The Canadian capital markets offer substantial opportunities for Korean companies interested in tapping into foreign capital markets. The senior market in Canada is the Toronto Stock Exchange (TSX), while the TSX Venture Exchange (TSXV) serves as the largest “venture” market in Canada. The TSX/TSXV form the integral part of the larger TMX Group, which operates cash and derivatives markets for multiple asset classes, including equities, fixed income and energy. The TSX has provided issuers with access to equity capital for over 150 years, and with approximately 3,892 listed issuers, the TSX/TSXV collectively list the most companies of any exchange in North America and the second most in the world. By comparison, the New York Stock Exchange excluding Euronext (NYSE) has approximately 2,312 issuers and the NASDAQ lists approximately 2,760 companies.
The TSX/TSXV provides the access to capital, the support and the framework through which companies of all sizes can thrive. The TSX is Canada’s senior exchange market and attracts mature and advanced companies. It lists approximately 1,516 issuers with an aggregate market value of US$2.2 trillion. In 2010, issuers listed on the TSX/TSXV raised approximately $54 billion in total financing, making it the eighth largest exchange group in the world by equity capital raised. Companies with smaller capitalizations in need of public venture capital list on the TSXV. The TSXV hosts approximately 2,376 issuers with an aggregate market capitalization $72.1 billion and features a wide range of sectors, including technology and electronics, mining, oil and gas, industrial, life sciences, and financial services.
The TMX Group recently announced a proposed merger with the London Stock Exchange Group, which holds the London Stock Exchange (LSE) and the Alternative Investment Market (AIM). The LSE/AIM collectively host approximately 2,966 issuers with an aggregate quoted market value of US$3.6 billion. This merger, if completed, promises to present listed issuers with unprecedented access to capital, upgraded technology infrastructure, a wider variety of investment options, and a broader range of market information services.
ADVANTAGES OF LISTING ON THE TSX/TSXV
Companies that list on the TSX or TSXV enjoy the advantages of market leadership, cost competitiveness, industry support and access to capital.
Canada is internationally known for its abundance of natural resources. Not surprisingly, Canadian capital markets are particularly attractive to the mining and oil and gas sectors. Mining is one of Canada’s most significant industries and the TSX is considered one of the world’s premier exchanges for mining companies. Approximately 58% of the world’s public mining companies have listed their securities on the TSX or TSXV, and of the 9,500 exploration projects held by TSX/TSXV companies, 50% are outside Canada. The TMX Group hosted 2,413 financings worth approximately $17.8 billion in 2010, which represents 60% of the world’s mining equity capital. There are approximately 1,562 mining issuers on the TSX/TSXV with a combined quoted market value of $557 billion. 2011 has seen even more growth, as the year’s first quarter brought 704 new financings worth over $5.4 billion. The world’s leading mining companies are tracked on the TSX through the S&P/TSX Global Mining Index, which provides investors with a global snapshot of publicly-traded mining companies. Through the TSX/TSXV and the S&P/TSX Global Mining Index, investors have access to companies such as Agnico-Eagle Mines Ltd. (AEM), IAMGOLD Corp (IMG), Agrium Inc. (AGU), Barrick Gold Corporation (ABX), Cameco Corporation (CCO) and Teck Resources Limited (TCK).
The TSX/TSXV is also a global leader in energy, hosting approximately 40% of the world’s publicly traded oil and gas companies, which is more than any other stock exchange. This leadership stems from Canada’s long history of financing energy exploration and development companies. The 396 energy issuers listed on the TSX/TSXV have an aggregate quoted market value of over $479 billion. In 2010, TSX and TSXV oil and gas issuers raised $11.3 billion through 504 financings. Canadian Natural Resources Limited (CNQ), EnCana Corporation (ECA), Husky Energy Inc. (HSE), Imperial Oil Limited (IMO) and Suncor Energy Inc. (SU) are all listed on the TSX.
