On November 28, the Toronto Stock Exchange (TSX) published two proposed amendments to Part VI – Changes in Capital Structure of Listed Issuers of its Company Manual (the Manual), specifically in relation to:

  • exemptions from security holder approval for newly implemented security-based compensation arrangements in the context of acquisitions under Section 611 of the Manual (the 611 Amendments); and 
  • circumstances in which the TSX will consider a transaction to constitute a backdoor listing (also known as a reverse takeover) under Section 626 of the Manual (the 626 Amendments).

The TSX is seeking public comment on the proposed amendments and has provided a 45 day comment period.

Amendments to Section 611 – New Security-Based Compensation Arrangements in Acquisitions

Under the current regime, security based-compensation arrangements (Share Compensation Arrangements) of a target issuer may generally continue upon completion of an acquisition without security holder approval. Upon request, the TSX has also been providing some issuers additional flexibility to implement Share Compensation Arrangements for employees of a target issuer without obtaining security holder approval. The purpose of the 611 Amendments is to create transparency by ultimately formalizing this discretionary exemption.

The 611 Amendments would allow listed issuers completing an acquisition to implement a Share Compensation Arrangement for employees or insiders of the target issuer without obtaining security holder approval, provided that:

  • the number of securities issuable under such a Share Compensation Arrangement does not exceed 2% of the issued and outstanding securities of the acquiring listed issuer; 
  • the number of securities issuable pursuant to the acquisition (including any related Share Compensation Arrangement) does not exceed 25% of the issued and outstanding securities of the acquiring listed issuer; and 
  • the employees to be compensated under such a Share Compensation Arrangement are not insiders or employees of the acquiring listed issuer prior to the acquisition.

Employees and insiders of the acquiring listed issuer are prohibited from participating in a Share Compensation Arrangement adopted under the exemption provided by the 611 Amendments. That is, the new exemption may not be used to circumvent the general requirement that listed issuers obtain security holder approval for Share Compensation Arrangements pursuant to Section 613 of the Manual.

The 611 Amendments also clarify that securities issuable to insiders under a Share Compensation Arrangement are included in determining whether security holder approval, on a disinterested basis, is required for the acquisition as a result of the number of securities issued or issuable to insiders as a group exceeding 10% of the number of securities of the acquiring listed issuer.

Amendments to Section 613 – Clarifying Backdoor Listings

The TSX has identified an apparent gap in Section 626 of the Manual that has enabled unlisted entities to use TSX-listed issuers to "go public" without having to meet original listing requirements unless the TSX exercises its discretion to apply the backdoor listing requirements. The purpose of the 626 Amendments is to close this gap and thereby help support investor protection and preserve the quality of the stock list and the marketplace. The 626 Amendments do so by:

  • clarifying the definition of a "backdoor listing" as occurring when a transaction, or series of transactions, results in the acquisition of a listed issuer by an entity not currently listed on the TSX, including a merger, an amalgamation or an issuance of securities for assets; 
  • clarifying the discretion of the TSX to either exempt a transaction from the requirements to meet original listing requirements that may otherwise constitute a backdoor listing or consider a transaction a backdoor listing even if it may not otherwise qualify as one; and 
  • proposing a series of factors to be considered by the TSX in determining whether a transaction constitutes a backdoor listing, including without limitation: the business of the listed issuer and the unlisted entity, changes in management (including the board of directors), voting power, ownership, name changes and the financial structure of the listed issuer, although these factors do not constitute bright line tests and will be assessed both individually and collectively in determining whether a transaction results in a backdoor listing.

It will continue to be the case that transactions resulting, or that could result, in more than 100% dilution for existing security holders of the listed issuer will generally be considered a backdoor listing. In assessing whether a transaction will or could result in 100% dilution for existing security holders, the TSX will take into account securities issued or issuable upon a concurrent financing that is contingent or otherwise linked to the transaction, whether it is by way of private placement or public offering (rather than only by private placement, as is the practice under the current regime).

The TSX has stated that transactions resulting in the listing of an issuer not previously listed on the exchange should be closely scrutinized and should generally be required to meet original listing requirements. The 626 Amendments are expected to broaden the scope of transactions that may be captured by the rules relating to backdoor listings and will therefore more fully and transparently support the policy objectives thereof.

All comments should be submitted to the TSX in writing by Monday, January 13, 2014. For the full text of the Amendments and further instructions relating to public comment, see Amendments to Toronto Stock Exchange Company Manual(November 28, 2013).The Amendments will only become effective following public notice and the approval of the Ontario Securities Commission.