On September 25, 2009, the Toronto Stock Exchange (TSX) announced a significant change to its company manual governing TSX-listed companies with important consequences for mergers and acquisitions practice in Canada. Effective November 24, 2009, TSX-listed issuers will be required to obtain buy-side shareholder approval (or unitholder approval, as the case may be) for public company acquisitions that would result in the issuance of 25% or more of the issued and outstanding shares (or units) of an acquiror on a non-diluted basis. Given the prior public notice and review process that included the dissemination of a proposal that would have implemented a shareholder approval requirement at 50% dilution, the new rule represents a significant and unanticipated change to the M&A landscape in Canada.
Historically, a Canadian listed company that proposed to acquire a public company target in a transaction involving the issuance of its shares as acquisition currency has not been subject to a requirement to obtain shareholder approval by its own shareholders (as opposed to those of the target), provided that the transaction would not “materially affect” control of the acquiror. In practice, this meant that, generally speaking, any proposed acquisition of a public company target that was widely held was not subject to a shareholder vote for the Canadian acquiror.
While this state of affairs arguably provided Canadian issuers with a rare tactical and timing advantage relative to issuers in other jurisdictions (where such a requirement is more common, including notably U.S. companies listed on the New York Stock Exchange or NASDAQ), it also attracted considerable controversy in recent years. In particular, portions of the Canadian institutional investor community have not been shy in expressing their dissatisfaction with the absence of a shareholder vote in a number of recent high-profile transactions, including the Goldcorp Inc. acquisition of Glamis Gold Ltd. in 2006, and the proposed acquisition earlier this year of Lundin Mining Corp. by HudBay Minerals Inc.
On October 12, 2007, the TSX published a request for comments on its security holder approval requirements for public company acquisition transactions. It received 22 comment letters reflecting two broadly divergent views on the appropriate regulatory regime. On the one hand, the institutional investor community supported a buy-side shareholder approval requirement with a relatively low dilution threshold comparable to those existing in the United States and certain other jurisdictions. On the other hand, the issuer community generally favoured either the preservation of the status quo or a modified, but less restrictive, status quo.
On April 3, 2009 the TSX published another request for comments and a draft amendment to its rules, proposing that a bright line test for shareholder approval on acquisitions be implemented at a 50% dilution threshold. The TSX received 23 comment letters in response and has described the comments received from this second stage of the process as having been “generally more uniform,” reflecting perhaps a mix of comments sourced more exclusively from the investor community than during the initial phase.
On September 25, 2009, the TSX adopted, and the Ontario Securities Commission approved, an amendment to Part VI of the TSX Company Manual. The amendment is a “public interest” amendment and has the effect of requiring shareholder approval for shares issued or issuable in payment of the purchase price for an acquisition of a public company which exceeds 25% of the number of issued and outstanding shares of the issuer.
The amendment to the TSX Company Manual requiring acquiror shareholder approval for acquisition transactions resulting in greater than 25% dilution will become effective on November 24, 2009. The amendment will not have any retroactive effect. Consequently, any transaction of which the TSX has been notified in writing prior to November 24, whether or not the TSX has already granted conditional approval, will be unaffected by the rule change. The transition time to implementation creates the possibility that some issuers with imminent transactions may seek to take advantage of the final window of opportunity and greater deal certainty available until November 24 by seeking to proceed without shareholder approval prior to that date.
The longer term impact of the rule change on Canadian M&A practice remains to be seen. One impact of the credit crisis of the past 18 months seems to have been an increase in the use of listed shares as acquisition currency, as large cash acquisitions became difficult to finance. This rule change may serve to temper the move to dilutive share-based transactions, given the impact on deal certainty by now requiring shareholder approvals for both the buy-side and the sell-side of affected transactions.
With debt capital markets continuing to be fairly tight for acquisition financing, we may see a move to an increased use of equity financings for the purpose of generating a pool of cash for use as acquisition currency, particularly given the lack of equivalent, bright-line shareholder approval requirements relating to equity financings and the relatively rapid timelines available to Canadian issuers in a typical “bought deal” transaction.