In addition to Canada’s top tier status in the fields of mining and energy, the TSX/TSXV is becoming increasingly well-regarded as a forum for technology and electronics companies due to the exciting opportunities that it provides for capital formation and trading liquidity. The TSX/TSXV has the second highest concentration of technology companies in the world with a combined quoted market value of over $59.8 billion. Tech issuers listed on the TSX include such internationally-recognized companies as Research in Motion Limited (RIM), Open Text Corporation (OTC), Celestica Inc. (CLS) and CGI Group Inc. (GIB).
Clean technology/renewable energy issuers are also highly active on the TSX/TSXV. As of the end of March 2011, it hosted 130 issuers with an aggregate quoted market value of over $19.5 billion. In the past two years, 211 financings raised over $2.8 billion in equity capital. Among those was the $100 million initial public offering (IPO) of Magma Energy Corp. (MXY), which now has a quoted market value of over $461.5 million. In the first quarter of 2011, 19 financings raised $304 million. Examples of clean tech issuers on the TSX/TSXV are Ballard Power Systems Inc. (BLD), Brookfield Renewable Power Fund (BRC), Capital Power Income L.P. (CPA), Northland Power Income Fund (NPI), and Zongshen PEM Power Systems Inc., a Chinese company.
Low Cost of Listing
From a cost perspective, achieving and maintaining a listing on the TSX is very competitive with other exchanges. The base fee for international issuers with market capitalizations of $50M -$100M is $57,563 plus a variable fee of 0.09525% for listing excess capitalization. By comparison, the NASDAQ Global Select Market Entry Fees for corporations with over US$50 million market capitalization is US$200,000.
Supportive Financial Network & Legal Environment
Canada offers a well-established financial market that has been ranked as the soundest in the world for three years in a row by the World Economic Forum. Natural resource companies that trade in Canada have access to a large support network comprising research analysts, investment bankers and legal advisors who are specialists in their fields. For example, more than 200 dedicated analysts cover TSX/TSXV-listed mining companies. On the investor side, Canadian institutional and high net worth investors are conversant, if not proficient, in the mining and energy sectors.
The Canadian securities regulatory system is highly evolved and transparent. Issuers are subject to a clear system of rules and policies, with specific regulations addressing disclosure standards in certain industries. These disclosure standards are designed to assist the public in making investment decisions. There are also supplemental rules and instruments regulating the mining and energy industries that recognize the large amount of risk capital required in mining, energy and mineral exploration. Mining companies are required to comply with National Instrument 43-101 Standards of Disclosure for Mineral Projects (NI 43-101) in order to enhance the accuracy and integrity of disclosure in the mining sector. NI 43-101 focuses on five core principles: the involvement of a qualified person; standardized terminology and definitions; the prohibition of misleading disclosure; contextual and cautious disclosure; and technical report supporting disclosure. Similarly, oil and gas companies must follow National Instrument 51-101 Standards of Disclosure of Oil & Gas Projects (NI 51-101), which requires annual disclosure of oil and gas reserves, properties, activities and technical reports. Please see the minimum listing requirements for mining and oil and gas issuers on the TSX/TSXV in Appendix A.
In terms of civil liability, investors may sue directors and officers of a company if the company’s disclosure contains misrepresentations. Recent changes to the Securities Act (Ontario) have also increased the scope of civil liability relating to secondary market disclosure, subject to caps on this liability. In general, however, the market in Canada is substantially less litigious than many other jurisdictions, such as the United States.
Cross Border Capabilities
Another benefit of listing on the TSX/TSXV is the proximity to and similarities between the Canadian and American markets that make it relatively easy for issuers to access capital on both sides of the border. For example, there are approximately 155 American companies listed on the TSX/TSXV and roughly a third of TSX-listed issuers with market capitalizations of more than $500 million are listed on a U.S. exchange. The NYSE houses a number of prominent TSX-listed issuers, including EnCana Corporation (ECA) and Suncor Energy Inc. (SU). It is important to note that companies listing on the TSX/TSXV need not be incorporated in Canada. However, the TSX may impose additional requirements on foreign companies depending on their nationality to ensure that they have a satisfactory level of corporate governance and are prepared to implement disclosure and investor protection mechanisms equivalent to those of Canadian companies. For example, the TSX may require foreign companies to introduce additional shareholder rights. Once the TSX/TSXV receives an application, it will review the corporate governance regime in the relevant country to determine if any additional requirements are warranted. In general, at least two members of the company’s board of directors must be independent and there must be at least two members with board experience on a public North American company.
