On February 9, the TMX Group Inc. and the London Stock Exchange Group plc announced a "merger of equals" combination transaction designed to create an "international exchange leader." After the transaction, the current LSE shareholders will own 55 per cent of the continuing enterprise and the current TMX shareholder group will own 45 per cent. For this reason, some are characterizing the transaction as a foreign take-over of the TMX.
The merged group will be jointly headquartered in London and Toronto, with what appears will be a significant presence in each of Calgary, Colombo, Milan, Montréal and Vancouver.
The TMX/LSE merger is expected to be completed in the second half of 2011 if the necessary TMX and LSE shareholder, Ontario court and regulatory approvals in Canada, the United Kingdom, the United States and Italy are obtained.
The merger is but one of the most recent of many consolidation transactions involving the world’s stock trading marketplaces, including the combination of NYSE Euronext and Deutsche Boerse announced on February 15.
The TMX and LSE have announced that the operations of existing trading markets will continue. Responsibility for the merged group’s businesses will be geographically allocated:
- London – international listings; global centre for technology solutions
- Toronto – global primary markets (listings and other issuer services), covering full range of listings across all of the merged group’s equity exchanges
- Milan – headquarters for Borsa Italiana; fixed-income business; global equities trading and European post-trade services
- Montréal – headquarters for Montréal Exchange and Canadian Derivatives Clearing Corporation (CDCC); global derivatives business
- Calgary – headquarters for Natural Gas Exchange Inc. (NGX); global energy business
- Vancouver and Calgary – joint headquarters for TSX Venture Exchange
The merger is structured as an arrangement under the Business Corporations Act (Ontario). The shares of the merged group will be listed on both the Toronto Stock Exchange and the London Stock Exchange.
There has been speculation in the press that the merger could face significant regulatory hurdles in Canada. The Canadian federal government has announced that it will review the proposed merger under the Investment Canada Act. To be approved, the Minister of Industry must be satisfied that the merger is likely to be of "net benefit to Canada."
The securities regulators in the provinces of Ontario, Québec, Alberta and British Columbia also need to approve transaction. We note that the Autorité des marchés financiers has already been commissioned by the Province of Québec to hold a public hearing on the merger, and we expect that other securities regulators may soon follow suit. The Ontario Minister of Finance has caught press attention by characterizing the TSX as a "strategic asset." Public opinion and politics will certainly play a major role in the outcome of these decisions.
As currently described, it is difficult to know whether the TMX/LSE merger, if completed, will have a significant impact on participants in the Canadian capital markets. It appears that all of the existing trading markets in Canada will continue to function and that there will be little change in the day-to-day operation of those markets. We suspect it will be business as usual for most participants in the capital markets immediately following completion of the transaction. Over time, the merged group may also seek to merge some of the trading, clearing and settlement platforms and technology solutions or even indices or other products.
Each of the merged group’s markets will continue to be regulated by existing regulators. A public company with securities listed on the TSX will continue to be a reporting issuer and subject to the continuous disclosure and other obligations imposed by applicable securities laws in Canada. If that public company decides it wishes to list its securities on the LSE, it will be required to comply with applicable securities laws in the United Kingdom as well. This is the case today and, assuming the merger proceeds as currently described, should continue to be the case following completion of the merger. The merger of the owners of the TMX and the LSE will not result in companies suddenly becoming listed on both exchanges.
Issuers in the mining and oil and gas industries, which together account for a majority of the total number of listed companies on the TSX and TSX Venture Exchange combined, as well as a significant number of listed companies on the LSE and AIM market combined, will be paying particular attention to any changes that may make it more efficient for them to access capital through the merged group’s markets.
We suspect that the merged group will seek to simplify and streamline the process an issuer must follow to cross-list its securities in both Toronto and London. This may be convenient for an issuer seeking a dual-listing, but a simplified application process alone is unlikely to determine where an issuer will list its securities or to result in a mass migration of TSX-listed issuers to the LSE (or vice versa). Liquidity, access to capital, securities regulation and cost of compliance will continue to be the key drivers of an issuer’s decision on where to list following completion of the TMX/LSE merger.
The devil is in the details; it is those details that will emerge as the federal government and the provincial securities regulators undertake their reviews. We are carefully monitoring the TMX/LSE merger process and will keep our clients and friends updated with developments as the transaction progresses and more details emerge.