October 17, 2007
In a move that would drastically alter Canada’s M&A landscape, the TSX is considering changes to Canada's takeover rules to give shareholders of public companies that are acquiring other public companies a chance to vote on the transactions.
TSX’s request for comments, published October 12 and accepting comments until December 12, is asking the market whether a shareholder-approval requirement should be implemented for deals where the acquiring company must issue shares from its treasury to buy another public company, which creates dilution.
Three of the world's largest markets—the NYSE, Nasdaq and LSE—already have shareholder-approval rules in place that are triggered when a certain level of dilution is hit.
"It would have a big impact on transaction structuring," says Aaron Emes. "More cash, less shares, potentially favouring a private-equity player versus a strategic [buyer] who was planning on issuing shares as currency."
The shareholder-approval requirement would increase the odds that a takeover deal between two public companies would crumble because shareholders of the acquiring company may revolt. If a board is faced with two takeover proposals—one from a private-equity shop and the other from a public company—it may opt for the private-equity offer because it is less risky, says Aaron.
To avoid going to shareholders for approval, predatory companies may increase the amount of cash they use in takeover transactions. This could pose a problem for many of Canada's oil and gas and mining companies, which use their cash for exploration and development and their stock as currency to finance their takeover ambitions.
In takeovers of private companies, TSX companies wishing to issue more than 25% of their outstanding securities to acquire a private company require shareholder approval. In its request for comment, the TSX is asking the market to weigh in on what would be an appropriate threshold to trigger a shareholder-approval requirement on acquisitions between two publicly listed companies. The NYSE and Nasdaq require shareholder approval on deals in which more than 20% of the company's shares will have to be issued, while the LSE shareholder-approval requirement is triggered on transactions exceeding 25% dilution. The Johannesburg Stock Exchange requires shareholder approval on deals exceeding 30% dilution, while the Hong Kong Stock Exchange's shareholder-approval requirement is triggered at 50% dilution.
Australian Securities Exchange rules mirror current TSX rules. TSX's request for comments notes that the number of publicly listed mining firms (1,314) and oil and gas listings (434) in Canada are closer to those on the Australian exchange than on either NYSE or LSE.
"Canadian issuers tend to be more growth-oriented issuers, frequently active in M&A to secure their growth," notes the TSX request for comments. "The U.S. exchanges may generally be characterized as listing larger, more mature issuers that have access to abundant cash flow or sources of credit to complete acquisitions on a cash basis."