If a foreign company listed on the TSX also chooses to incorporate or organize itself under Canadian law, it can also gain access to the American markets through the multijurisdictional disclosure system (MJDS). MJDS, which was adopted in 1991 by the United States Securities and Exchange Commission (the SEC) and the Canadian provincial securities regulators, allows eligible Canadian or foreign private issuers to publicly offer securities in the United States by preparing a prospectus according to Canadian disclosure regulations. To take advantage of MJDS, a foreign company must be incorporated or organized under Canadian law, have been subject to continuous disclosure requirements of any provincial securities regulator in Canada for at least twelve months prior to filing, be in compliance with all of its reporting obligations, and retain a market value of at least US$75 million.
EMERGING MARKETS COMPANIES LISTING ON THE TSX/TSXV
For the reasons listed above and below, the TSX/TSXV has become increasingly attractive to foreign companies, many of which originate from emerging markets. There are approximately 318 international issuers listed on the TSX/TSXV with an aggregate quoted market value of $187.1 billion. Though American issuers remain the largest component of international companies on the TSX/TSXV at just under 50%, Chinese companies have been steadily increasing their presence in recent years. Seventeen percent of all TSX/TSXV-listed international issuers are Chinese-based, compared with 12% from Australia/New Zealand and 8% from the United Kingdom/Europe. As of the end of the first quarter of 2011, there were 52 Chinese companies listed on TSXV and 24 on the TSX, with a combined market capitalization of over $18 billion. The TSX is home to such internationally-recognized Chinese companies as Sino-Forest Corporation, GLG Life Tech Corporation, Silvercorp Metals Inc., and China Gold International Resources Corp. Ltd.
The reach of TSX/TSXV companies also extends to Latin America. For example, in 2006, Brazilian mining company Companhia Vale do Rio Doce (Vale) made a US$17 billion takeover bid for Inco, a leading producer of nickel, copper, cobalt and precious metals. Vale is now one of the largest mining companies in the world. Chariot Resources Limited (CHD), a TSXV to TSX graduate, owns Mina Justa Project which is one of the premier advanced stage copper projects in South America. Talon Metals Corp. (TLO), a TSX-listed company, recently finalized an agreement giving it the right to acquire a 75% interest in a subsidiary of Lara Exploration Ltd. (LRA), which holds all 13 of Lara’s potash exploration licences located in Sergipe State, Brazil. Talon Metals also concluded an agreement with Brazauro Resources Corporation (BZO) granting Brazauro an option to earn a 100% interest in Talon’s Água Branca Gold Project in the Tapajós Gold District in Pará State, Brazil.
SPECIFIC PROGRAMS TO ASSIST COMPANIES GOING PUBLIC
The TSX/TSXV offers several programs to help companies of all sizes interested in offering securities to the public in Canada. In fact, the TSX/TSXV boasts the ability to finance companies from $1 million to $1 billion or more.
Capital Pool Company Program
The Capital Pool Company Program on the TSXV (CPC) is a vehicle designed to afford early stage and small cap companies access to needed capital and expertise to promote growth. International companies may utilize the CPC provided they meet TSXV listing requirements. The two-step program operates as follows:
Phase 1 – Set up the Capital Pool Company
Three to six experienced directors and officers may incorpora te a shell company known as a “Capital Pool Company” by collectively investing a minimum $100,000 of initial seed capital. No other assets and no commercial operations are required. The compan y then issues shares in exchange for seed capital at a minimum price of the greater between $0.05 and 50% of the price at which subsequent shares are to be sold via prospectus.
- The CPC then files and clears a prospectus with the TSXV with the intention of raising between $200,000 and $4,750,000 pursuant to an IPO. The shares, which must be issued as a single c lass, typically sell at a price of $0.10.
