The Toronto Stock Exchange (the “TSX”) has published a staff notice offering guidance on the pricing of public offerings and private placements by issuers in possession of material undisclosed information. While the staff notice codifies current unwritten practice for those financings that are announced concurrently with an acquisition (the “Pricing Exception”), it clarifies limitations on the Pricing Exception and introduces an additional requirement.
Current rules and the pricing exception
The TSX Company Manual (the “Company Manual”) requires that a private placement – and a prospectus offering to which the TSX has determined its private placement rules apply – be priced at “market price”, as defined in the Company Manual, minus a permitted discount. The market price is intended to take into account all material events, changes and announcements of the issuer, consistent with the principle that all material information relating to the issuer should be publicly disclosed. In short, the Company Manual assumes that where the market has access to all material information, the market price will fully reflect the business and affairs of the issuer; conversely, if an event is not material, it does not need to be disclosed, as it would ostensibly have no effect on the market price.
On this basis, it is generally not permissible to price a financing where the issuer possesses material undisclosed information. However, the TSX has historically applied the Pricing Exception where a material transaction, such as a significant acquisition, that has not been disclosed would only be possible in conjunction with a financing.
New requirements and limitations to the pricing exception
While the Pricing Exception will remain available, the staff notice advises of new limitations on its application. First, the TSX will now require issuers, other than in exceptional circumstances (which have not been defined), to provide an officer’s certificate confirming that (a) the proposed acquisition would not have been entered into without the related financing and (b) the proceeds of the financing are intended to be used primarily to fund the acquisition.
Second, the TSX identified two scenarios in which the Pricing Exception may not be available:
- Where the proceeds of the financing significantly exceed the amount payable in connection with the proposed acquisition (generally by 30% or more), the TSX may require the issuer to reduce the financing, announce the acquisition in advance of pricing the financing, or seek shareholder approval.
- Where the financing includes significant insider participation, which for public offerings means participation beyond the insider’s pro rata position, the TSX may not apply the Pricing Exception on the basis that insiders have been provided (or appear to have been provided) with an economic advantage not generally available to the investing public.
Why is this relevant?
The staff notice highlights the TSX’s focus on equal access to information, the importance of full disclosure to an efficient market and the importance of an efficient market to the protection of investors. Issuers that may seek to rely on the Pricing Exception should ensure that they are in a position to provide the required officer’s certificate, and should approach the TSX as early as possible if they may not be able to do so or if the proceeds of the financing may exceed the cost of the proposed acquisition by 30% or more.