The proposed merger of TMX Group Inc. (TMX) and London Stock Exchange Group plc (LSE) announced on February 9, 2011, has renewed interest in cross-listing on the national stock exchanges of Canada and the United Kingdom. The Globe and Mail quoted Denis Jasmin, Vice-President of Investor Relations at SNC-Lavalin, as saying that “[The TMX-LSE merger] will attract more interest from foreign investors and analysts to Canadian companies, more exposure ... [and] will also improve TSX services, technology and products,” and Leo de Bever, Chief Executive Officer of Alberta Investment Management Corp. noted that “From an investor perspective, [the TMX-LSE merger is] a great thing... it’s very hard to deny that there is going to be a net benefit in terms of trading efficiency.”
Regardless of the proposed exchange merger, a Canada/UK cross-listing can deliver several advantages to an issuer: exposure to a broader range of investors, lower cost of capital, increased analyst coverage and additional index inclusion to name a few. While certain additional requirements exist, cross-listing is a viable option for a wide range of companies.
Companies that wish to cross-list between Canada and the UK may do so on either the Toronto Stock Exchange (the TSX) or the TSX Venture Exchange (the TSX-V) and either the London Stock Exchange (the LSE) or the Alternative Investment Market (the AIM). Currently there are approximately two dozen companies cross-listed on the TSX and the AIM, one dozen companies cross-listed on the TSX-V and the AIM and an additional one dozen companies cross-listed on the TSX and the LSE. The majority of these companies are in the mining and oil and gas sectors.
Recent developments have made it easier to do a Canada/UK cross-listing, and most of the issues of concern for issuers can be readily addressed. For example:
- Continuous Disclosure: Subject to limited exceptions, Canadian issuers are required to prepare, certify and file financial statements (unaudited) and the Management’s Discussion and Analysis on a quarterly basis. UK issuers are only required to provide such disclosure on a semi-annual basis. Because Canadian companies are quarterly filers, those that wish to cross-list on the LSE or the AIM are as a rule able to satisfy the UK semi-annual reporting requirements with minimal additional effort. However, to meet Canadian requirements, UK issuers typically need to become quarterly filers thus facing greater prerequisites. If less than 10% of their equity securities (on a fully diluted basis) are beneficially owned by residents of Canada there is a de minimis exemption that may be available to certain UK issuers under Canada securities laws from the requirement to provide quarterly disclosure.
- Accounting and Financial Statements: The adoption of IFRS accounting standards in Canada as of January 1, 2011 removes a significant obstacle to cross-listing between Canada and the UK. Cross-listed companies were previously required to reconcile their financial statements from IFRS to Canadian GAAP or vice versa. However, with the adoption of IFRS in Canada the reconciliation will no longer be required and this inconvenient barrier to cross-listing has been eliminated.
- Listing Standards: The TSX and TSX-V have developed listing standards for companies which set minimum thresholds for, among other things, public float, capitalization, earnings, pre-tax cash flows and working capital. In the UK, the Financial Services Authority implemented new rules in April 2010 creating two listing categories: (a) a “standard” listing category which complies with European Union minimum standards, and (b) a “premium” listing category, the requirements of which must be satisfied in order to gain inclusion in a FTSE index. There is overlap between the Canadian and UK listing requirements and, broadly speaking, a company that is eligible for listing on the TSX should be eligible for a “standard” listing in the UK (and vice versa).
- Clearing: The primary clearing and settlement systems for Canada and the UK are CDS Clearing and Depository Services Inc. (CDS) and Euroclear UK & Ireland (Euroclear), respectively. The majority of shareholders in Canada and the UK hold their securities electronically through a broker or other intermediary that is a participant of either settlement and clearing system and in most cases CDS or Euroclear is the registered holder of listed securities. In order to trade securities between Canada and the UK, shareholders instruct their broker or other intermediary to transfer the securities from CDS to Euroclear or vice versa. CDS and Euroclear have network agreements in place that provide participants with access to both settlement systems so settlement is effectively seamless.
- Regulation: Cross-listed companies engage regulatory oversight on both sides of the Atlantic. In Canada, each listed company is subject to the regulatory oversight of the securities regulatory authority in each province and territory of Canada in which the company is a reporting issuer. However, as a practical matter, the company will deal primarily with a single securities regulatory authority as principal regulator on behalf of the other securities regulatory authorities. UK companies seeking to cross-list on the TSX or TSX-V would typically be subject to regulatory oversight by the Ontario Securities Commission. In the UK, listed companies are subject to the regulatory oversight of the Financial Services Authority or a nominated advisor (Nomad). The Nomad concept is specific to companies listed on the AIM. Nomads often act as the issuer’s underwriter and assume a continuing role in regulating the issuer.
The above is an introduction of some of the issues faced by companies wishing to cross-list. The particular circumstances of each individual company may raise additional questions that should be addressed on a case-by-case basis.