- The CPC engages a broker to sell the shares, pursuant to the prospectus, to at least 200 arm’s length shareholders, each of whom must buy at least 1,000 shares. No one purchaser may purchase more than 2% of the offering, and no one purchaser together with his, her, or its associates or affiliates may purchase more than 4% of the offering. Once the distribution has been completed and closed, the CPC is listed for trading on the TSXV with a “.P” as part of its symbol to signify its status as a CPC.
Phase 2 – The Qualifying Transaction
- The proceeds of the seed capital financing and the public offering may be used to discharge the expenses of the IPO and to identify and acquire a business or assets through a “Qualifying Transaction”.
- In pursuing a Qualifying Transaction, the CPC must acquire assets or a business that, following the completion of the transaction, will allow the resulting issuer to meet the minimum listing requirements in the appropriate industry category (as set forth in Appendix A). A CPC must complete a Qualifying Transaction within 24 months of its listing.
- The target assets in a Qualifying Transaction may be outside of Canada and the United States. However, enhanced disclosure is required in the form of a non-offering prospectus in connection with a Qualifying Transaction involving non-mining and non-oil and gas assets outside of Canada and the United States, where the CPC is a reporting issuer in Ontario.
- Following completion of the Qualifying Transaction, the CPC continues trading as a regular TSXV listed company.
The CPC program has remained popular with companies with smaller capitalizations since its establishment in 1987. Approximately 2,140 companies have gone public through the CPC process, with over 80% successfully completing a Qualifying Transaction to trade on the TSXV. Furthermore, as TSXV companies mature, they often go on to list on the senior TSX through a stream-lined graduation process. 103 graduates of the CPC process now trade on the TSX.
Special Purpose Acquisition Corporation Program
The new Special Purpose Acquisition Corporation Program of the TSX (SPAC) was designed to allow for the creation of investment vehicles for public investors in companies and/or industry sectors normally of interest to private equity firms. Available to both domestic and international issuers, SPAC may provide an opportunity for individuals unable to buy into hedge or private equity funds to participate in the acquisition of private operating companies traditionally targeted by those funds.
SPAC enables experienced directors and officers to form a corporation that has no commercial operations or assets other than cash contributed by the founders. The SPAC corporation is then listed on the TSX following an IPO, in which it must raise a minimum of $30 million. Ninety percent of the funds raised in the IPO must be placed in escrow and used toward a future investment in a business or asset.
The SPAC corporation must complete its initial investment opportunity, defined as the “Qualifying Acquisition,” within 36 months of its listing on the TSX. As was mentioned above, the Qualifying Acquisition need not be a Canadian investment or involve a Canadian company or asset. Once the SPAC corporation has completed its Qualifying Acquisition, the resulting company must meet TSX listing requirements and its shares will continue trading as a regular listing on the TSX.
By virtue of filing and clearing a prospectus in connection with its IPO, a SPAC corporation becomes a reporting issuer, meaning it is subject to continuous disclosure rules (including those requiring financial reporting) and other requirements under applicable securities regulations. As a publicly traded entity, SPAC corporations also provide access to liquidity for investors.
GOVERNMENT REVIEW OF FOREIGN INVESTMENT
Canadian markets welcome foreign investment. However, there are regulatory requirements that must be followed for a foreign company to invest in Canada. The Investment Canada Act (Canada) (ICA) provides for the review of significant transactions through which non-Canadian entities acquire control of Canadian assets or corporations to ensure the transactions are of net benefit to Canada. Non-Canadians must file either a notification or an application for review, depending on the industry involved and either the value of the Canadian assets or the enterprise value of the Canadian business being acquired.
An investment involving an acquisition of control by a non-Canadian is reviewable (as opposed to being merely notifiable) if the asset or enterprise value of the Canadian business being acquired meets or exceeds one of the following thresholds:
If the investor is or is controlled by a World Trade Organization (WTO) member, but is acquiring a business engaged in cultural industries, or is not a WTO member and the investment is over $5 million for a direct acquisition or over $50 million for an indirect acquisition.
- Note, however, that the $5 million threshold described above applies for an indirect acquisition if the asset value of the Canadian business being acquired exceeds 50% of the asset value of the global transaction.
