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|Amendments to Part VI of the Toronto Stock Exchange Company Manual (April 3, 2009)||Security Holder Approval Requirements for Acquisitions (October 12, 2007)|
Public Interest Amendments to add Part X — Special Purpose Acquisition Corporations to the TSX Company Manual (August 15, 2008)
Toronto Stock Exchange ("TSX") is publishing for comment a proposed new rule ("Part X") which would result in the introduction of Part X — Special Purpose Acquisition Corporations to the TSX Company Manual (the "Manual"). Part X is being published for a 30 day comment period.
Part X will be effective upon approval by the Ontario Securities Commission (the "OSC") following public notice and comment. Comments should be in writing and delivered by Monday, September 15, 2008 to:
Toronto Stock Exchange
The Exchange Tower
130 King Street West
Toronto, Ontario M5X 1J2
Fax: (416) 947-4461
A copy should also be provided to the OSC:
Ontario Securities Commission
20 Queen Street West
Toronto, Ontario M5H 3S8
Fax: (416) 595-8940
Comments will be publicly available unless confidentiality is requested.
TSX is seeking comments on Part X. Currently, TSX only approves for listing issuers with an operating business which meet certain financial requirements, as provided in Part III of the Manual. However, TSX has recently observed, in the United States, a growing number of issuers going public with the intention to later complete a qualifying acquisition by merging with or acquiring an operating company with the proceeds of such offering. Such financial vehicles are generally known as special purpose acquisition corporations or "SPACs", and such transactions are similar to reverse mergers or reverse takeovers. However, unlike reverse takeovers, SPACs generally offer: i) a clean public company shell; ii) more experienced management teams; iii) greater certainty of financing; and iv) a readily available retail and institutional securityholder base.
Recent SPAC offerings have included a wide range of investor protections that mitigate TSX's previous concerns about listing SPACs. SPACs bear some similarity to capital pool companies ("CPCs") in that both involve the creation of publicly-traded shell companies which later acquire an operating business using the initial proceeds raised. However, the proposed SPAC rules differ from the CPC rules, particularly because SPACs are much larger than CPCs and therefore involve more stringent investor protections. The proposed SPAC rules take into account SPAC rules recently adopted by the New York Stock Exchange and currently proposed by NASDAQ, while also incorporating best commercial practices observed in the SPAC market in the United States.
As at April 30, 2008, in the United States, 94 SPACs had completed their initial public offerings, having raised an aggregate of US$18.6 billion, but had not yet completed their qualifying acquisition. Another 87 SPACs were in the process of registration. In the United States, the American Stock Exchange has been the leading exchange for SPACs. Recently, NASDAQ and New York Stock Exchange both proposed to adopt SPAC rules. NYSE's SPAC rules were approved and came into effect on May 6, 2008. In addition, global financial institutions such as Goldman Sachs, Citi, UBS, Deutsche Bank, Merrill Lynch, JP Morgan and Morgan Stanley have acted as investment bankers for SPACs.
As a result of the growing market acceptance of SPACs in the United States, and building on the CPC concept, TSX is proposing Part X to provide a framework for the listing of SPACs on TSX.
Part X sets out: i) the original listing requirements which must be met by the SPAC; ii) the continued listing requirements that a SPAC must meet prior to the completion of a qualifying acquisition; and iii) the process relating to the completion of a qualifying acquisition, or failing that, liquidation distribution of the SPAC.
Part X is attached as Appendix A and is summarized below.
Part X — Special Purpose Acquisition Corporations:
Original Listing Requirements — Sections 1003–1018
TSX has considered a number of factors in developing Part X, including the SPAC rules in place or proposed by other stock exchanges. The proposed original listing requirements for SPACs also take into account TSX's current original listing requirements for operating businesses, the need for investor protection, as well as the size and nature of the Canadian marketplace. TSX also consulted with its Listings Advisory Committee which is made up of investment bankers, securities lawyers and institutional investors, in order to ensure a broad spectrum of considerations are addressed in Part X and this request for comments.
TSX will retain discretion to take into account any factors it considers relevant and appropriate when assessing the merits of listing a SPAC. In particular, TSX will take into account factors such as the experience and track record of management, the extent of the founding securityholders' equity ownership in the SPAC and the gross proceeds publicly raised in its initial public offering ("IPO"). Part X includes many features to enhance investor protection given the lack of financial and operating history of a SPAC.
