On April 3, 2023, significant amendments (the “Amendments”) to the policies of the Canadian Securities Exchange (the “CSE”) came into force. The CSE has amended each of its ten policies – some of the Amendments are material and comprehensive, while others are consequential changes made for housekeeping purposes.
We are releasing a series of blog posts which summarize the material Amendments implemented by the CSE. In this second post, we focus on Amendments related to the distribution of securities issuers. Subsequent posts will focus on Amendments related to: the creation of a separate tier of “NV Issuers”; and the listing of special purpose acquisition corporations.
Readers are also encouraged to review our recent post on the qualifications for listing of new issuers on the CSE. That post is available here.
Distributions
CSE Policy 6 – Distributions & Corporate Finance (“Policy 6”) sets out the requirements issuers must meet for the distribution of listed securities or any distribution of a security that is exchangeable, exercisable or convertible into a listed security. This post focuses solely on the Amendments related to private placements, acquisitions and security based compensation arrangements.
Please note that the Amendments to Policy 6 also amend requirements related to rights offerings, control block distributions, shareholder rights plans, takeover bids and normal course issuer bids. These topics are outside the scope of this post.
Private Placements
The CSE has a minimum offering price per security of $0.05. The Amendments now allow issuers to complete private placements at offering prices lower than $0.05 per security provided that:
the price must not be lower than the volume-weighted-average-price for the previous 20 trading days as determined by the CSE;
the proceeds are to be used for working capital or bona fide debt settlement, excluding accrued salaries to officers or directors of the issuer and payment for investor relation activities; and
the following information is provided to the CSE and the price is approved by the CSE in advance of closing:
the name and trading symbol of the issuer;
the level of intended or anticipated insider participation, including whether the proposed issuance will result in a new insider or control position, or materially affect control, and the basis of the issuer’s determination including the information upon which it is based;
any undisclosed material information about the issuer;
the intended total value and use of proceeds;
the structure of the financing, including type and issue price of securities and the exercise price of any securities convertible into listed securities; and
any significant information not included above that may be relevant.
The CSE retains the discretion to accept or require an alternate price such as a multi-day volume-weighted-average-price in place of a closing price.
All issuers intending to complete a private placement must now announce their intention to do so at least five business days prior to closing.
The proposed issuance of securities by way of a private placement or prospectus offering (an “offering”) must now be approved by shareholders if the number of securities issuable in the offering (calculated on a fully diluted basis) is greater than: (i) 50% of the outstanding securities and a new control person is created; or (ii) 100% of the outstanding securities. Shareholder approval is also required for offerings if the issuance price of securities is lower than the market price less the maximum permitted discount, regardless of the number of shares to be issued.
Shareholder approval of an offering may not be required if: (i) the issuer is in serious financial difficulty; (ii) the issuer has reached an agreement to complete the offering; (iii) no related person of the issuer is participating in the offering; and (iv) the audit committee of the issuer, if comprised solely of independent directors, or if the audit committee is not comprised solely of independent directors, the independent directors constituting a majority of the board’s independent directors, have determined that the offering is in the best interests of the issuer, is reasonable in the circumstances and that it is not feasible to obtain shareholder approval or complete a rights offering to existing shareholders on the same terms. Issuers intending to rely on this exemption must issue a news release five days in advance of the offering stating it will not hold a shareholder vote and fully explaining how it qualifies for the exemption.
For additional information regarding shareholder approval, see “General Shareholder Approval Matters” below.
Acquisitions
In certain circumstances, acquisitions pursuant to which issuers propose to issue securities are now subject to CSE approval. Notwithstanding compliance with the specific requirements set out in Policy 6, the CSE retains the discretion to object to a transaction or impose additional requirements on issuers.
Issuers must ensure that shares being issued in connection with an acquisition are not issued at a price that exceeds the maximum permitted discount under CSE policies. In addition, all issuers intending to complete an acquisition must now announce their intention to do so at least five business days prior to closing and provide notice to CSE by posting a “Notice of Proposed Issuance of Listed Securities”. If the CSE has not objected to the acquisition within the five business day period, the issuer may proceed to close the acquisition.
The proposed issuance of securities in connection with an acquisition by an issuer must now also be approved by shareholders if the “total number of securities issuable” (calculated on a fully diluted basis) is greater than: (i) 50% of the outstanding securities and a new control person is created; or (ii) 100% of the outstanding securities. It is important to note that “total number of securities issuable” includes all securities issuable pursuant to the acquisition agreement, any security based compensation arrangement of the target entity that is being assumed by the issuer (or replacement awards that are being granted) and any concurrent private placement upon which the acquisition is contingent or otherwise linked.
For additional information regarding shareholder approval, see “General Shareholder Approval Matters” below.