- If the investor is from a WTO member country, any direct investment in excess of $312 million. Indirect investments are not reviewable. Legislative amendments will dramatically increase the threshold for review for WTO member investments to US$1 billion, based on enterprise value, over the next several years.
Under the review process, the Minister of Industry (Minister) will assess whether the proposed investment will be of net benefit to Canada. If the Minister does not make a positive determination that the transaction will be of net benefit to Canada, the investment cannot be completed.
Though significant investments in Canada are rarely blocked by the federal government, it is important to note that, in some cases, investors make negotiated undertakings in relation to the operation of the Canadian business as a condition of the Minister’s approval. An example of a recent investment review and approval is PetroChina International Investment Company Limited’s $1.9 billion investment in two projects held by Athabasca Oil Sands. In order to obtain approval, PetroChina made several significant commitments and undertakings to the Canadian government: to increase employment levels over the next three years for the oil projects; to make upwards of $250 million in capital expenditures for its share of development expenses; to maintain an Alberta head office for the operating companies for the next five years; to ensure a majority of senior management positions are filled with Canadians; to ensure that the operating companies will remain subject to Canadian laws; and that it will work with Athabasca to enhance the productivity and efficiency of the oil sands projects. Any potential merger or acquisition must also comply with Canada’s Competition Act.
The federal government has also introduced guidelines for investment by “state-owned enterprises,” which are entities that are owned or controlled by a foreign government, and “sovereign wealth funds,” which are the investment and management arms of resource reserves or national savings of foreign governments (collectively SOE). The Minister will assess a proposed SOE investment using the ICA principles described above to determine whether a reviewable acquisition of control by an SOE is of net benefit to Canada. The Minister will examine the SOE’s corporate governance practices, reporting structure and its adherence to Canadian laws and practices. The Minister will also consider the extent to which the business will continue to operate commercially as it relates to export, processing and its Canadian workforce.
MERGERS AND ACQUISITIONS BY FOREIGN INVESTORS OF CANADIAN BUSINESSES
International companies interested in investing or bidding for a company listed on a Canadian exchange are subject to certain restrictions relating to consideration. If a foreign bidder wants to issue consideration other than cash to Canadian shareholders, the foreign bidder must be capable of providing prospectus-level disclosure relating to the issuer and the share consideration. It is also important for a shareholder to be able to freely resell those securities either on a foreign market or, in some cases, to other Canadians. This will depend upon the nature of the consideration being offered, the jurisdiction of the bidder, and other factors. A technique used in non-cash acquisitions in which a significant Canadian shareholder is seeking deferral of tax otherwise payable will involve the use of exchangeable securities. Exchangeable securities are basically synthetic securities that mirror, and are exchangeable for, the bidder’s foreign-listed securities, but are considered Canadian securities for Canadian income tax purposes.
Acquisitions of Canadian public companies may be structured by way of a public takeover bid or by a statutory plan of arrangement. In a takeover bid, a formal offer is made to all shareholders, which is consummated by acceptance (or tenders of shares) by the target’s shareholders. These transactions can be either recommended by management or hostile. Statutory plans of arrangement are unique to Canada and will generally be implemented by agreement between the bidder and the target. A plan of arrangement may provide for a wide range of pre- and post-acquisition transactions, such as share purchases, amalgamations, divestitures, winding-ups, debt restructurings, redemptions of shares, transfers of assets and issues of new shares. The flexibility and the ability to accommodate various transaction objectives and tax-planning requirements makes plans of arrangement attractive to bidders and target shareholders alike. A plan of arrangement requires both shareholder and court approval.
CANADIAN TAX CONSIDERATIONS
Korean companies should seek experienced legal advice if they are considering listing on the TSX/TSXV or investing in Canada so as to maximize potential earnings and minimize risk. Canada’s tax regime is based on residence. Canadian tax authorities will typically determine a corporation’s residency by examining the location of incorporation and the main location of the majority of the corporation’s directors. Residents are taxed on income earned both inside and outside of Canada. Non-residents of Canada are taxed only on taxable income earned in Canada where the non-resident has carried on a business in Canada or disposed of taxable Canadian property.
