TSX Adopts Extension Amendments Regarding Security-Based Compensation Arrangements and Backdoor Listings

Written By Russel W. Drew, Christian P. Gauthier, John D. MacNeil and William S. Osler

The Toronto Stock Exchange has adopted amendments to the TSX Company Manual, which:

• allow listed issuers to adopt security-based compensation arrangements for employees of a target company in the context of an acquisition without obtaining security approval; and
• broaden the scope of the transactions that may be considered “backdoor listings”.

The amendments to the TSX Company Manual came into force on October 1, 2014.

Security-Based Compensation Arrangements of an Acquisition Target

Before the amendments, listed issuers were permitted to directly assume the security-based compensation arrangements of a target company or replace the security-based compensation of the target company with the security-based compensation arrangements of the listed issuer without obtaining security holder approval. The rules did not allow new awards to be made under the target's security-based compensation arrangements unless security holder approval was obtained. On a discretionary basis, the TSX did provide listed issuers with the flexibility to adopt new incentive arrangements for employees of a target company without obtaining security holder approval. The amendments to Section 611 of the TSX Company Manual formalize the TSX's discretionary practice.

Listed issuers can now establish a new security-based compensation arrangement for employees of a target company without security holder approval if:

1. the number of securities issuable under such arrangement does not exceed two percent of the issued and outstanding securities of the listed issuer (on a non-diluted basis); and
2. the number of securities issuable in connection with the acquisition, (including any related security-based compensation arrangements) does not exceed 25 percent of the issued and outstanding securities of the listed issuer (on a non-diluted basis).

The exemption from security-holder approval only applies to security-based compensation arrangements for employees of the target issuer. The exemption cannot be used for employees of the acquiror.

The amendments also clarify that securities issuable to insiders in an acquisition are included in determining whether shareholder approval is required. Security-holder approval is required where the number of securities issued or issuable to insiders as a group, together with any securities issued or made issuable to insiders as a group for acquisitions during the previous six months, in payment of the purchase price for an acquisition exceeds 10 percent of the number of securities of the listed issuer.

Backdoor Listings

A backdoor listing is a transaction whereby a privately-held company acquires a TSX-listed issuer. If the resulting issuer can satisfy the TSX minimum listing requirements, the privately-held company is typically able to bypass the initial public offering process and is able to assume the public listing of the listed issuer.

Under section 626 of the TSX Company Manual, a transaction will be considered a “backdoor listing” if it (i) results in a change in effective control of the listed issuer and (ii) will or could result in the existing security holders of the listed issuer holding less than 50 percent of the securities or voting power in the entity resulting from the transaction. In effect, this means that the transaction will or could result in more than 100-percent dilution, taking into consideration the securities issuable in connection with the transaction and all securities issuable pursuant to a concurrent private placement.

The amendments to Section 626 broaden the scope of the transactions that may be considered backdoor listings by giving the TSX broad discretion to look at many factors.

• A “backdoor listing” may include a transaction, or series of transactions, resulting in the acquisition of a listed issuer by an entity not currently listed on the TSX, and it may take various forms, including an amalgamation, or an issuance of securities for assets.
• In assessing whether a transaction is a backdoor listing, the TXS will consider the business of the listed issuer and the unlisted entity, changes in management and the board of directors, voting power, security ownership, name changes and changes to the capital structure.
• Finally, in determining whether the transaction will or could result in the existing security holders of the listed issuer holding less than 50 percent of the securities or voting power in the entity resulting from the transaction, the TSX will take into account securities issued or issuable upon a concurrent financing, whether it is by way of a private placement or public offering. Previously, the TSX only included those securities issued or issuable in a concurrent private placement.