Rule Change For TSX Companies: No More ‘Jamming The Deal Through’ (October 05, 2009)

The Toronto Stock Exchange will soon force companies to hold a shareholder vote for any acquisition that dilutes issued and outstanding shares by more than 25%.

The new rule, meant to protect shareholders, will come into effect on Nov. 24. Up until this point, management teams have been able to issue as many shares as they want to buy other companies without consulting shareholders.

Rob McEwen, chairman and CEO of US Gold (UXG-T, UXG-X), says the rule change is long overdue and that it will be good for Canadian capital markets.

“It will put them in line with other markets in the world in terms of shareholder votes,” McEwen says. “Management will have to sell their shareholders on the merits of the transaction they are proposing rather than just jamming the deal through and letting the exchange say you don’t need a vote.”

McEwen launched a court battle back in 2006, when Goldcorp (G-T, GG-N) made a controversial US$8.6-billion bid for Glamis Gold that diluted Goldcorp shares by 67%. McEwen, who had been CEO of Goldcorp until 2005, held 1.5% of Goldcorp at the time. Regulators let the deal go through in the end.

Then, earlier this year, HudBay Minerals (HBM-T, HBMFF-O) shareholders protested management’s friendly stock-swap deal for Lundin Mining (LUN-T, LUNMF-O) that would have diluted their shares by 100%. The Ontario Securities Commission ordered the company to hold a vote. The deal was quashed before the scheduled shareholder vote.

Kevin Cowan, group head of equities for the TMX Group (TSX-T), which operates the TSX, says the new measures will give more confidence to investors.

“Today’s announcement is in line with many of the world’s major exchanges and provides us with an even stronger platform as we work to attract new investors and capital,” Cowan said in a statement.

The new requirement will not be retroactive — companies in the midst of doing deals now will not have to hold a vote if the TSX is notified prior to Nov. 24, whether or not it’s been approved.

Wes Hall, president of Kingsdale Shareholder Services says shareholders will love the new rule but that it could create problems for smaller companies.

“A lot of companies view going to the market to get shareholder approval as a risk to getting the deal done,” he said. But Hall noted that the TSX “is just catching up to the rest of the world so the market will just have to get used to that.”

As for why Toronto has been so slow to change, McEwen isn’t quite sure.

“There are a number of investment bankers and securities lawyers that like getting deals done,” he says. “It was just left on the books and the exchange didn’t see a reason to change, nor did the people that make their money from issuing securities.”

McEwen says he doesn’t think the dilution rule will result in fewer deals but perhaps better deals and more rigorous analysis of transactions.

“Maybe some of the deals that weren’t so good won’t get through now,” McEwen says.