On June 6, 2006, the Toronto Stock Exchange (“TSX”) issued a staff notice to update previously issued guidance regarding amendment procedures in securities based compensation arrangements (“Plans”) and clarifying amendments to option terms during black out periods.
Amendment ProceduresIn January 2005, the TSX introduced rules regarding amendments to Plans providing that, in order for an issuer to amend its Plan, the Plan must specify its own amendment procedure (the “Amendment Procedure”), including whether or not security holder approval is required for that type of amendment. Prior to the introduction of these new rules, security holder approval was required if an amendment was considered material by the TSX, which led to significant uncertainty for issuers.
At the time of implementation of the new rules, the TSX realized that many Plans already contained a “general amendment” provision, permitting amendments to their Plans, subject to board approval and TSX approval. In order to assist with the transition to the new rules, the TSX issued a staff notice in December 2004, clarifying the situations in which this “general amendment” procedure would be sufficient for amendments to a Plan without security holder approval and providing a non-exhaustive list of examples. The TSX also laid out a list of amendments that would remain subject to security holder approval.
The TSX has stated that the interpretation of the December 2004 staff notice was intended to be temporary in order to ease the transition of the new rules. The TSX has now announced that effective June 30, 2007, it will retract the interpretation it gave to its new rules regarding Amendment Procedures and will apply the rules to their full extent. Accordingly, after such date, issuers with Plans that contain “general amendment” provisions will no longer be able to make any amendments without security holder approval, including those considered to be of a “housekeeping” nature. Therefore, issuers with existing Plans that contain “general amendment” procedures are strongly advised to introduce detailed amendment provisions to their Plans and to seek security holders approval at their next meeting of security holders, in order to maintain the ability to amend their Plans as required.
Amendment Procedures should, at a minimum, provide that boards of directors may make the following changes to their Plans without security holder approval:
(a) amendments of a “housekeeping” nature;
(b) a change to the vesting provisions of a security or a Plan;
(c) a change to the termination provisions of a security or a Plan which does not entail an extension beyond the original expiry date; and
(d) the addition of a cashless exercise feature, payable in cash or securities, which provides for a full deduction of the number of underlying securities from the Plan reserve.
Such changes may be required in the normal course throughout the life of a Plan and represent changes that are not fundamental to the Plan.
Fundamental changes to Plans, which were previously subject to security holder approval, may now also be made by boards of directors without security holder approval, to the extent they are specifically provided for in the Amendment Procedures of an issuer for which the requisite approval has been obtained from security holders. Examples of fundamental changes are as follows:
(a) any change to the eligible participants which would have the potential of broadening or increasing insider participation;
(b) the addition of any form of financial assistance;
(c) any amendment to a financial assistance provision which is more favourable to participants;
(d) the addition of a cashless exercise feature, payable in cash or securities which does not provide for a full deduction of the number of underlying securities from the Plan reserve; and
(e) the addition of a deferred or restricted share unit or any other provision which results in participants receiving securities while no cash consideration is received by the issuer.
Certain restrictions continue to apply and may not be varied even by broad Amendment Procedures, notably:
(a) the exercise price for any stock options granted under a Plan must not be lower than the market price of the securities at the time the option is granted;
(b) the Plan must have a maximum number of securities issuable, either as a fixed number or a fixed percentage of the listed issuer’s outstanding capital represented by such securities; and
(c) security holder approval (excluding the votes of securities held directly or indirectly by insiders benefiting from the amendment) is required for (x) a reduction in the exercise price or purchase price or (y) an extension of the term, under a Plan, benefiting an insider of the issuer.
Black Out Periods
The TSX has also recognized that many of its listed issuers are under self-imposed black out periods from time to time, which black out periods often prevent officers, directors and employees from exercising options.
Since Plans may set any expiration term so long as it is approved by security holders, the TSX has suggested that issuers consider providing in their Plans an expiration date that is “conditional” upon potential expiration during a black out period. Plans may provide that the expiration of the term of an option may be the later of a fixed expiration date (“Fixed Term”), or a date shortly after the expiration date should the Fixed Term expiration date fall within, or immediately after, a black out period (“Black Out Expiration Term”), provided that the Plan or the Black Out Expiration Term has been approved by security holders. Where the Fixed Term expires immediately after the black out period ends, the Black Out Expiration Term should be reduced by the number of days between the Fixed Term expiration date and the end of the black out period (i.e. if the Black Out Expiration Term is five days after the end of a black out period, options whose Fixed Term expires two days after the black out period ends will only have an additional three days in which to exercise).
Issuers wishing to amend their Plan to allow for this type of extension should describe the following in the expiration provision in the Plan:
- the Black Out Expiration Term should only be available when there is a black out period self-imposed by the listed issuer (i.e. it should not apply to a listed issuer or its insiders being the subject of a cease trade order);
- the Black Out Expiration Term, after the lifting of the black out period, should be reasonable (i.e. five to ten business days), and should be clearly defined in the Plan as a fixed period of time which will not be subject to board discretion; and
- the Black Out Expiration Term should be available to all eligible participants under the Plan, under the same terms and conditions.
The disclosure in the listed issuer’s information circular must appropriately describe the expiration term of options granted under the Plan as it may relate to black out periods.
Any amendment to an existing Plan to provide for a Black Out Expiration Term must be approved by security holders notwithstanding that the Plan has a broad underlying amending procedure.
As a consequence of this guidance, most issuers will likely wish to amend their Plans as suggested by the TSX and submit them to security holder approval during the course of next year’s proxy season.
If you have any questions regarding the foregoing, please contact Neil Kravitz (514-841-6522) or Sébastien Roy (514-841-6493) in the Montréal office or Patricia Olasker (416-863-5551), Donna Aronson (416-367-7430) or Robert Druzeta (416-367-7476) in the Toronto office.
Davies Ward Phillips & Vineberg LLP, with over 235 lawyers, practises nationally and internationally from offices in Toronto, Montréal, New York and an affiliate in Paris and is consistently at the heart of the largest and most complex commercial and financial matters on behalf of its North American and overseas clients.
The information and comments contained herein are for the general information of the reader and are not intended as advice or opinions to be relied upon in relation to any particular circumstances. For particular applications of the law to specific situations, the reader should seek professional advice.
