Key considerations when considering a normal course issuer bid

This article provides an outline and checklist for corporations that may be considering initiating a “normal course issuer bid” (“NCIB”), commonly known as share buy-backs.

A publicly listed corporation may consider a NCIB when management believes the corporation’s underlying value is not adequately reflected in the market price of its shares. If this is the case, the purchase by the corporation of its own shares, and subsequent cancellation of those shares, may be in the best interest of the corporation and its shareholders. This may be of particularly appealing for corporations during the COVID-19 pandemic in light of depressed share prices.

Under applicable securities laws in Canada, corporations seeking to buy back their previously issued shares are generally subject to the requirements of National Instrument 62-104 – Take-over Bids and Issuer Bids (“NI 62-104”). However, NI 62-104 provides for an exemption from the more onerous issuer bid requirements prescribed under the instrument for share buybacks made under a NCIB in compliance with the rules of the stock exchange upon which it is listed.

The applicable law, marketplace restrictions, and general steps for initiating an NCIB are outlined below.

Exchange limitations on NCIBs

Toronto Stock Exchange (“TSX”)

Over a twelve month period, the TSX restricts the purchases of shares by a corporation to a maximum number equal to the greater of (i) 10% of the corporation’s public float (i.e. shares held by non-insiders and free of resale restrictions) and (ii) 5% of the issued and outstanding shares of the class that are subject to the NCIB. In addition to this overall limit, the TSX applies a daily limit that restricts purchases to ‎25% of the average daily trading volume of the shares and‎ 1,000 shares‎.

TSX Venture Exchange (“TSXV”)

The TSXV limits purchases under an NCIB to (i) no more than 2% of the total issued and outstanding ‎securities of the class at the time of purchase, aggregated with all other purchases in the preceding 30 ‎days (whether through the TSXV or otherwise), and (ii) over a 12-month period, no more than the greater ‎of 10% of the public float and 5% of the class of securities on the first day of the 12-month period.‎

Corporate law considerations

Before proceeding with a NCIB, the corporation’s management and board of directors must ensure the requirements set out in the applicable corporate statute are met. For example, sections 34 of the Canadian Business Corporation Act and the Business Corporations Act (Alberta) (the “ABCA”) each prohibit a corporation from making any payment to purchase or otherwise acquire its shares if there are reasonable grounds for believing that either (a) the corporation is, or would after the payment be, unable to pay its liabilities as they become due, or (b) the realizable value of the corporation’s assets would after the payment be less than the aggregate of its liabilities and stated capital of all classes. Directors should be aware that they may be personally liable for losses resulting from a breach of these solvency tests. Most corporate statues across Canada contain similar provisions.

Steps to launch an NCIB

1. Board Approval: The board of directors must first approve the NCIB. In respect of a decision to implement an issuer bid, the board should carefully document the bid’s purpose, how it is in the corporation’s best interest, and that the corporation meets each of the requirements of applicable legislation.
2. Retain Broker/Dealer: The corporation must appoint and retain a broker/dealer to manage the NCIB, as a broker/dealer is required to conduct all purchases under an NCIB.‎
3. TSX/TSXV Approval: The corporation must submit an application to the TSX or TSXV and receive acceptance of the NCIB.
4. Issue Press Release: Before the commencement of the NCIB, a corporation must issue a press release containing the following information:
   1. the number of shares to be purchased;
   2. the dates, if known, on which the NCIB will commence and expire;
   3. the value, in Canadian dollars, of the consideration offered per share;
   4. the manner in which the shares will be acquired; and
   5. the reasons for the NCIB.
5. Disclose Material Information: In the next annual report, information circular, quarterly report, or other document mailed to its shareholders, the corporation must include a summary of the material information contained in its NCIB application to the TSX or TSXV. Such disclosure must indicate that shareholders can obtain, without charge, a copy of the notice by contacting the corporation.

Monthly report

Within 10 days of the end of each month in which any purchases are made, the corporation is required ‎to file a report with the TSX or TSXV, as may be applicable, stating the number of securities ‎purchased that month and the average price paid, confirming the shares have been ‎cancelled, and identifying the total number of shares purchased under the NCIB to date. Note that nil reports are not required and monthly reporting obligations may be delegated to ‎the broker/dealer conducting the NCIB.‎

Insider trading and reporting

Before instructing the broker/dealer to make any trade, a corporation needs to be satisfied that there is no undisclosed material information concerning the operations and affairs of the corporation and ‎to otherwise ensure that any trade will be carried out in compliance with the corporation’s insider trading ‎and reporting policy. Although beyond the scope of this bulletin, careful consideration is necessary in evaluating the corporation’s affairs for undisclosed material information. Given the current uncertain economic climate as a result of the COVID-19 pandemic, assessing materiality may prove to be more ‎difficult for certain corporations. Corporations should consider all‎ relevant facts and circumstances in advance of implementing or purchasing securities ‎under an NCIB.

‎A corporation is an “insider” in relation to its own securities, therefore insider reports are required to be filed by a corporation as a result of a NCIB. However, insider reports may be filed within 10 days of the end of the month in which the acquisition ‎was made, instead of within 5 days of each purchase, due to an exemption in Section 7.1 of National ‎Instrument 55-104 - Insider Reporting Requirements and Exemptions. Note that the purchased shares should be cancelled effective the date of ‎purchase, to comply with requirements of the ‎ABCA or equivalent corporate statutes.

Conclusion

If you have any questions, or you would like to discuss any aspect of NCIBs or any other securities law related matters, please do not hesitate to contact one of the authors or your regular DLA Piper contact.

This article provides only general information about legal issues and developments, and is not intended to provide specific legal advice. Please see our disclaimer for more details.