TSX provides guidance on acceptable anti-dilution provisions for convertible securities, adding a cashless exercise feature to security compensation arrangements and compliance with NCIB price restrictions
On December 7, the TSX published a staff notice providing guidance on: (i) acceptable standards for anti-dilution provisions for convertible securities; (ii) recent amendments to the TSX Manual respecting security-based compensation arrangements that provide for cashless exercises; and (iii) the application of the uptick prohibition for purchases made pursuant to normal course issuer bids (NCIBs).
Anti-dilution provisions for convertible securities
Convertible securities, such as warrants, options, debentures and preferred shares typically contain anti-dilution provisions designed to compensate holders of convertible securities for changes in a listed issuer's capital. The notice clarifies the standards that the TSX applies in considering such changes. Specifically, the notice states that the TSX generally does not accept downward adjustments to the exercise or conversion price of a convertible security when a listed issuer completes a subsequent issuance of securities at a lower subscription price unless:
- in the case of warrants and options, the exercise price is not lower than the market price at the time the convertible security as issued; and
- in the case of a convertible instruments (such as debentures and preferred shares) the adjustment results in a conversion price that is not lower than the market price at the time the convertible security was issued, less the maximum discount allowed under the TSX Manual.
Where an adjustment results in the issuance of additional securities rather than a change to the subscription or conversion price, the TSX will consider the effect on the effective subscription or conversion price in order to apply the above rules. If the above pricing conditions are not satisfied, disinterested security holder approval will be required.
In addition, the notice clarifies that adjustments to the number of securities due to stock splits and consolidations must be proportionate and adjustments to the exercise or conversion price of securities to compensate security holders for the loss of value where there is a rights offering or special distribution are generally acceptable, but anti-dilution provisions for dividends or distributions in the ordinary course of business are not. According to the notice, participation of convertible security holders in regular distributions to shareholders is subject to the TSX's prior consent, and amendments to conversation or exercise prices under “basket” clauses (which permit the board to amend the exercise or conversion price at its discretion in the event of a dilutive event not specifically contemplated in the anti-dilution provisions) are subject to the prior consent of the TSX. The notice also states that instruments governing the terms of convertible securities should provide that any amendments shall be subject to the prior consent of the TSX. The notice also clarifies that not all of the guidance provided in respect of convertible securities will apply to exchangeable securities.
Addition of a cashless exercise feature to security compensation arrangements
Currently, security holder approval is required to add a cashless exercise feature to a fixed maximum plan where there is not a corresponding full deduction of the underlying securities. The notice clarifies that the TSX considers such an amendment "to be equivalent to an increase in the maximum number of securities issuable" under the arrangement. As such, security holder approval is required according to section 613(i)(iv) of the Manual, even where the compensation arrangement contains detailed amendment provisions.
NCIBs
Section 629(l)(1) of the Manual prohibits listed issuers making an NICB from purchasing its securities at a price higher than the last independent trade of a board lot (the “uptick prohibition”) in order to prevent it from "abnormally influenc[ing] the market price of its security." The TSX, however, has recognized the difficulty in complying with this prohibition and states in the notice that it will not consider trades to be a violation of the uptick prohibition where:
- the independent trade occured no more than one second before the NCIB purchase that created the uptick;
- the independent trade is a down tick to the previous trade and the NCIB purchase would not have created an uptick to the trade prior to the last independent trade; and
- the price difference between the independent trade and the NCIB purchase was not more than $0.02.
Issuers will be expected to provide evidence that the above conditions were met where trades appear to violate the prohibition.