A foreign corporation that lists its shares on the TSX/TSXV, or participates in the CPC or SPAC programs, will likely not be considered a resident of Canada merely because they have satisfied the listing or program requirements of the TSX/TSXV, and consequently will not be subject to Canadian tax liability. However, a foreign, non-resident corporation that carries on business in Canada or disposes of taxable Canadian property will be required to file a tax return in prescribed manner and form within six months of the end of its taxation year.
Under Article 7 of the Convention Between the Government of Canada and the Government of the Republic of Korea for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion With Respect To Taxes on Income (the Convention), Canada cedes its rights to tax profits of a foreign corporation except to the extent that those profits are attributable to a permanent establishment situated in Canada. Any activity undertaken by a foreign corporation as described above should not, in itself, be sufficient to constitute a permanent establishment under the Convention. Thus, for foreign corporations listing and selling shares on the TSX/TSXV or through the CPC or SPAC programs, the only potential exposure may be the requirement to file a tax return in the year of an IPO transaction.
The implications of a foreign corporation investing in a Canadian business, either by acquiring shares in a Canadian corporation or by purchasing a Canadian corporation’s assets, are more complicated and potentially more significant. Most notably, foreign corporations must decide whether or not to incorporate a subsidiary in Canada and how they wish to finance their Canadian operations. The best course of action will be different for every different company, which underscores the importance of obtaining experienced local legal counsel with respect to tax planning.
THE TSX/TSXV OR THE KOREA EXCHANGE?
The TSX/TSXV is generally regarded as a market of choice. It provides the structure, the support and the access to capital a company requires to thrive, especially with respect to the mining and oil and gas sectors. The TSX/TSXV has provided its issuers with steady growth in capital investments for five straight years, in a country with an extremely stable financial system and a culture of holding equities widely. The strong trading liquidity of the TSX/TSXV is exhibited by the fact that value traded has more than doubled over the past five years. Listing on the TSX/TSXV is advantageous to issuers in many disparate industries and of many different sizes.
The TSX/TSXV offers small and medium-sized companies an assortment of opportunities to gain access to capital. As was mentioned above, the CPC program provides companies with needed expertise and access to capital at a very early stage of development. Companies may utilize the SPAC program to access sectors normally reserved for private equity firms. The TSX/TSXV features low trading impact costs and analyst coverage at early stages of development. Furthermore, companies that list on the TSXV have a realistic chance of graduating to the TSX for further maturation, as evidenced by the 491 companies that have done so in the past ten years. To list on the TSXV, a company must have pre-tax earnings of the equivalent of approximately 50 million KRW and market capitalization of approximately 560 million KRW. In comparison, a company requires pre-tax earnings approximately 200 times greater or a market capitalization approximately 55 times greater to list on the KOSDAQ Market, which purports to cater to smaller companies. In Korea, small and medium-sized companies do not benefit from established programs such as CPC and SPAC, nor do they enjoy similar access to capital at early stages of development. Companies that wish to list on the KOSPI or KOSDAQ markets must wait until they have operated for at least three years, while TSX companies may list after only two years. The Korea Exchange (KRX) simply cannot boast the breadth of opportunity that the TSX/TSXV is capable of offering small and medium-sized companies.
Large Korean companies would also benefit from listing on the TSX as compared to the KRX. The TSX provides efficient access to more capital with greater liquidity and a more active secondary financing market. Issuers listed on the TSX already have access to the American markets, and are likely to soon have access to markets in the United Kingdom. The TSX’s listing requirements are less onerous than the KOSPI Market, and, in some circumstances, are even less onerous than the smaller KOSDAQ Market.
The KRX has a number of excellent qualities. It has sufficient liquidity and a solid investor base that invests in a diverse range of industries. However, for the reasons mentioned above and throughout this bulletin – most notably, access to markets and to capital, the stability of financial markets, the breadth of support, and a history of excellence – Korean companies would be well-advised to investigate the opportunities that await in Canada.