuer's financial situation;
- in light of any other alternatives considered by management and the board of the listed issuer, an explanation as to why the proposed transaction is reasonable for the listed issuer under the circumstances;
- if insiders are participating in the transaction: (a) confirmation that no such insider was involved in the negotiations on behalf of the listed issuer, (b) information about other parties that have been approached by the listed issuer to participate in the proposed transaction and what role, if any, such insider played in those negotiations on behalf of the listed issuer, and (c) any other contemplated transactions (as applicable);
- the manner in which the proposed transaction will remedy the financial problems of the listed issuer, which should include a budget of sources and uses of capital for a six month period, a description of how long the funds raised in the proposed transaction will sustain the issuer and how the issuer will address any anticipated capital deficiencies;
- details concerning why the listed issuer is not able to seek security holder approval, including consideration of whether approval in writing is possible, particularly if the listed issuer is closely held;
- names of financial and legal advisors retained by the listed issuer, its board of directors or the committee of the board (if applicable) and the role such advisors, board of directors or the committee of the board have played in considering alternatives and in structuring the transaction and, in particular, details as to any opinion they have arrived at in relation to the transaction and its fairness to security holders;
- any other material information in respect of the proposed transaction and the financial situation of the listed issuer which may be relevant to the TSX; and
- a draft press release, which should detail the reasons for the issuer's serious financial difficulty and the proposed use of proceeds, as well as the material terms of the transaction and that the listed issuer has relied on this exemption.
These new requirements are consistent with the more onerous approach of the TSX for reviewing transactions following the OSC's decision in the HudBay/Lundin transaction. See our January 30, 2009 and April 15, 2009 MarketCaps issues for more information.
Several of the above requirements are directed at the people and the process behind the structuring of the transaction. When considering a listed issuer's financial alternatives and possible transactions to remedy financial circumstances, the board and management should review and be prepared to respond to these informational requirements of the TSX.