Part X contemplates that a minimum of $30 million be raised on the SPAC IPO. TSX considers that this threshold is appropriate to demonstrate market and management support and provides sufficient funds to purchase an operating business that may reasonably meet TSX's original listing requirements. The $30 million minimum also takes into account the relative size of the Canadian marketplace and the average IPO size in Canada.
Part X is also designed to align the interests of the founding securityholders with public securityholders and to ensure their continued participation by requiring such founding securityholders to hold an equity interest of at least 10% in the SPAC. Typically this interest is purchased in advance of the IPO at a price which may be significantly less than the IPO price. These securities may not be transferred prior to the completion of the qualifying acquisition and subsequently, may be subject to TSX's Escrow Policy. The securities are also restricted from voting on the qualifying acquisition and will not be permitted to receive proceeds from any liquidation distribution, as later described.
Although Part X sets a minimum equity interest of the founding securityholders in the SPAC, there is no proposed maximum. Generally, as with any IPO, TSX expects that the founding securityholders and underwriters will negotiate a commercially reasonable level of equity interest held by the founding securityholders, failing which a successful marketing of the IPO would be unlikely. However, TSX will consider the equity interest of the founding securityholders in listing the SPAC since such interest may be acquired at a price which may be significantly less than the IPO price. TSX may refuse to list a SPAC if the interest of the founding securityholders in the SPAC appears excessive. TSX would generally consider founding securityholders' interest above 20% of the resulting issuer excessive, excluding securities acquired in the IPO, on the secondary market or under a rights offering.
Finally, to prevent SPACs from being used to subvert the IPO and listing process for operating businesses, Part X requires that a SPAC must not be an active business and may not enter into a written or oral, binding or non-binding agreement in respect of a qualifying acquisition when seeking a listing on TSX.
Securities to be issued by the SPAC must include a conversion right and a liquidation distribution feature.
The conversion right will allow securityholders (other than founding securityholders) who vote against a proposed qualifying acquisition to convert their securities into a pro rata portion of the proceeds held in trust if the qualifying acquisition is completed. Upon exercise of the conversion right, securityholders would be entitled to receive, for each security held, an amount equal to: (1) the aggregate amount then on deposit in the trust account (net of any applicable taxes and direct expenses related to exercise of the conversion right), divided by (2) the aggregate number of securities then outstanding.
The liquidation distribution feature will return a pro rata portion of the proceeds held in trust to securityholders if a qualifying acquisition is not completed within the prescribed time frame. Upon a liquidation distribution, all securityholders (other than founding securityholders in respect of their founding securities) will receive, for each security held, an amount at least equal to: (1) the aggregate amount then on deposit in the trust account (net of any applicable taxes and direct expenses related to the liquidation distribution), divided by (2) the aggregate number of securities then outstanding less any founding securities held by the founding securityholders.
The securities held by the founding securityholders are not excluded from the pro rata calculation for exercise of a conversion right because at this point, although the founding securityholders do not vote on the qualifying acquisition, they still participate in the qualifying acquisition if it is completed. However in the liquidation distribution scenario, the founding securityholders are not entitled to participate except to the extent of any securities purchased under the IPO prospectus, on the secondary market or under a rights offering. Therefore the remaining securityholders benefit from the forfeiture of the initial investment in the SPAC by the founding securityholders.
For illustrative purposes only, we have assumed a SPAC IPO of 6 million units at $5 per unit, each unit being comprised of a common share and 2 common share purchase warrants, as follows:
We further assume that no income is generated on the $27 million SPAC proceeds in trust, no taxes or expenses are applicable upon conversion or liquidation and the founding securityholders do not own any securities other than their founding securities.
Upon exercise of the conversion right, securityholders will receive $4.09 for each common share held, calculated as follows:
proceeds in trust [$27 million]
common shares outstanding [6.6 million]
Upon a liquidation distribution, securityholders will receive $4.50 for each common share held, calculated as follows:
proceeds in trust [$27 million]
common shares outstanding [6.6 million] — founders common shares [0.6 million]
TSX believes it is appropriate to limit dilution incurred by securityholders of a SPAC prior to completion of a qualifying acquisition. SPAC securities typically are not very liquid prior to announcement of a qualifying acquisition. TSX is therefore requiring that if units are issued in the IPO, share purchase warrants may not be exercisable before completion of a qualifying acquisition, expire if no qualifying acquisition takes place, and are not entitled to proceeds from liquidation.
To provide additional protection to securityholders, it is further proposed that a SPAC may not obtain any form of debt financing until the time of, or after, a qualifying acquisition.
