TSX Proposes Additional Flexibility for Issuers in Cases of Dilutive Acquisitions

July 20, 2018
  • On June 14, 2018, the Toronto Stock Exchange (TSX) proposed allowing issuers to issue additional shares beyond the amount for which they have already obtained shareholder approval to use as compensation for the acquisition of a public company.
  • Where shareholder approval has been obtained to issue shares beyond current dilution threshold, no further shareholder approval would be required for an issuance of up to an additional 25% of the number of shares originally approved.
  • The ability to issue additional shares without further shareholder approval would provide issuers with the flexibility to consider increasing an unsolicited bid without publicly signaling their strategic intentions.

Shareholder Approvals for Dilutive Acquisitions

The existing rule

Since 2009, the TSX Company Manual has required issuers to obtain shareholder approval for issuances of securities exceeding 25% of issued and outstanding shares where the shares are to be used as consideration for the acquisition of a public company. Until 2009, such shareholder approval was not required where the target of the acquisition was a public company.

The new proposal: Adding flexibility once approval is obtained

While issuers may request approval to issue any number of shares, approval is usually requested for the number of shares required to complete the publicly announced transaction. Requesting approval to issue more than that number of shares would signal to the market that the bidder is willing to increase its offer for the target company. So would requesting further approval should it be necessary to make a superior proposal where a competing offer emerges for the target company.

According to the TSX, the initial hostile bidder has been successful in half the hostile transactions in Canada since 2002. In most of these transactions, the consideration for the transaction was increased by an average of 25% from the initial offer. While the introduction of the 25% dilution threshold has provided shareholders with a say on dilutive acquisitions, issuers remained concerned with the potential tactical disadvantage created by requiring shareholder approvals in a competitive bid situation.

To address these concerns, the TSX proposal would allow issuers to exceed the number of shares they issue as part of a transaction to acquire a public company by an additional 25% of the original number of shares approved by shareholders. Thus, for example, if an issuer obtained shareholder approval to issue 1 million shares to fund an acquisition, the issuer would be permitted to issue an additional 250,000 shares (25% of the originally approved 1 million shares, for a total of 1.25 million shares) without further shareholder approval.

The additional shares would only be issuable to increase the consideration under the transaction. Further, while issuers would not have to disclose their intentions to potentially issue shares beyond the number approved by shareholders, the TSX proposal would require that specific language be included in the materials provided to shareholders stating that the TSX would not require issuers to obtain securityholder approval to exceed the number of shares approved by up to 25%.

Next Steps

The TSX will review feedback received on its proposal (the comment period expired earlier in July). It specifically asked for comment on whether alternatives to its proposal would be more appropriate, whether the amendments should be expanded to private placements and asset acquisitions, and whether the 25% limit for issuing additional shares is appropriate.

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