The TSX has clarified its rules regarding the circumstances in which a listed issuer can dilute its existing security holders by more than 25%, engage in transactions that materially affect control of the issuer, and / or engage in transactions with insiders of the issuer, in reliance on the financial hardship exemption from the security holder approval requirement under section 604(e) of the TSX Company Manual. The TSX staff notice is available here.
The staff notice discusses the level of information that the TSX will expect from issuers making applications to use the financial hardship exemption. Highlights of the information required include:
- the reasons for the issuer's serious financial difficulty;
- how the proposed transaction will remedy the issuer's financial difficulty, including a budget for at least 6 months;
- insider involvement in the proposed transaction and alternatives considered;
- evidence of the process undertaken by the issuer and the reasonableness of the proposed transaction; and
- any indications of fairness to the issuer's security holders and the reasons why their approval cannot be obtained.
The notice indicates that the "TSX will consider previous reliance by the listed issuer on the financial hardship exemption." Presumably, repeated recourse to this exemption will receive a higher level of scrutiny. Also, the TSX will not generally accept the use of this exemption for transactions that do not directly improve the issuer's financial situation through an inflow of cash or reduction of a financial liability.
The Financial Hardship Exemption
The financial hardship exemption applies to many of the types of transactions for which security holder approval is required under Part VI of the TSX Company Manual, such as transactions:
- materially affecting control of the issuer;
- involving consideration to insiders of the issuer of 10% or more of the issuer's market capitalization;
- pursuant to which insiders of the issuer acquire securities equal to 10% or more of the issuer's total outstanding securities; or
- resulting in greater than 25% dilution to existing security holders (subject to exceptions).
The financial hardship exemption provides that, upon application to the TSX, an issuer that continues to meet the ongoing listing requirements will be exempt from security holder approval requirements if the application is accompanied by a resolution of the issuer's board of directors stating that:
- the issuer is in serious financial difficulty;
- the application is made upon the recommendation of a committee of board member(s), free from any interest in the transaction and unrelated to the parties involved in the transaction;
- the transaction is designed to improve the issuer's financial situation; and
- based on the determination of the committee, the transaction is reasonable for the issuer in the circumstances.
Issuers using this exemption are required to issue a press release at least five business days in advance of the closing of the transaction disclosing the material terms of the transaction and that the issuer has relied upon this exemption. The TSX will not issue its conditional approval for a transaction until at least five days after the press release, which will allow time for parties who oppose the transaction to make their views known to the TSX.
Discussion
The notice indicates that the financial hardship exemption was introduced to allow issuers to enter into transactions in a timely manner when in financial difficulty. It was also deemed appropriate for TSX to defer to the decision of an issuer's unrelated directors in this regard.
However, notwithstanding that it is described as an exemption, the financial hardship exemption requires an affirmative decision of the TSX before an issuer is exempt from the security holder approval requirement.1 The level of detailed information that the TSX requires for consideration of an application for such decision suggests that the TSX will undertake its own analysis of the issuer's and its board of directors' actions in connection with the proposed transaction, rather than deferring to the reasonable business judgment of the unrelated directors.
In view of the recent decision of the Ontario Securities Commission in connection with the HudBay – Lundin merger, it is not clear how this analysis will differ from the TSX's considerations in exercising the discretion conferred under 603 of the Company Manual to allow exemptions from any of the requirements contained in part VI of the Company Manual.
The TSX staff notice further highlights the new prominence of the issue of security holder approval for significant transactions and is an indication that the TSX may scrutinize exemption applications in more depth.
Footnote
1. The requirement for an affirmative decision for an issuer to rely on the financial hardship exemption is in contrast to the almost identical exemption to the formal valuation and minority approval requirements provided under sections 5.5(g) and 5.7(1)(g) of Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions.
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