Part X proposes that a minimum of 90% of the gross proceeds raised on the IPO be put into trust. This is consistent with the requirements of other exchanges. The minimum may voluntarily be set at a higher amount. Furthermore, the trust funds may only be invested in certain permitted investments. These rules are intended to protect securityholders by ensuring that sufficient proceeds are available for a qualifying acquisition or to be returned to securityholders should a qualifying acquisition not be made within the permitted time frame. The interest earned from permitted investments may be used by the SPAC, generally to fund administrative expenses of the SPAC, provided any such intended use is disclosed in the IPO prospectus.
Underwriters will be required to deposit 50% of their commissions from the IPO into trust with the IPO proceeds. This portion of the commissions will only be released to the underwriters upon completion of a qualifying acquisition. Otherwise they will be distributed to securityholders as part of a liquidation distribution. In the event that a securityholder exercises his or her conversion rights and the qualifying acquisition is completed, the securityholder will be entitled to receive his or her pro rata portion of the trust funds, including the deferred commissions. This provision is intended to ensure that the interests of the underwriters are aligned with those of the SPAC securityholders.
The proposed public distribution requirements are consistent with the existing minimum listing requirements for operating issuers, that is, a minimum of 1 million securities held by the public and a minimum of 300 public holders.
Continued Listing Requirements Prior to Completion of a Qualifying Acquisition — Sections 1019–1021
TSX is concerned about the dilution of securityholders in a SPAC prior to completion of a qualifying acquisition. Therefore in addition to the restrictions on debt financing and the exercisability of warrants, TSX is requiring that additional securities issued prior to a qualifying acquisition must be issued by way of a rights offering to existing securityholders. A minimum of 90% of additional funds raised must also be placed into trust pending a qualifying acquisition or liquidation.
Similarly, a SPAC may not have any security based compensation arrangement in place prior to completion of a qualifying acquisition, after which securityholder approval will be required in accordance with Section 613 of the Manual.
Completion of a Qualifying Acquisition — Sections 1022–1030
Under Part X, SPACs will have up to three years from the date of the closing of the distribution under the IPO prospectus to complete a qualifying acquisition. The qualifying acquisition must be approved by a majority of the votes cast by securityholders of the listed SPAC, excluding founding securityholders, at a duly called meeting. If multiple acquisitions are required to meet TSX original listing requirements and those of a qualifying acquisition, each transaction must be approved by securityholders and must close prior to the deadline. This deadline has been set taking into account the timelines under the rules of other stock exchanges and to provide sufficient time and flexibility for a SPAC to complete a qualifying acquisition.
Part X also requires that the value of the qualifying acquisition must represent at least 80% of the value of the IPO proceeds in trust. If multiple acquisitions are required to satisfy this requirement, these transactions must close concurrently. Both NYSE and NASDAQ have an equivalent requirement for the minimum fair market value of the target asset(s) or business(es). TSX considers this threshold appropriate in order to ensure that the qualifying acquisition can reasonably meet TSX original listing requirements and to ensure that the IPO proceeds in trust are used for their intended purpose.
It is contemplated that holders of securities voting against a qualifying acquisition will be entitled to convert their securities for their pro rata portion of the proceeds in trust. NYSE has a similar conversion right for a securityholder voting against a proposed qualifying acquisition.
Certain stock exchanges, including NYSE, will assess whether the issuer resulting from the completion of a qualifying acquisition meets continued listing requirements rather than original listing requirements, unless the qualifying acquisition constitutes a backdoor listing. NYSE will not permit a qualifying acquisition to proceed if public securityholders owning in excess of a certain threshold amount (to be set no higher than 40%) of the securities exercise their conversion rights.
Part X provides that a majority of public holders of securities must approve the proposed qualifying acquisition and does not set a maximum threshold amount for conversion rights. However, the SPAC may choose to set limits or conditions, which must be disclosed in its IPO prospectus and information circular. In addition, TSX will review every resulting issuer in accordance with original listing requirements. TSX is not therefore proposing to require a conversion right threshold amount. However, a SPAC may then need to obtain debt or equity financing to complete a qualifying acquisition which meets TSX original listing requirements. Any debt or equity financing will be taken into consideration in conjunction with the original listing review when assessing the capital structure of the resulting issuer. Such financing may not be completed other than contemporaneously with or immediately following the qualifying acquisition. Any equity financing by the SPAC must be completed in accordance with Parts VI and X.
