ASX requirement for non-transferable exchangeable shares may disadvantage Australian corporations looking at a Canadian acquisition transaction

Quentin Markin -

On March 31, 2014, Mamba Minerals, together with its wholly-owned subsidiary, Champion Exchange (Canco), completed the acquisition of all of the common shares of Champion Iron Mines (Champion) by means of a court-approved plan of arrangement. The transaction was structured as an exchangeable share transaction under which certain eligible Canadian shareholders could elect to receive all or part of their consideration in the form of exchangeable shares of Canco instead of ordinary shares of Mamba. The purpose of the exchangeable shares was to offer a tax deferred rollover for eligible Canadian shareholders, rather than the immediate triggering of a taxable disposition under the Canadian Income Tax Act.

As part of the approval process, Mamba sought confirmation from the Australian Securities Exchange (ASX) on which it was and remains listed (under its new name Champion Iron Limited), that in the opinion of the ASX “the terms that apply to each class of equity securities … be appropriate and equitable” as required by ASX Listing Rule 6.1. The ASX subsequently granted that confirmation in respect of the exchangeable shares but subject to conditions, including that the exchangeable shares not be transferrable. As a result, the transaction terms were ultimately amended, and the exchangeable shares made non-transferrable save for certain transfers that are integral to the operation of the exchangeable share structure, and transfer where, in effect, no beneficial ownership change occurs. Champion issued a press release on March 10, 2014 announcing the transfer restriction applicable to the exchangeable shares.

The ASX viewed that the exchangeable shares should have limited terms and be non-transferable because they are issued for a limited purpose. The ASX also expressed a more general concern with this type of secondary security and structure, which are not a feature of the Australian capital markets. Interestingly, there have been similar transactions in which a transfer restriction was not imposed. The most recent was the 2012 arrangement by which ASX-listed Galaxy Resources Limited (Galaxy) acquired Lithium One Inc. In that case, Galaxy received the required confirmation from the ASX. Conversely, in 2007, a transfer restriction was imposed on exchangeable shares when ASX-listed Worley Parsons acquired Colt Companies. However, unlike Champion, the target Colt Companies was not listed in Canada and was not a reporting issuer.

In the Mamba – Champion transaction, the exchangeable shares were not listed on the ASX or TSX, nor did the parties require any such listing as condition to the arrangement. As a result, there was limited practical impact in this transaction resulting from the transfer restriction. However, in any future transaction, where it is intended to list exchangeable shares (whether on the TSX or ASX, or any other exchange), that listing would not be feasible for an ASX-listed company where this type of transfer restriction is required. 

Ultimately, this means that ASX-listed companies will not be able to offer a tax deferred rollover by means of an exchangeable share for eligible Canadian shareholders. That may mean that in any competition between foreign buyers for a Canadian corporation where an exchangeable structure is used, ASX companies will be at a competitive disadvantage, as other non-Canadian buyers would remain able to offer this tax deferred alternative to Canadian shareholders. While this will not in and of itself determine the outcome of a future negotiation, other things being equal, it could be expected that a Canadian corporation’s board of directors will be more attracted to a proposal by a foreign buyer under which the target’s Canadian shareholders will have a tax deferred option together with a transferable security.

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