The Toronto Stock Exchange (TSX) has finalized and adopted rules that will permit special purpose acquisition corporations (SPACs) to be listed on the TSX. The new rules became effective on December 19, 2008. The final TSX SPAC rules are substantially identical to the proposed rules that the TSX published for comment in August 2008. Those proposed rules were discussed in our article "Coming Soon to Canada: Special Purpose Acquisition Corporations (SPACs)," which was published in McCarthy Tétrault Co-Counsel: Business Law Quarterly, 3:4, November 2008.

In this e-Alert, we discuss some of the changes between the proposed rules and the final rules. This e-Alert should be read together with our previous article. The final rules are embodied in amendments to Part X of the TSX Company Manual.

Section 1002 – Exercise of Discretion

The TSX has amended Section 1002 to clarify that discretion may be exercised in favour of granting or denying a SPAC application. However, the TSX must be satisfied in exercising its discretion that the fundamental investor protections provided in Part X are met, and in some cases must first have discussions with, and the concurrence of, the Ontario Securities Commission.

Subsection 1002(c) and Section 1004 – Exercise of Discretion and Founding Securityholders' Interest

The TSX has amended Sections 1002(c) and 1004 to provide guidance as to the appropriate level of the founding securityholders' equity interest in the SPAC rather than to prescribe specific levels. The founders' equity interest in the SPAC cannot properly be reviewed without reference to the price paid for the founding securities, as both are intrinsically linked. The founders' level of interest in the SPAC should reflect the quality of the founders, as well as their financial contribution to the SPAC. The TSX therefore agrees that there should be more flexibility with respect to considering the adequacy of the founding securityholders' interest. The TSX expects that founders' interest will be in the range of 10% to 20% of the outstanding equity of the SPAC. However, lower or higher levels may be acceptable depending on the financial and other contributions by the founders.

Section 1006 – No Operating Business

Comments were received expressing concern over the prohibition against having entered into a "non-binding agreement with respect to a potential qualifying acquisition." Comments noted that SPACs could enter into confidentiality agreements or other non-binding expressions of interest which have numerous contingencies, consistent with a SPAC not having identified a qualifying acquisition, but perhaps being in the process of reviewing potential qualifying acquisitions.

The prohibition against having identified a qualifying acquisition target is to ensure that the IPO process is not subverted. The TSX agrees that allowing a SPAC to enter into non-binding agreements, including confidentiality agreements and non-binding letters of intent, does not contravene this principle. The TSX has amended Section 1006 accordingly.

Section 1016 – Pricing

The TSX has reduced the minimum price per security from $5.00 to $2.00 in order to afford more flexibility for the SPAC's capital structure while preserving an orderly market for such securities. Comments were received concerning the minimum price, primarily because the TSX does not have a minimum price in its other original listing requirements. However, given the unique nature of SPACs, the TSX supports setting a minimum price because an issuer without an operating business may be prone to more price volatility or price manipulation with an excessively low security price. However, the TSX agrees that the minimum price need not be as high as $5.00 in order to achieve this objective and has amended the requirement accordingly.

Section 1024 – Securityholder and Other Approvals

Section 1024 has been amended to include a requirement that the qualifying acquisition must be approved by a majority of the SPAC's directors who are unrelated to the qualifying acquisition. The TSX has added this requirement to ensure that directors related to the qualifying acquisition are not permitted to vote to approve the acquisition regardless of the jurisdiction of incorporation or the corporate form of the SPAC.

TSX Escrow Policy Statement

The TSX Escrow Policy Statement has been revised. Where escrow is applicable to an issuer listing on the TSX by completing a qualifying acquisition with a SPAC, 10% (rather than 25%) of the founding securities will be released at the date of closing of the qualifying acquisition. The remainder of the founding securities will be released over the following 18 months. Securities other than the founding securities will be subject to the regular escrow requirements and release schedule, where applicable.

Comments were received suggesting an escrow requirement for founding securities to further align the interests of founding securityholders with SPAC securityholders upon completion of a qualifying acquisition.

Other Matters

A number of requirements in Part X impact prospectus disclosure. The TSX intends to publish a Staff Notice summarizing the key disclosure requirements and other operational issues that may arise for SPACs. In addition to those set forth in the final version of Part X at Appendix A, the TSX advises applicants of the following disclosure expectations:

  • In the SPAC IPO prospectus, issuers should disclose the valuation methods they intend to use in valuing the qualifying acquisition, particularly if the IPO prospectus discloses that a qualifying acquisition will be in a certain sector such that the method of valuation may be known in advance.  
  • In the prospectus assuming completion of a qualifying acquisition, issuers should disclose whether a valuation took place. If so, issuers should disclose whether it was independent and the method used to value the qualifying acquisition. If there was no valuation, issuers should disclose how the consideration paid for the qualifying acquisition was determined. In addition, the TSX advises applicants that it expects information circulars prepared for qualifying acquisitions to wrap around the prospectus assuming completion of the qualifying acquisition, thus reducing duplicative or unnecessary work by issuers and their advisors, and ensuring the quality and consistency of the disclosure in the information circular.