Location: TSX Company Manual > Staff Notices to Applicants, Listed Issuers, Securities Lawyers and Participating Organizations > 2009 > 2009-0006

2009 2009-0003

2009-0006

  Versions
(1 version)
 
Dec 7 2009 onwards

December 7, 2009

Anti-dilution provisions
Subsection 501 (i) - Non-Exempt Issuers
Subsection 602 (e) - General
Subsection 607(e) - Private placements
Subsection 609 (d) - Listed Warrants
Subsection 623 (a) - Supplemental Listings

Cashless Exercises
Section 613 - Security Based Compensation Arrangements

Price Limitations
Subsection 629(l)(1) - Normal Course Issuer Bids (Repealed February 4, 2011)

STAFF NOTICE TO APPLICANTS, LISTED ISSUERS, SECURITIES LAWYERS AND PARTICIPATING ORGANIZATIONS

Toronto Stock Exchange ("TSX") staff is providing guidance on the following provisions of the TSX Company Manual (the "Manual"):

1. Anti-dilution provisions for warrants and convertible securities (collectively, "Convertible Securities") that are acceptable to TSX;
2. Amendments to security based compensation arrangements ("Arrangements") to add a cashless exercise feature; and
3. Price limitations for purchases made pursuant to normal course issuer bids ("NCIBs").

1. Anti-dilution provisions

Anti-dilution provisions are designed to compensate Convertible Security holders when a listed issuer makes changes to its capital structure such as stock splits, consolidations and special distributions. Anti-dilution adjustments are made to the terms of Convertible Securities to proportionately offset the change made to the underlying securities.

Historically, TSX staff has applied the following standards to anti-dilution provisions for the purposes of Section 602(e). TSX also generally applies these standards to the terms and provisions attached to Convertible Securities listed and posted for trading on TSX when reviewing such securities in accordance with Section 640 of the Manual.

Exchangeable securities are not considered Convertible Securities for the purposes of this guidance as they typically are the economic and voting equivalent to the underlying securities. TSX expects exchangeable securities to have appropriate anti-dilution provisions. However, not all of the guidance provided in this staff notice is applicable to exchangeable securities.

Adjustments due to subsequent issuance of securities at a lower subscription price

Subsection 607(e) of the Manual provides that anti-dilution adjustments made to Convertible Securities (i) for which not all security holders are compensated and (ii) which may result in securities issued at an exercise (or conversion) price lower than market price (as defined under Part I of the Manual) minus the maximum allowable discount, as applicable, will not be permitted, unless approved by security holders (excluding securities held by insiders who are benefiting from the anti-dilution provisions).

TSX therefore 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:

(1) such adjustment, in the case of warrants and options, results in an exercise price that is not lower than the market price at the time when the Convertible Security was issued;
(2) such adjustment, in the case of a convertible instrument (such as debentures and preferred shares), results in a conversion price that is not lower than the market price at the time when the Convertible Security was issued less the maximum allowable discount provided in Subsection 607(e) of the Manual; or
(3) security holder approval (excluding the votes attached to securities held by insiders who are benefiting from the anti-dilution provisions) has been obtained if the exercise price is: i) lower than market price (in the case of warrants and options); or ii) lower than market price less the maximum allowable discount provided in Subsection 607(e) of the Manual (in the case of Convertible Securities such as debentures and preferred shares).

Where the terms of the Convertible Securities are adjusted by the issuance of an additional number of underlying securities (e.g. common shares), rather than by an adjustment to the exercise or (conversion price), TSX will consider the effect of the issuance of such additional securities on the effective subscription (or conversion) price. Such issuances will not be permitted unless the effective subscription (or conversion) price meets the conditions enumerated above.

Stock splits and consolidations

Anti-dilution provisions where both the exercise (or conversion) price and number of securities issuable upon exercise (or conversion) are adjusted are acceptable if the adjustments are proportionate. The adjustment to the number of securities is inversely proportionate to the price adjustment. The adjustment can be made to the number of Convertible Securities or to the number of securities underlying the Convertible Security.

For example:

100 warrants to buy 100 shares @ $1 Split (2:1) Consolidation (1:2)
200 warrants to buy 200 shares
@ $0.50 per share
50 warrants to buy 50 shares
@ $2 per share

or

100 warrants to buy 100 shares @ $1 Split (2:1) Consolidation (1:2)
100 warrants to buy 200 shares
@ $0.50 per share
100 warrants to buy 50 shares
@ $2 per share

Special distributions and rights offerings

Adjustments to the exercise (or conversion) price of securities to compensate for the loss of value to security holders where there is a special distribution or a rights offering are generally acceptable. Anti-dilution provisions for dividends or distributions in the ordinary course of business are not acceptable.

The adjustment may be equal to an amount that is no greater than the difference between: i) the trading price of the underlying securities immediately prior to such underlying securities trading on an "ex-distribution" basis; and ii) the trading price of the underlying securities immediately after the underlying securities have commenced trading on an "ex-distribution" basis.

TSX generally requires that the trading prices be based on volume weighted average trading price for a five-day period ending immediately prior to the "ex-distribution" date and a five-day period commencing on the "ex-distribution" date.

Participation in "regular" distributions

Holders of Convertible Securities may not participate in "regular" distributions made to common shareholders (or similar securities). In the event that holders of Convertible Securities are eligible to participate in distributions made to common shareholders (or similar securities), such participation is subject to the prior consent of TSX.

"Basket" clauses

Where the terms of a Convertible Security have a basket clause which provides that the board of directors (or equivalent body) can amend the exercise (or conversion) price at its discretion in the event of a dilutive event not specifically contemplated by the anti-dilution provisions in the indenture (or similar document), any such amendment to the exercise (or conversion) price is subject to the prior consent of TSX.

Amendments to instruments governing the terms of Convertible Securities

Instruments governing the terms of Convertible Securities should provide that any amendments thereto shall be subject to the prior consent of TSX.

2. Addition of a cashless exercise feature to Arrangements

The Notice of Approval for certain amendments to Part VI of the Manual dated September 18, 2009 (the "Notice") noted that security holder approval is required to add a cashless exercise feature to a fixed maximum plan if there is no full deduction of the underlying securities. TSX considers such an amendment to be equivalent to an increase in the maximum number of securities issuable under the Arrangement, and in accordance with Subsection 613(i)(iv), security holder approval is required, notwithstanding that the Arrangement may contain detailed amendment provisions.

3. NCIB price limitations (upticks)

Repealed February 4, 2011.

If you have any questions about this Staff Notice, please contact your listings manager.


2009 2009-0003

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