Written By John E. Piasta, Jon C. Truswell, Andrew N. Disipio and Eric Wiebe
On November 24, 2021, the TSX Venture Exchange (the Exchange) revised its policies regarding security-based compensation. Specifically, Policy 4.4 — Incentive Stock Options (the Former Policy) has been replaced by new Policy 4.4 — Security Based Compensation (the New Policy). The New Policy, which takes effect immediately, represents a significant change to the Former Policy, providing greater flexibility for Exchange-listed issuers insofar as the New Policy:
- covers a wider variety of incentive securities, rather than only stock options;
- provides greater flexibility in structuring security-based compensation plans;
- permits the exercise of stock options on a cashless and net exercise basis; and
- codifies certain pre-existing, unwritten rules of the Exchange governing security-based compensation plans and grants.
New Types of Incentive Securities Issuable Under Security-Based Compensation Plans
The Former Policy only covered stock options, whereas the New Policy expands the incentive securities issuable under security-based compensation plans of Exchange-listed issuers beyond stock options to include deferred share units, performance share units, restricted share units and stock appreciation rights (collectively, Incentive Securities).
In many instances, grants of Incentive Securities under the New Policy are subject to many of the same rules and procedures as compared to grants of stock options under the Former Policy. There are, however, some important distinctions. For example, the New Policy provides that Incentive Securities may not vest for a period of at least one year from the date of grant or issuance, subject to acceleration in limited circumstances, whereas the Former Policy did not contain any such vesting condition. In addition, under the New Policy, persons providing investor relations services may only be granted stock options and the grant of stock options to these persons must vest in stages over a period of not less than 12 months, whereas the Former Policy did not contain include such a restriction.
It should be noted that capital pool companies and issuers listed on the NEX may only grant stock options and no other types of security-based compensation.
New Categories of Security-Based Compensation Plans
The New Policy provides for four categories of permitted security-based compensation plans (an issuer must choose one category):
- a "Rolling Plan" under which the number of listed shares of the issuer that are issuable pursuant to all security-based compensation plan(s) in aggregate is equal to up to a maximum of 10% of the issued shares of the issuer as at the date of grant or issuance of any security-based compensation under any of such security-based compensation plan(s);
- a “Fixed Plan” under which the number of listed shares of the issuer that are issuable pursuant to all security-based compensation plan(s) in aggregate is a fixed specified number of listed shares of the issuer up to a maximum of 20% of the issued shares of the issuer as at the date of implementation of the most recent of such security-based compensation plan(s) by the issuer;
- a "Hybrid Plan" consisting of a rolling stock option plan up to 10% and other fixed up to 10%, under which the number of listed shares of the issuer that are issuable pursuant to the exercise of stock options is equal to up to a maximum of 10% of the issued shares of the issuer as at the date of any stock option grant, and “fixed” security-based compensation plan(s) (other than stock option plans) under which the number of listed shares of the issuer that are issuable pursuant to all such security-based compensation plan(s) (other than stock option plans) in aggregate is a fixed specified number of listed shares of the issuer up to a maximum of 10% of the issued shares of the issuer as at the date of implementation of the most recent of security-based compensation plan(s) (other than stock option plans) by the issuer; and
- a "Fixed Stock Option up to 10% Plan" under which the number of listed shares of the issuer that are issuable pursuant to the exercise of stock options is a fixed specified number of listed shares of the issuer up to a maximum of 10% of the issued shares of the issuer as at the date of implementation of the stock option plan by the issuer.
The Former Policy permitted only two "types" of stock option plans, being the Rolling Plan and Fixed Plan. While these types of plans remain available to issuers, both have been expanded to permit the issuance of the Incentive Securities. Moreover, the Hybrid Plan is a new category, designed to provide additional flexibility to issuers in meeting their compensation needs. Meanwhile, the Fixed Stock Option up to 10% Plan, is effectively a subset of the Fixed Plan in that it permits a fixed number up to 10% only, and it is further limited to stock options only (and no other types of Incentive Securities).
Issuers must obtain shareholder approval for the implementation of all security-based compensation plans described above with the exception of the Fixed Stock Option up to 10% Plan.