As the SPAC and the qualifying acquisition may be viewed as a two-stage going public process, TSX believes that it is more appropriate to complete an original listing review of the resulting issuer rather than ensuring that a specified portion of the trust proceeds are available for the qualifying acquisition, provided that a majority of the securityholders have approved the transaction. TSX proposes that securityholder voting rights and conversion rights are sufficient protection and that if necessary, the market will set an appropriate threshold beyond which a proposed qualifying acquisition may not be consummated.
In Canada, there is generally no requirement under securities law to file a prospectus for the resulting issuer in connection with a qualifying acquisition. An information circular in connection with the securityholder meeting called to consider a proposed qualifying acquisition with prospectus level disclosure must be pre-cleared by TSX and distributed to securityholders. In the United States, the Securities and Exchange Commission pre-clears proxy circulars, other than for foreign private issuers, relating to securityholder meetings to consider a qualifying acquisition, as well as any registration statement for securities being issued on a qualifying acquisition.
Further to discussions with securities regulators, Part X includes a requirement for SPACs to file and obtain a receipt from applicable securities regulators for a final prospectus containing full, true and plain disclosure regarding the resulting issuer assuming completion of the qualifying acquisition. The receipt must be issued prior to mailing the information circular describing the qualifying acquisition in order to ensure complete and consistent disclosure. The prospectus will be a non-offering prospectus if additional securities are not being distributed to the public at the time of the qualifying acquisition. Failure to obtain the receipt prior to completion of the qualifying acquisition will result in the delisting of the SPAC.
Liquidation and Delisting Following Failure to Complete a Qualifying Acquisition — Sections 1031–1033
SPACs which fail to complete a qualifying acquisition prior to the deadline must complete a liquidation distribution within 30 days after the deadline. The SPAC will be delisted from TSX on or about the liquidation distribution date. Founding securityholders may not participate in any liquidation distribution for their founding securities. The aggregate amount then on deposit in trust will be distributed to securityholders, net of any applicable taxes and direct expenses related to the liquidation distribution. These requirements and time frame are consistent with those of other exchanges.
Continued Listing Requirements Following Completion of a Qualifying Acquisition — Section 1034
Upon completion of a qualifying acquisition, the resulting issuer will be subject to TSX continued listing requirements and other rules.
Ancillary Proposed Rule Amendments
The following ancillary rule amendments are non-public interest and will only be made at the effective time of Part X.
Part I — Introduction
Definitions will be added. See Appendix B.
Part III — Original Listing Requirements
Appendix C — Toronto Stock Exchange Escrow Policy Statement
Section III will be amended to refer to escrow requirements for SPACs. See blackline attached as Appendix D.
TSX is publishing Part X for a 30 day comment period, which expires September 15, 2008. TSX believes that it is important for its key stakeholders to have an opportunity to review Part X prior to its implementation. As a result, Part X will only become effective following public notice, a comment period and the approval of the OSC.
Text of Policy
Part X is attached as Appendix A.
Proposed Part X of the TSX Company Manual
Special Purpose Acquisition Corporations
Scope of Policy
Listing a SPAC on the Exchange is a two-stage process. The first stage involves the filing and clearing of an IPO prospectus, the completion of the IPO and the listing of the SPAC's securities on the Exchange. The second stage involves the identification and completion of a qualifying acquisition.
