On October 19, 2017, the Toronto Stock Exchange (TSX) announced that it had adopted two sets of amendments to the TSX Company Manual after a lengthy consultative process — see our earlier posts of June 4, 2016 and May 5, 2017. In short, the amendments relate to disclosure requirements for security-based compensation arrangements such as stock option plans and to website disclosure of certain corporate documents. This post will deal with each in turn.
Security-Based Compensation Arrangements
The amended disclosure requirements for security-based compensation arrangements will be effective for financial years ending on or after October 31, 2017. In other words, these changes are effective almost immediately. Technically, the new requirements are set out in amendments to section 613(d) and in new section 613(p) of the TSX Company Manual.
Under section 613(d), as amended, for a shareholders’ meeting at which approval is sought for a security-based compensation arrangement such as a stock option plan or other similar plan, and also on an annual basis, the management information circular must set out, as applicable, (i) the maximum number of securities issuable under the plan as a fixed number together with the percentage which the fixed number represents of the number of issued and outstanding shares, or the fixed percentage of the number of issued and outstanding shares; (ii) the number of outstanding securities awarded under the plan, together with the percentage this number represents of the number of issued and outstanding shares; and (iii) the total number of securities that remain available for grant under the plan together with the percentage that this number represents of the number of issued and outstanding shares.
Under section 613(d) as amended, this disclosure must be presented as at the end of the issuer’s most recently-completed fiscal year, if such materials are included in a circular for an annual meeting (which is generally the case). This amendment will facilitate preparation of circulars, as previously certain of the information had to be as of the date of the circular, such as the number of outstanding stock options, which created practical problems for listed companies. Further, it will no longer be necessary to disclose “the total number of securities issued …. under each arrangement”, which required the listed company to provide information since the inception of the plan, which again often created practical problems.
In light of section 613(d) as amended, if a listed company has a stock option plan which provides for the issuance of a maximum of 3 million shares, and at the end of its last fiscal year had 50 million shares and 2 million stock options outstanding, the circular would include disclosure along the following lines:
“There are a maximum of 3 million shares issuable under our stock option plan, representing 6% of our issued and outstanding shares as at the end of our last fiscal year. As at the end of our last fiscal year, there were 2 million stock options outstanding under the stock option plan, representing 4% of our shares then issued and outstanding, and 1 million stock options remained available for grant, representing 2% of our shares then issued and outstanding.”
Alternatively, if a listed company has an “evergreen” stock option plan which provides for the issuance of shares in a maximum number equal to 10% of the number of issued and outstanding shares from time-to-time, and at the end of its last fiscal year had 50 million shares and 2 million stock options outstanding, the circular would include disclosure along the following lines:
“The maximum number of shares issuable under our stock option plan is equal to 10% of the number of our issued and outstanding shares from time-to-time. As at the end of our last fiscal year, there were 2 million stock options outstanding under the stock option plan, representing 4% of our shares then issued and outstanding, and 3 million stock options remained available for grant, representing 6% of our shares then issued and outstanding.”
In the case of a shareholders’ meeting (other than an annual meeting) at which approval for a security-based compensation arrangement is sought (e.g., a special meeting), the disclosure must be made as at the date of the circular. This will be exceptional.
And now for something new; the amendment to section 613 requires disclosure of the “annual burn rate” (ABR) for each plan. The method for calculation of ABR is set out in new section 613(p) of the TSX Company Manual. In short, ABR must be expressed as a percentage, where the numerator is the total number of securities granted under the plan during the applicable fiscal year (e.g., the number of stock options, performance share units, deferred share units, restricted share units or other similar awards granted during the fiscal year) and the denominator is the weighted average number of securities (e.g., shares) outstanding during the applicable fiscal year. The TSX Company Manual notes that the weighted average number of securities outstanding should be calculated in accordance with the CPA Canada Handbook; as a result, the figure used in the calculation of ABR will be consistent with that in the company’s financial statements.
Applying the foregoing, if the listed company’s weighted average number of shares outstanding during the last fiscal year was 50 million and the company granted 1 million stock options during the fiscal year, ABR will be 2%.
ABR must be disclosed for each of the last three fiscal years, to the extent applicable. If the plan has not been in existence for three fiscal years, the listed company must disclose ABR for each completed fiscal year since the plan was adopted. ABR may be omitted for the first fiscal year of a newly-adopted plan. The rationale for this exception is not immediately clear, if the plan has been in existence for at least one full fiscal year.
Section 613(d) requires the foregoing disclosure for meetings at which shareholder approval for a security-based compensation arrangement is sought, for example, when a plan is first established or for an “evergreen” stock option plan without a fixed maximum number of shares, for which the TSX requires approval every three years. However, section 613(g) of the TSX Company Manual requires annual disclosure in respect of each of the items set out in section 613(d). As section 613(d) now includes ABR, listed issuers will be required to disclose ABR every year.
The amendments regarding website disclosure will be effective on April 1, 2018. Subject to limited exceptions, TSX-listed companies will be required to maintain a publicly-accessible website and to post current versions of numerous documents, including articles of incorporation, amalgamation or continuance and corporate by-laws; and, if adopted, the following: majority voting policy, advance notice policy, position description of the chairman of the board, position description of the lead director, the mandate of the Board of Directors, and the charters of the various Board committees. Further, the webpage(s) containing these documents must be “easily identifiable” (e.g., “Corporate Documents and Policies”) and accessible from the website’s home page or investor relations page.
The new requirements for website disclosure are set out in section 473 of the TSX Company Manual.
The TSX acknowledges that many of these documents must be filed on SEDAR (notably, corporate articles and by-laws) but notes that they may be difficult to locate on SEDAR. The purpose of the amendment is to make all such documents “more readily accessible to the investing public” by providing a centralized location for a listed company’s corporate governance information. One cannot argue with that logic.
Many TSX companies already comply with the website disclosure requirement by making corporate documents and various policies available on their respective websites. Starting April 1, 2018, all TSX-listed companies will have to do so.