Sharon Geraghty and Aaron Emes comment on how the Maple-TMX deal came together in IFLR

How The New TMX Was Created

August 09, 2012

Canadian securities trading will never be the same now that a consortium of investment companies has taken private the Toronto Stock Exchange and associated entities. It creates real potential for conflict, albeit mitigated by behavioral remedies, however new efficiencies abound. Here’s how it all came together.

Maple Group Acquisition Corporation's C$3.8 billion ($3.81 billion) two-step integrated transaction to acquire TMX Group, Alpha Group and the Canadian Depository for Securities (CDS) was nearly finished on July 31 when more than the 70% of required shares were tendered in accordance with a partial takeover bid.

The TMX bid had to be a two-step process for two reasons. First, TMX was still in talks with the London Stock Exchange (LSE) when Maple unilaterally launched the transaction. Second, TMX had a considerably large US shareholder base, meaning a registration statement would be required in absence of a court approved plan of arrangement. A plan of arrangement cannot be imposed without approval of the target company's board.

The first step was to acquire between 70% and 80% of TMX shares for cash at C$50 per share. Remaining shares can be tendered for cash until tomorrow, Friday August 10. Shareholders who do not redeem their shares will receive shares in Maple (the new TMX) at a ratio of one-to-one in accordance with the plan of arrangement, the second step of the transaction. As of July 31, approximately 91% of shares had been deposited, according to a TMX news release.

"The rules would not have allowed Maple to force a different form of consideration at the back end (after the first 70-80% was purchased for cash) without minority shareholder approval and a formal valuation," said Sharon Geraghty, counsel to TMX.

This meant a no-action letter was required from Canadian securities regulators. Exemptive relief was granted on the condition the bid was extended for 10 days after the tender offer to allow remaining shareholders an opportunity to receive the C$50 per share payments.

Greater than two-thirds of shareholders have already tendered shares, but the plan of arrangement will formally complete after shareholders approve the plan and a court decides it is a fair deal for TMX shareholders. Court approval is needed to qualify the US shares for a registration exemption under the Securities Act as well as convert existing TMX options into options in the new company.

Cross-margining could lower trading costs of Canadian financial institutions by lowering the margins required on each trade. At the moment, the Canadian Derivatives Clearing Corporation is the central clearing counterparty for exchange-traded derivatives and options, while CDS is the clearinghouse for equities. Clearing could be done under one roof after the deal closes.

"If implemented, this type of programme could result in significant reductions in required margin positions where common members of both clearing houses hold off-setting positions, a recognition of the lower risk involved in those situations," said Aaron Emes, who also represented TMX.

Trading costs have been a contentious issue in the TMX-Maple discussion, despite possible benefits resulting from cross-margining and simple economies of scale.

Read the full article here.


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