Carrie Tait, Financial Post

In a move that would drastically alter the domestic merger-and-acquisition landscape, the Toronto Stock Exchange is considering changes to Canada’s takeover rules to give shareholders of companies attempting to swallow other public companies the chance to vote on the deals.

The TSX is asking the market whether a shareholder-approval requirement should be implemented for deals in which the acquiring company must issue shares from its treasury, creating dilution, in order to buy another public company. The New York Stock Exchange, Nasdaq and London Stock Exchange — three of the world’s largest markets — already have shareholder-approval rules in place that are triggered when a certain level of dilution is hit.

“It would have a big impact on transaction structuring,” said Aaron Emes, a partner at Torys LLP in Toronto. “More cash, less shares, potentially favouring a private-equity player versus a strategic [buyer] who was planning on issuing shares as currency.”

If implemented, the shareholder-approval requirement would increase the odds that a takeover deal between two public companies would crumble because shareholders of the acquiring company may revolt. If a board is faced with two takeover proposals — one from a private-equity shop and the other from a public company — it may opt for the private-equity offer because it is less risky, Mr. Emes said.

The increased risk could alter other aspects of takeover deals. To avoid going to shareholders for approval, predatory companies may increase the amount of cash they fork over in takeover transactions. This, however, could pose a problem for many of Canada’s oil and gas and mining companies, which like to use their cash for exploration and development, while using their stock as currency to finance their takeover ambitions.

The shareholder-requirement debate became a high-profile facet in Goldcorp Inc.’s takeover of Glamis Gold Ltd. last October. Rob McEwen, Goldcorp’s founder and largest shareholders, went to court, asking for the right to vote on the deal, which traded every Glamis share for 1.69 Goldcorp shares. At the time, the share issue represented 67% of Goldcorp’s outstanding shares. Mr. McEwen’s attempt to force a vote was denied.

The current rules are different for takeovers of private companies. TSX companies wishing to issue more than 25% of their outstanding securities for these types of deals require shareholder approval.

In its request for comment, the TSX is also asking the market to weigh in on what would be an appropriate threshold to trigger a shareholder-approval requirement on acquisitions between two publicly listed companies.

The NYSE and Nasdaq require shareholder approval on deals in which more than 20% of the company’s shares will have to be issued. The LSE shareholder-approval requirement is triggered on transactions exceeding 25% dilution. The Johannesburg Stock Exchange requires shareholder approval on deals exceeding 30% dilution, while the Hong Kong Stock Exchange’s shareholder-approval requirement is triggered at 50% dilution.

Australian Securities Exchange rules mirror current TSX rules. TSX’s request for comments, published Oct. 12, notes the number of publicly listed mining firms (1,314) and oil and gas listings (434) in Canada are closer to those on the Australian exchange than on either NYSE or LSE.

“Canadian issuers tend to be more growth-oriented issuers, frequently active in M&A to secure their growth,” the TSX request for comments note says. “The U.S. exchanges may generally be characterized as listing larger, more mature issuers that have access to abundant cash flow or sources of credit to complete acquisitions on a cash basis.”

The TSX is accepting comments on the shareholder approval idea until Dec. 12.

© National Post 2007