Recent amendments to certain Canadian Securities Exchange policies: Part 1

Introduction

On March 30, 2023, the Canadian Securities Exchange (the “CSE”) received final approval from the Ontario Securities Commission to revise its policies (the “Amendments”). The Amendments came into effect on April 3, 2023 and contain significant changes to the CSE’s existing policies, including the introduction of a new category of senior issuers, which the CSE has designated as “NV Issuers” (or non-venture issuers) and a new program for Special Purpose Acquisition Corporations (“SPACs”), comparable to the TSX Venture Exchange’s Capital Pool Company program.

This article is part one of Miller Thomson’s two-part series of articles addressing the Amendments and will be of particular interest to companies currently listed on the CSE (the “Issuers”). The second article in this series will discuss Amendments to the CSE’s initial listing requirements, including the initial listing requirements applicable to NV Issuers and SPACs.

Private placements

The Amendments require Issuers to issue a press release announcing the intention to complete a private placement at least five business days prior to closing and immediately post a notice of proposed issuance of listed securities with the CSE.

The Amendments also permit Issuers to issue securities at a price lower than the previous minimum price of $0.05 without security holder approval, provided:

1. 1. the proposed issuance price is not less than the twenty (20) day volume weighted average price less the maximum permitted discount;
   2. the proceeds will be used for working capital and/or bona fide debt settlement (excluding accrued salaries to officers or directors of the Issuer and payments for investor relations activities);
   3. details of the offering, including the Issuer name and trading symbol, anticipated insider participation, including whether the issuance will result in a new control position, any undisclosed material information, intended total value and use of proceeds, the structure of the financing, and any other information that may be relevant with respect to the offering are provided to the CSE; and
   4. the CSE approves the issuance price in advance of closing.

Acquisitions involving the distribution of Issuer securities

Similar to the requirements applicable to securities offerings described above, the Amendments require Issuers to issue a press release announcing the intention to complete an acquisition at least five business days prior to closing and immediately post a notice of proposed issuance of listed securities with the CSE. If the CSE does not object to the acquisition or disposition within the five business day period, the Issuer is permitted to close the transaction.

Matters requiring security holder approval

Security holder approval required for transactions that materially affect control of the Issuer

The CSE will generally require security holder approval of any transaction that, in the opinion of the CSE, will “Materially Affect Control” of the Issuer. A transaction that results, or could result, in a new holding of more than 20% of the voting securities by one security holder or a combination of security holders acting together will be considered to Materially Affect Control of the Issuer, 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, such as the ability of security holders acting together to influence the outcome of a vote.

Security holder approval required for the sale of securities

The Amendments require Issuers to seek security holder approval for securities offerings (by way of a prospectus offering or private placement) in certain circumstances, including where:

For Issuers other than NV Issuers

1. 1. the number of securities offered is (a) more than 100% of the total number of securities outstanding or (b) more than 50% of the total number of securities outstanding and such offering results in the creation of a “Control Person,” being a person or combination of persons holding a sufficient number of securities of the Issuer to Materially Affect Control of the Issuer, with the presumption that any person or combination of persons holding more than 20% of the outstanding voting securities of the Issuer shall be considered a Control Person, unless circumstances indicate otherwise; or
   2. the offering price is lower than the market price less the maximum permitted discount, regardless of the number of shares to be issued.

For NV Issuers

1. 1. the number of securities offered is more than 25% of the total number of securities outstanding;
   2. the number of securities issuable to related persons in the offering combined with securities issued to such related persons in private placements or acquisitions in the last 12 months exceeds 10% of the Issuer’s outstanding securities; or
   3.  the offering price is lower than the market price less the maximum permitted discount, regardless of the number of shares to be issued.

The CSE may exempt an Issuer from security holder approval requirements for an offering if the Issuer (i) is in serious financial difficulty, (ii) has already reached an agreement to complete the offering, (iii) no related person is participating in the offering, and (iv) the audit committee of the Issuer (if comprised solely of independent directors) or a majority of the Issuer’s independent directors have determined that the offering is in the best interest of the Issuer, is reasonable in the circumstances and that it is not feasible to obtain security holder approval or complete a rights offering to existing security holders on the same terms.

