Share Buybacks During COVID-19? Practical Considerations Before Proceeding

March 27, 2020

Issuers looking to undertake or continue normal course issuer bids (NCIBs) during the COVID-19 pandemic should consider a number of issues.

Canadian issuers wishing to buy back previously issued shares are generally subject to the issuer bid rules set out in National Instrument 62-104 Take-Over Bids and Issuer Bids (NI 62-104). Notwithstanding the formal issuer bid rules, NI 62-104 provides an exemption for bids made in the normal course through the facilities of a designated exchange (e.g., the Toronto Stock Exchange, the TSX Venture Exchange, or the NEO Exchange) all in accordance with the by-laws, rules, regulations and policies of such exchange (a Designated Exchange NCIB). A similar exemption exists for issuers listed on a published market (e.g. the CSE) other than a designated exchange (a Published Market NCIB).

During the COVID-19 pandemic, issuers might find a normal course issuer bid (or NCIB) to be appealing, particularly in light of depressed share prices. In this article we discuss certain matters to consider when thinking about implementing a NCIB (or buying shares under a pre-existing NCIB).  

Material Undisclosed Information

In light of the current COVID-19 pandemic, issuers should carefully assess whether they are in possession of material undisclosed information. The impact of the COVID-19 pandemic coupled with the ability to extend filing deadlines may result in a greater risk that an issuer is apprised of material undisclosed information which could prevent the institution of an NCIB or the purchase of securities under an existing NCIB.

  • While the various designated exchanges have different rules governing NCIBs, they all generally aim to uphold the policy objective of treating securityholders equally through the provision of adequate information and creating an even-handed buy-back process. To this end, issuers are generally prohibited from undertaking an NCIB while in possession of material undisclosed information.
  • As an example, the TSX Company Manual explicitly prohibits the use of an NCIB while a company is in possession of material undisclosed information. Listed issuers are not permitted to make any purchases of their securities pursuant to an NCIB if they have material information that has not been disseminated.
  • Given the current uncertain economic climate, assessing materiality may prove to be more challenging for certain issuers or industries. Issuers should carefully consider the relevant facts and circumstances in advance of implementing or purchasing securities under an NCIB.
  • If relying on the Canadian Securities Administrators’ (CSA) recently published relief to delay the filing of annual or interim financial statements, MD&A or annual information forms, issuers should consider the impact of such a delay on their ability to launch an NCIB.
  • Issuers are also reminded about compliance with insider trade reporting and filing of other reports as to issued and outstanding securities required by the applicable exchange.

Automatic Securities Purchase Plans

As discussed above, purchases of securities by an issuer under an NCIB during a period where the issuer has knowledge of material undisclosed information relating to it or its material subsidiaries should not take place. During the COVID-19 pandemic, issuers will likely face increased challenges of operating an NCIB as issuers are always in peril of entering into a blackout. To address this, some issuers may choose to set up an automatic securities purchase plan (ASPP) in order to be able to purchase securities during these periods; however ASPPs are not without their own potential issues.

  • OSC Staff Notice 55-701 Automatic Securities Disposition Plans and Automatic Securities Purchase Plans clarifies that an ASPP will generally satisfy the exemption from insider trading prohibitions provided that the plan is truly “automatic”, meaning that, in the case of an NCIB:
    • The issuer does not have decision-making ability over the trading of securities governed by the ASPP and cannot make “discrete investment decisions” through the ASPP;
    • The issuer is not in possession of material undisclosed information at the time it enters into, amends or terminates the ASPP;
    • Trading parameters and other pertinent instructions are set out in a written plan document;
    • The ASPP contains “meaningful restrictions” on the ability of the issuer to vary, suspect or terminate the ASPP;
    • The ASPP prohibits a broker from consulting with the issuer regarding any purchases under the ASPP, and the issuer from disclosing information to the broker concerning the issuer that might influence the execution of the ASPP; and
    • The ASPP is entered into in good faith.
  • Given the current economic climate, some issuers may want to re-evaluate their approach to ASPPs, including amending or terminating ongoing ASPPs. The amendment and/or termination of an ASPP, as typically required under standard ASPP provisions, can only happen when issuers do not have any material undisclosed information. As discussed above, this may become an issue, given the increased risk of unplanned and/or prolonged blackout periods.
  • Given the current economic climate, issuers may also consider adopting, amending or terminating ongoing ASPPs. Of course, the amendment and/or termination of an ASPP, as typically required under standard ASPP provisions, can only happen when issuers do not have any material undisclosed information. This may become an issue for issuers who find themselves in a position where they want to terminate or amend an ASPP but cannot do so because of the persistent existence of material undisclosed information.
  • For more information about ASPPs, please see our previous post: Use of Automatic Plans to Facilitate Trading by Company Executives.

Use of Capital

While an NCIB may be an attractive use of cash, issuers will need to balance this opportunity with the need to preserve capital in light of the potential uncertainties facing the business as the impact of COVID-19 continues to unfold. Notwithstanding the potential benefits of an NCIB, Canadian corporate legislation generally prohibits the buyback of shares if there are reasonable grounds for believing that either (a) the corporation is, or would after the payment be, unable to pay its liabilities as they become due, or (b) the realizable value of the corporation’s assets would after the payment be less than the aggregate of its liabilities and stated capital of all classes. Directors of the company may be personally liable for losses resulting from a breach of these solvency tests.

  • Issuers should assess whether they can satisfy the solvency tests following the purchase of any securities pursuant to the NCIB, particularly in light of declining economic conditions and potential strains on liquidity as a result of COVID-19.
  • Potential NCIB purchases should also be considered in light of the issuer seeking concessions from lenders and/or laying off employees. Similarly, as government assistance becomes available for Canadian corporations during the COVID-19 crisis, issuers should consider whether the purchase of securities through an NCIB or otherwise might preclude the availability of these resources (as has been suggested in the U.S.).

Purchase Limits

The rules applicable to NCIBs, both Designated Exchange NCIBs and Published Market NCIBs, impose daily and annual limits on the number of securities an issuer may purchase.

Under TSX rules, listed issuers may generally purchase up to the greater of (i) 25% of the average daily trading volume (ADTV) of the securities of that class, and (ii) 1000 securities per day. As recently discussed, in response to the current COVID-19 pandemic, the TSX has temporarily increased the volume of purchases that may be made under an NCIB from 25% to 50% of the ADTV, between March 23, 2020 and June 30, 2020.

Under its NCIB policy, the TSX-V limits purchases under an NCIB to (i) no more than 2% of the total issued and outstanding securities of the class at the time of purchase, aggregated with all other purchases in the preceding 30 days (whether through the TSX-V or otherwise), and (ii) over a 12-month period, no more than the greater of 10% of the public float and 5% of the class of securities on the first day of the 12-month period. Similarly, an NCIB on the NEO Exchange is limited to the greater of 10% of the public float or 5% of the securities of the class outstanding, over a 12-month period. Neither the TSX-V or the NEO Exchange have increased their NCIB purchase limits in light of the COVID-19 pandemic. 

Purchases under a Published Market NCIB are limited to not more than 5% of the outstanding securities of a class, both at the time of purchase and during a 12-month period.

DISCLAIMER: This publication is intended to convey general information about legal issues and developments as of the indicated date. It does not constitute legal advice and must not be treated or relied on as such. Please read our full disclaimer at www.stikeman.com/legal-notice.

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