Capital Raising to Finance Acquisitions: New TSX Guidance

The TSX has published a staff notice addressing the practice of public companies announcing concurrently a material acquisition and the pricing of a financing being used to fund that acquisition. Although the TSX notes that it is not generally permissible to price a financing where there is material undisclosed information, the TSX has typically permitted companies to announce a financing concurrently with a material acquisition on the basis that the two transactions are inextricably linked. The new TSX guidance codifies this previously unwritten rule and imposes some additional restrictions on companies.

The Pricing Exception

The TSX will continue to allow material acquisitions – i.e. acquisitions that would reasonably be expected to significantly affect the market price of the company’s securities – to be announced concurrently with related financings (called the Pricing Exception), provided the company certifies that

  • the company would not be entering into the acquisition without the concurrent financing, and

  • the proceeds of the financing will be used primarily to fund the acquisition.

If a company is unable to provide this certification, the TSX advises that companies should consider first announcing the material acquisition and pricing the financing only after the market has absorbed, and the market price of the securities reflects, the acquisition announcement. Given that most Canadian M&A deals contain no financing condition, we would not expect to see this approach taken in most circumstances. Parties may be reluctant or unable to take this approach.

Use of Proceeds Test

If the proceeds of a financing significantly exceed the cash consideration needed to fund a material acquisition (plus reasonable, related capital expenditures or similar expenses), the TSX may conclude that the link between the acquisition and the financing is not sufficiently strong to support the availability of the Pricing Exception. The TSX will generally consider a financing to significantly exceed the cash consideration where the financing raises 30% or more in excess of the cash consideration required for the acquisition plus related expenses. In these cases, the TSX may require the company to reduce the size of the offering, announce the acquisition before pricing the offering, or condition the offering on securityholder approval.

The TSX notes that in exceptional circumstances it may accept alternative submissions from a company in support of its ability to rely on the Pricing Exception. It is not clear what would constitute exceptional circumstances, but companies are encouraged to contact the TSX well in advance of a contemplated financing to fund a material acquisition if it appears that the 30% threshold may be triggered or if the company is unable to otherwise provide the required certification.

Insider Participation

The TSX generally permits insider participation in public offerings up to the insider’s pro rata holdings. However, the staff notice cautions issuers and their advisors to carefully consider the appropriateness of insider participation in offerings that rely on the Pricing Exception. In particular, the TSX advises that significant insider participation in these circumstances may provide or appear to provide insiders with an economic advantage not generally available to the investing public.

To discuss these issues, please contact the author(s).

This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.

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