Security Based Compensation Arrangements
All security based compensation arrangements instituted by CSE-listed issuers must now state a maximum number of securities issuable as a fixed number or percentage of the issued and outstanding shares of the same class of securities.
Issuers must now obtain shareholder approval for an evergreen plan (also known as a rolling plan) within three years of institution of such plan and within every three years thereafter in order to continue to grant awards under such plan. The resolution passed by shareholders must specifically approving unallocated entitlements under evergreen plans and also include the next date by which the issuer must seek shareholder approval. If shareholder approval is not obtained within the specified timeframes, all unallocated entitlements must be cancelled and the issuer will not be permitted to grant further entitlements under the evergreen plan. However, all allocated awards (i.e., options that have been granted but not yet exercised) can continue unaffected. If security holders fail to approve the resolution for the renewal of a plan, the issuer must immediately stop granting awards under such plan, even if such renewal approval was sought prior to the end of the three-year period.
Upon the first grant under a security based compensation arrangement, or following an amendment to a security based compensation arrangement, issuers must now provide the CSE with a copy of the security based compensation arrangement and, if the security based compensation arrangement provides for the issuance of greater than 5% of the issued and outstanding shares at the time of adoption as applying to an individual or 10% in total in the next 12 months, evidence of shareholder approval of the security based compensation arrangement and confirmation that it was adopted by the majority of shareholders other than those required to be excluded. In addition, issuers must now include notice of exercise or cancellation during any month in the monthly progress report that is filed with the CSE.
General Shareholder Approval Matters
Prior to the Amendments, CSE policies required shareholder approval for a limited number of transactions. Pursuant to the Amendments, several transactions will now require shareholder approval including, but not limited to, certain financings and acquisitions. Issuer have the ability to satisfy the requirement of obtaining shareholder approval by obtaining a written resolution signed by shareholders holding more than 50% of the securities having voting rights. Any materials sent to shareholders in connection with a vote for approval must contain information in sufficient detail to allow such persons to make an informed decision. If an information circular is being sent to shareholders, issuers must file a draft of the information circular with the CSE for review before sending it out to shareholders in respect of a transaction that requires CSE review or approval.
In addition to any specific requirement for shareholder approval summarized under “Private Placements” and “Acquisitions” above, the CSE will generally require security holder approval if in the opinion of the CSE a proposed transaction would “Materially Affect Control” of the issuer. "Materially Affect Control" means the ability of any shareholder or combination of shareholders acting together to influence the outcome of a vote. The CSE states that such an ability will be affected by the circumstances of a particular case, including the presence or absence of other large shareholders, the pattern of voting behaviour by other holders at previous meetings and the distribution of the voting securities. A transaction that results, or could result, in a new holding of more than 20% of the voting securities by one security holder or combination of security holders acting together will be considered to materially affect control, unless the circumstances indicate otherwise. Transactions resulting in a new holding of less than 20% of the voting securities may also materially affect control, depending on the circumstances outlined above.
Shareholder approval requirements for “NV Issuers” differ slightly from those above and will be discussed in more detail in later blog post.
Treasury Orders
Pursuant to the Amendments, all treasury and reservation orders must now contain the following information:
the date of the treasury order;
the name and municipality of the transfer agent;
full particulars of the number and type of securities being issued or reserved for issuance;
the issue price per security or the deemed issue price;
the balance of issued securities of the issuer following the issuance;
the names and addresses of all parties to whom the securities are being issued or are reserved for issuance;
the date of CSE acceptance, if applicable, of the issuance of such securities;
confirmation that the issuer has received full payment for the securities and that the securities are validly issued as fully paid and non-assessable;
instructions that the wording of any legend required by applicable securities laws be imprinted on the face of the certificate (or if the face of the certificate has insufficient space, on the back of the certificate with a reference on the face of the certificate to the legend); and
a legend describing the hold period required by CSE policies.
In addition, every treasury order must be signed by at least two directors or senior officers of the issuer, with the names and titles of each signatory being printed beneath their respective signatures. Every issuer must also require that its transfer agent provide a copy of each treasury order to the CSE within five business days following the issuance of any securities.
Additional Information
Readers are encouraged to review Policy 6 prior to proceeding with any proposed security issuances. Please note that the information above only summarizes the material Amendments made to Policy 6 as they relate to private placements, acquisitions and share based compensation arrangement and should not be interpreted as a comprehensive summary on the CSE’s requirements related to distributions of securities.
Stay tuned for additional blog posts regarding the Amendments. Please contact us if you would like further information.
DISCLAIMER: This post is intended to convey general information about legal issues and developments as of the date above. It does not constitute legal advice and must not be treated or relied on as such.