The Toronto Stock Exchange (TSX) has proposed two sets of rule changes affecting listed issuers: one relating to equity compensation plans for target employees in connection with acquisitions, and the other relating to backdoor listings.1 Both sets of proposed rules are open for comment until January 13, 2014.
Equity Compensation Plans for Target Employees
The TSX’s current rules permit listed issuers, in connection with acquisitions, to assume or replace a target’s equity compensation plans without obtaining shareholder approval. This is an exception to the general rule that shareholder approval is required when a listed issuer adopts a new equity compensation plan. On a discretionary basis, the TSX has sometimes waived the shareholder approval requirement in connection with new plans adopted by listed issuers for target employees, on the grounds that equity incentives are a retention mechanism and integral to an acquisition. The TSX is now proposing to codify this approach with a new rule that would include the following conditions:
- the number of securities issuable under the new compensation plan may not exceed 2% of the listed issuer’s pre-transaction outstanding securities (consistent with the TSX’s current rule for employment inducement awards granted to officers);
- the number of securities issuable pursuant to the acquisition, including under the new compensation arrangements, may not exceed 25% of the listed issuer’s pre-transaction outstanding securities; and
- the target’s employees may not be insiders or employees of the listed issuer prior to the acquisition.
To preserve the quality of the marketplace and better protect investors, the TSX is proposing to replace its existing test for identifying backdoor listings with a broader, more discretionary test. Under the existing test, a backdoor listing occurs when a listed issuer is acquired by an unlisted company and the acquisition results in (i) a change in effective control of the listed issuer and (ii) the listed issuer’s security holders owning less than 50% of the securities or having less than 50% of the voting power in the new entity. If a transaction constitutes a backdoor listing, the acquiring entity must generally meet the TSX’s original listing criteria. Under the proposed new test, the TSX would consider a variety of qualitative factors to determine whether a transaction constitutes a backdoor listing, including:
- the businesses of the parties and their relative sizes;
- changes in management and boards; and
- voting power, securities ownership and capital structure.
In assessing the above factors, as well as in calculating the amount of dilution of the listed issuer’s security holders, the TSX is proposing to count securities issued in any concurrent financing transaction (whether a public offering or a private placement).
The TSX has indicated that under the proposed rules, listed issuers would have the opportunity to make submissions as to whether a transaction should be characterized as a backdoor listing. It can be expected that a more discretionary test will result in a greater number of transactions being characterized that way.
1 Also known as reverse mergers or reverse takeovers.
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