Three industry players have answered the Toronto Stock Exchange’s (TSX) request for comments on Section 611(d) of its manual. The section relates to security holder approval requirements for acquisitions of public companies.

The Pension Investment Association of Canada (PIAC), The Canadian Pension Plan Investment Board (CPPIB) and the Canada Coalition of Good Governance (CCGG) have all submitted letters that urge the TSX to amend the section to remove the exemption.

Currently, according the manual, the public company that is buying another public company with shares does not have to take the decision to a shareholders’ vote. In such a purchase, the acquiring company has to issue more of its shares to buy the public company, which dilutes shares.

What these industry players—who are representing, in part, institutional investors—would like to see is that the acquiring company’s shareholders should have the right to vote if the acquisition dilutes share by more than 20 to 25%.

PIAC believes the dilution threshold should be 25% while CCGG suggested it should be lower at 20%, which would align the Toronto market with other global markets. The New York Stock Exchange, American Stock Exchange and Nasdaq require security holder approval for stock issuances exceeding 20% of an issuer’s outstanding shares and do not provide exemptions for acquisitions of public companies.

“Requiring security holder approval for issuances exceeding 25% of the outstanding securities in connection with an acquisition by TSX-listed issuers is an important governance process,” PIAC said in its statement to the TSX. “[This instills] in investors the same confidence in Canadian capital markets that they have in other markets and enhances the competitiveness of the Canadian economy.”

The TSX has expressed concern that removing the exemption could discourage acquisitions because some companies rely on equity as their primary source of funding to finance. In its response, the CCGG said: “the worry is unfounded. Technology companies [on the Nasdaq] mirror resource companies in so far as they rely on equity as currency for making acquisitions. The requirement for a vote did not appear to discourage acquisitions over the last 15 years.”

To read PIAC’s submission, click here.

Click here for CCGG’s submission.

To read CPPIB’s submission, click here.

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