While the Fixed Stock Option up to 10% Plan may be implemented without shareholder approval, it is subject to certain requirements, including that it does not permit the net exercise of stock options and that the number of listed shares issuable under the Fixed Stock Option up to 10% Plan not be increased more than once in a 24 month period.
Any amendments to an implemented security-based compensation plan, including when the number of shares issuable under the security-based compensation plan is modified, also requires shareholder approval.
The New Policy also requires shareholder approval on annual basis for the Rolling Plan and the rolling portion of the Hybrid Plan.
Net Exercise/Cashless Exercise
Under the Former Policy, the exercise price of a stock option was required to be paid in cash. By contrast, the New Policy permits stock options to be exercised on a "net exercise" basis, where there is no cash payment to the issuer and the participant receives shares based on a formula using the five-day volume weighted average trading price of the underlying shares. The New Policy also expressly permits "cashless exercise" where a brokerage firm facilitates the exercise of a stock option, and the issuer still receives the exercise price of the stock option in cash.
Security-Based Compensation Outside of a Security-Based Compensation Plan
The New Policy permits the Exchange to consider, in certain specified circumstances, an application of an issuer to grant or issue security-based compensation outside of a security-based compensation plan, for example where:
- Securities for Services: Under the New Policy and Exchange Policy 4.3 — Shares for Debt, an agreement by the issuer to compensate a person by way of securities for services is subject to a number of requirements imposed by the Exchange. For example, if the person providing the services is a non-arm's length party to the issuer or to any of its affiliates, the New Policy stipulates that only listed shares may be issued. Moreover, the New Policy states that such securities cannot be issued for investor relations, promotional or market making activities;
- Compensation Owed to Non-Arm's Length Parties: Under Policy 4.3, an agreement by the issuer to settle outstanding debt for securities is subject to a number of requirements imposed by the Exchange. In particular, Policy 4.3 states that the Exchange may deny acceptance of any shares for debt transaction if the debt relates to management fees of more than $2,500 per month. Under the New Policy, the Exchange increased this limit to $5,000 per month per person and $10,000 per month in aggregate per issuer. Only listed shares may be issued under Policy 4.3;
- One Time Payments as Inducement or Severance: The New Policy permits issuers to issue listed shares as an inducement or as severance without shareholder approval provided that the maximum number of listed shares that an issuer may issue is limited to:
- 1% of the issued shares for any particular issuance;
- 1% of the issued shares to any one person in any 12-month period; and
- 2% of the issued shares to all persons in aggregate in any 12-month period.
- Loans: Where an issuer wishes to lend funds to a person for the purpose of acquiring securities of the issuer, such loan must first be approved by the shareholders of the issuer.
It is important to note that, any such grant or issuance of security-based compensation outside of a security-based compensation plan, unless otherwise provided (such as One Time Payments as Inducement or Severance as noted above), will be subject to shareholder approval, which may be obtained at a meeting or by written consent.
The former Form 4G has been expanded to address the additional types of security-based compensation that issuers may issue, and to include "snapshot" summaries of outstanding security-based compensation plans and outstanding security-based compensation. It now also includes the former Form 4F as its Schedule "A". Further, the new Form 4G is now simply a reporting form and it will no longer be used to apply to the Exchange for its acceptance of a proposed amendment to security-based compensation (rather, a letter application will be required in relation to the latter).
The Form 4F certification and undertaking required from an issuer granting an incentive stock option has been repealed, as the new Form 4G includes the substantive contents of Form 4F.
The New Policy is effective as of November 24, 2021. The New Policy permits security-based compensation plans filed with the Exchange prior to November 24, 2021 (a Legacy Security-Based Compensation Plan) and all security-based compensation granted, issued or amended before or after November 24, 2021 pursuant to such Legacy Security-Based Compensation Plans, to remain in force in accordance with their existing terms. However, any Legacy Security-Based Compensation Plan that is to be placed before shareholders for approval and any other security-based compensation plan that is implemented or amended after November 23, 2021, must comply with the New Policy. Any security-based compensation that is granted, issued or amended after November 23, 2021, other than pursuant to Legacy Security-Based Compensation Plans must comply with the New Policy.
If you have any questions regarding changes to the TSX Venture Exchange's security-based compensation policies, please contact a member of the Bennett Jones Capital Markets group.