Change in Shareholder Approval Requirements for Certain TSX-V-Listed Issuers Undertaking a Change of Business or Reverse Takeover
Written by Tessa E. J. Guenther and Katie M. Miller
On December 15, 2016, the TSX Venture Exchange (TSX-V) published amended Policy 5.2 – Changes of Business and Reverse Takeovers of the TSX Venture Exchange Corporate Finance Manual (Policy 5.2). The amendments to Policy 5.2 include, among other things, specific guidance on where the TSX-V may waive the requirement for shareholder approval of a change of business (COB) or reverse takeover (RTO).
The stated purpose of Policy 5.2 is to enable TSX-V and NEX issuers to efficiently complete a COB or RTO while protecting the interests of the affected shareholders and preserving the integrity of the market. The amendments to the policy enable eligible issuers to avoid the potentially costly and time-consuming exercise of obtaining the required level of shareholder approval for such a transaction.
Shareholder Approval of a COB or RTO
When Shareholder Approval is Not Required
Prior to the amendments to Policy 5.2, shareholder approval of a COB or RTO was always required in order to obtain approval from the TSX-V for such a transaction. This requirement has been eased in the amended Policy 5.2, which now prescribes that prior shareholder approval of a COB or RTO must be obtained except where:
- The transaction is not a related party transaction and no other circumstances exist which may compromise the independence of the issuer or other interested parties, including the directors and senior officers of the issuer.
- The TSX-V has confirmed to the issuer that the issuer has no active operations (issuers confirmed by the TSX-V as having no active operations will generally include issuers listed on NEX, Tier 1 and Tier 2 issuers that do not meet activity requirements but have yet to be transferred to NEX and issuers that have otherwise satisfied the TSX-V that they are without active operations).
- The issuer is not subject to a cease trade order and will not be suspended from trading on completion of the transaction.
- Shareholder approval of the transaction or any element thereof is not required under applicable corporate or securities laws.
- In a news release announcing the transaction, the issuer discloses that it will not be obtaining shareholder approval for the transaction and sets out the reasons why such approval will not be sought.
In instances where shareholder approval is not required, the issuer will be expected to file all requisite disclosure documents on SEDAR at least seven business days prior to: (i) the date on which trading in the securities of the issuer resumes following the closing of the COB or RTO, if such securities are halted from trading; or (ii) the closing date of the COB or RTO, if the securities of the issuer are not subject to any trading halt.
Form of Shareholder Approval
Consistent with the prior version of Policy 5.2, shareholder approval, if required, must be obtained at a meeting of shareholders or by written consent: (i) by a majority of votes where the transaction is an arm's length transaction; (ii) where the transaction is a non-arm's length transaction, by a majority of votes excluding non-arm's length parties to the issuer who are receiving a collateral benefit and non-arm's length parties to the transaction; and (iii) by means of minority approval if required by the policies of the TSX-V.
The amended Policy 5.2 additionally prescribes that written shareholder consent must include: (i) an explanation of the transaction, including why the shareholder consent is required; (ii) the name, signature, and date of signature of the shareholder; (iii) the number of securities of the issuer beneficially owned by the shareholder; (iv) confirmation that the shareholder has received a copy of or has access to and has read the issuer's final filing statement; and (v) confirmation that the shareholder understands and approves the transaction.
Other Amendments to Policy 5.2
Restrictions on Financings
The amendments to Policy 5.2 also impose certain restrictions on financings completed in connection with a COB or RTO. For this purpose, the amended policy differentiates between a "concurrent financing", defined as a financing completed by the issuer concurrently with the closing of a COB or RTO in order to cover closing costs and satisfy initial listing requirements, and a "bridge financing", defined as a financing completed by the issuer during the period between the execution of a COB or RTO agreement and the closing of a COB or RTO to cover interim transaction costs, such as audit fees and legal expenses.
Under the amended Policy 5.2, an issuer may not complete a bridge financing in connection with a COB or RTO unless certain conditions are satisfied. These conditions include:
- Lack of Available Funds: An issuer proposing to complete a bridge financing must lack the funds necessary to cover the costs associated with advancing the COB or RTO, as applicable, to its closing stage.
- Independence: The proposed bridge financing must not be tied to the completion of the COB or RTO. The proceeds of the bridge financing must be immediately available to the issuer upon the closing of the bridge financing and must generally be directed towards proceeding to the completion of the COB or RTO, as applicable.
- Appropriate Pricing: The terms of the proposed bridge financing must be consistent, in terms of offering price and type of security offered, with the terms of any concurrent financing; provided, however, that a bridge financing may be priced at a discount to a concurrent financing or involve the issuance of warrants (even when the concurrent financing does not) to account for actual risk being assumed by the bridge financing’s investors.
The amended Policy 5.2 requires that at least 75 percent of a bridge financing be subscribed for by arm’s length parties in instances where: (i) the bridge financing is carried out on terms preferable to those used in the concurrent financing; or (ii) the terms of the concurrent financing have not been settled at the time of the bridge financing.
Loans to Target Companies
Finally, the amendments to Policy 5.2 formalize the process by which an issuer may advance funds in excess of $25,000 to a vendor or target company in connection with a COB or RTO. Under the amended Policy 5.2, such advances are subject to exchange acceptance and may only be made if:
- The advance is structured as a secured loan.
- The advance is announced in a news release disseminated at least 15 days prior to the advance being made.
- The COB or RTO is an arm's length transaction.
- The COB or RTO has been announced in a news release.
- The due diligence with respect to the COB or RTO is well underway.
- A sponsor has been engaged or sponsorship has been waived in relation to the COB or RTO, if applicable.
- The funds being advanced do not exceed $250,000 in the aggregate (provided that advances in excess of this amount may be permitted where the funds advanced represent less than 20 percent of the working capital of the issuer).