Security holder approval required for acquisitions and dispositions

Similar to the above requirements concerning securities offerings, Issuers are now required to obtain approval from security holders for certain acquisitions and dispositions, including, in the case of acquisitions, where:

For Issuers other than NV Issuers that are not investment funds

1. 1. the number of securities being issued is greater than 50% of the total number of securities outstanding with the addition of a new Control Person; or
   2. the total number of securities to be issued is more than 100% of the Issuer’s outstanding securities.

For NV Issuers

1. 1. a related person or a group of related persons hold an interest of 10% or greater in the target assets and the total number of issuable securities is more than 5% of the NV Issuer’s outstanding securities; or
   2. other than investment funds, the total number of securities to be issued is greater than 25% of the NV Issuer’s outstanding securities or it is determined by the CSE that the acquisition or disposition would Materially Affect Control of the Issuer.

All Issuers are required to obtain approval from security holders for transactions resulting in the  disposition of all or substantially all of the assets, business or undertaking of the Issuer.

Security holder approval required for rights offerings

The Amendments require security holder approval of a rights offering if the securities offered pursuant to the rights offering are issued at a price that is less than the current market price of the securities, less the maximum permitted discount.

An Issuer is not required to obtain security holder approval of a rights offering if the audit committee of the Issuer (if comprised solely of independent directors) or a majority of the Issuer’s independent directors have determined that the rights offering is in the best interest of the Issuer and is reasonable in the circumstances. Issuers relying on the forgoing exemption must issue a news release stating that the Issuer will not hold a security holder vote in connection with the rights offering and explaining how the Issuer qualifies for the exemption.

Security holder approval required for consolidations

The Amendments require security holder approval of a consolidation of any securities of the Issuer if: (i) the consolidation ratio is greater than 10 to 1; or (ii) when combined with any other consolidation completed in the previous 24 months that was not approved by security holders, the consolidation ratio is greater than 10 to 1.

Security holder approval required for equity incentive plans

The Amendments require security holder approval of security based compensation arrangements of Issuers, including stock option plans, restricted stock unit (RSU) or deferred stock unit (DSU) plans and other equity incentive plans within three years after instituting any such security based compensation arrangement and every three years thereafter for evergreen or rolling plans. If security holder approval is not granted within three years of the institution or required renewal of an evergreen or rolling plan, all unallocated entitlements under the applicable plan must be cancelled and the Issuer will not be permitted to grant further entitlements under the plan until security holder approval is obtained.

Security holder approval required for shareholder rights plans

The Amendments require security holders to ratify an Issuer’s shareholder rights plan no later than six months following the adoption of the plan and any material amendment to the plan. If security holder ratification is not obtained within this time period, the plan must be cancelled.

Investor relations activities

The Amendments require Issuers to pay for investor relations related services (“Investor Relations Activities”) with only cash and options.  Options may be used to compensate Investor Relations Activities service providers as long as the number of securities issuable to all such service providers on the exercise of such options, in the aggregate, does not exceed 2% of the outstanding securities of the Issuer in any 12-month period.

The Amendments also include robust disclosure requirements with respect to Investor Relations Activities including a requirement to file a CSE Form 10 – Notice of Proposed Transaction and issue a news release with certain prescribed disclosure upon the Issuer arranging for the provision of services involving Investor Relations Activities. The disclosure requirements do not apply if the person conducting the promotional activity is an officer, director or employee of the Issuer.

In addition, the Amendments provide the CSE with the right to deem any person to be unacceptable to be associated with the Issuer in any manner if the person has made or accepted excessive payments for promotional/investor relations activities, or has been associated with approval or distribution of overly promotional materials on behalf of any reporting issuer.

Conclusion

The Amendments represent a significant overhaul of the CSE’s policies, bringing them further in line with the policies of other Canadian stock exchanges. The Amendments came into effect on April 3, 2023.

Should you have any questions regarding the Amendments or require further information, please do not hesitate to contact a member of Miller Thomson’s Capital Markets & Securities group.