The main headings in this Part X are:
A. General Listing Matters
Securities to be Listed
Exercise of Discretion
B. Original listing Requirements
No Operating Business
Jurisdiction of Incorporation
Prohibition of Debt Financing
Use of Proceeds Raised in the IPO and Trust Requirements
C. Continued Listing Requirements Prior to Completion of a Qualifying Acquisition
Additional Funds by way of Rights Offering Only
D. Completion of a Qualifying Acquisition
Permitted Time for Completion of a Qualifying Acquisition
Fair Market Value of a Qualifying Acquisition
Prospectus Requirement for Qualifying Acquisition
E. Liquidation Distribution and Delisting Upon Failure to Meet Timelines for a Qualifying Acquisition
F. Continued Listing Requirements Following Completion of a Qualifying Acquisition
Ancillary Proposed Amendments to Part I — Definitions
Definitions to be added to Part I:
"founding securities" means securities in the SPAC held by the founding securityholders, excluding any purchased by founding securityholders under the IPO prospectus, on the secondary market or under a rights offering by the SPAC;
"founding securityholders" means insiders and equity securityholders of a SPAC prior to the completion of the IPO who continue to be insiders or equity securityholders, as the case may be, immediately after the IPO;
"IPO prospectus" means the final prospectus for the initial public offering of the SPAC;
"listing application" means an application for the original listing on the Exchange in the form found in Appendix A of the Manual;
"permitted investments" means investments in the following: cash or in book based securities, negotiable instruments, investments or securities which evidence: (i) obligations issued or fully guaranteed by the Government of Canada, the Government of the United States of America or any Province of Canada or State of the United States of America; (ii) demand deposits, term deposits or certificates of deposit of banks listed Schedule I or Schedule III of the Bank Act (Canada), which have a short term debt rating of "R 1 (low)" or better by DBRS and "A 1+" or better by S&P; (iii) commercial paper directly issued by Schedule I or Schedule III Banks having, at the time of the investment therein, a short term debt rating of "R l (low)" or better by DBRS and "A 1 +" by S&P or better; or (iv) call loans to and notes or bankers' acceptances issued or accepted by any depository institution described in (ii) above;
"principal regulator" means the issuer's principal regulator determined in accordance with Multilateral Instrument 11-102 — Passport System;
"qualifying acquisition" means the acquisition of assets or one or more businesses by a SPAC which result in the issuer meeting the Exchange's original listing requirements set out in Part III of the Manual;
"SPAC" means a special purpose acquisition corporation;
"trust funds" means the funds placed in trust as required under Section 1010;
Ancillary Proposed Amendments to Part III — Original Listing Requirements
|Industrial (excluding SPACs)||Sections 309 to 313|
|Mining||Sections 314 to 318|
|Oil and Gas||Sections 319 to 323|
For SPACs, the minimum listing requirements, as well as other requirements, are set out in Part X.
The minimum listing requirements should be read in conjunction with the Exchange policy on quality of management, as set out in Section 325.
Ancillary Proposed Amendments to Appendix C — Toronto Stock Exchange's Escrow Policy Statement
Effective June 30, 2002, the Canadian Securities Administrators ("CSA") introduced National Policy 46-201, Escrow for Initial Public Offerings, (the "National Policy") and a standard form of escrow agreement, Form 46-201F1, Escrow Agreement (the "Escrow Form"), in connection with the National Policy.
As determined by the CSA, the fundamental objective of escrow is to encourage continued interest and involvement in an issuer, for a reasonable period after its initial Public Offering ("IPO"), by those principals whose continuing role would be reasonably considered relevant to an investor's decision to subscribe to the issuer's IPO.
All terms contained in the TSX Escrow Policy are as defined in the National Policy.
II. Application of the National Policy
Under the National Policy, escrow is not required for an issuer listing on TSX that, immediately after completion of its IPO, is:
All other issuers completing initial public offerings and listing on TSX will be subject to the National Policy. Principals of such issuers will be required to place their securities in escrow under an escrow agreement in accordance with the terms of the National Policy, to be administered by the relevant CSA jurisdiction and not by TSX.
III. Application of the TSX Escrow Policy
The TSX Escrow Policy applies to issuers not otherwise subject to the National Policy that have:
In deciding whether escrow is appropriate for such issuers, TSX will apply the principles of the National Policy. The provisions of the National Policy will be applied by TSX, including the use of the Escrow Form. TSX will administer escrow agreements entered into under the TSX Escrow Policy.
Subject to such terms and conditions as it may impose, TSX may:
For issuers where escrow is required, a principal's escrow securities are to be released as follows:
|On the date of issuer's securities are listed on TSX (the listing date)||1/4 of the escrow securities|
|6 months after the listing date||1/3 of the remaining escrow securities|
|12 months after the listing date||1/2 of the remaining escrow securities|
|18 months after the listing date||the remaining escrow securities|
IV. Administration of Existing Escrow Agreements
Issuers may apply to TSX to amend the terms of existing TSX escrow agreement and to request the transfer of securities within escrow or the early release of securities from escrow to reflect the release terms of the National Policy. For non-TSX escrow agreements, issuers must apply to the relevant exchange or relevant CSA jurisdiction under which the escrow agreement was originally entered into for any specific request to approve the transfer of securities within escrow or for the early release of securities from escrow.
The National Policy and the Escrow Form may be found on the web sites of CSA members including, but not limited to, the Ontario Securities Commission (www.osc.gov.on.ca).
|Amendments to Part VI of the Toronto Stock Exchange Company Manual (April 3, 2009)||Security Holder Approval Requirements for Acquisitions (October 12, 2007)|
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