TSX Venture Exchange adopts amendments to modernize and clarify framework for security based ‎compensation arrangements

On November 24, 2021, the TSX Venture Exchange (the “TSXV”) announced in its bulletin Security Based Compensation certain amendments to its policies regarding security based compensation (the “Security Based Compensation Changes”) which took effect immediately. In accordance with the Security Based Compensation Changes, the TSXV amended its Policy 4.4 – Incentive Stock Options (the “Former Policy”) and renamed it Policy 4.4 - Security Based Compensation (the “Amended Policy”). The Amended Policy provides for a more comprehensive framework than the Former Policy, which only addressed stock options (“Stock Options”). These changes immediately impact all issuers (“Issuers”) with securities listed on the TSXV and provide Issuers with enhanced flexibility to structure share compensation arrangements. 

The Amended Policy clarifies the rules for classes of compensation securities other than stock options, such as deferred share units (“DSU”), performance share units (“PSU”), restricted share units (“RSU”) and stock appreciation rights (“SAR”, together with DSU, PSU, RSU, Stock Options and other forms of security based compensation arrangements discussed below, “Awards”) and permits the exercise of Stock Options on a cashless and/or net exercise basis.

The changes introduced with the Amended Policy codify certain of the TSXV’s pre-existing unwritten rules governing security based compensation plans and arrangements. While the Former Policy did not explicitly permit or contemplate the granting of security based incentive compensation, other than Stock Options, in more recent years it had been routinely approving them as Issuers were more frequently requesting the adoption of plans which included one or more types of Awards in an effort to diversify the compensation types and provide flexibility to attract and retain talent. Prior to the adoption of the Amended Policy, Issuers had little visibility as to what would or would not be acceptable to the TSXV and there was at time inconsistency and discretion exercised as to what was permitted in respect of plans that proposed to permit other types of Awards. In addition, the Amended Policy largely tracks the security based compensation arrangements permitted by the Toronto Stock Exchange (the “TSX”), which is intended to make it easier for an Issuer to graduate from the TSXV to the main board of the TSX.

A discussion of the key highlights of the Security Based Compensation Changes and distinction from the Former Policy are set out below.

Amended policy covers additional types of security based compensation

The Amended Policy was expanded to cover a variety of types of security based compensation Awards, which have become effective compensation tools that advance the interests of Issuers to attract, motivate and retain the best possible personnel who can facilitate their long-term success.

The Amended Policy permits the issuance of a number of different types of security arrangements beyond Stock Options, including DSUs, PSUs, RSUs, SARs, Securities for Services, Stock Purchase Plans, any security purchase from treasury by a participant which is financially assisted by the Issuer by any means whatsoever, and any other compensation or incentive mechanism involving the issuance or potential issuance of securities of the Issuer from treasury to a participant, excluding: (a) arrangements which do not involve the issuance from treasury or potential issuance from treasury of securities of the Issuer; (b) arrangements under which security based compensation is settled solely in cash and/or securities purchased on the secondary market; and (c) shares for services and shares for debt arrangements governed by TSXV’s Policy 4.3 – Shares for Debt that have been conditionally accepted by the TSXV prior to the adoption of the Amended Policy on November 24, 2021.

There was a fair deal of uncertainty regarding the rules governing the grant of security based compensation, other than Stock Options, as the Former Policy only explicitly contemplated Issuers granting Stock Options as security based compensation. The Amended Policy provides that a number of the same rules that apply to Stock Options also apply to other types of Awards, although there are some distinctions, as discussed below.

Types of permitted plans under the Amended Policy

The Former Policy only contemplated two types of plans: (1) a “rolling” Stock Option plan up to 10%; and (2) a “fixed” Stock Option Plan of up to 20%. The Amended Policy now permits four distinct types of security based compensation plans, including (1) (a “Rolling 10% Plan”) and (2) (a “Fixed 20% Plan”) above (but expanded to include additional types of Awards in addition to Stock Options), as well as  (3) a “rolling” Stock Option plan up to 10% and other Award fixed up to 10% (a “Hybrid Plan”), and (4) a “fixed” Stock Option plan up to 10% (a “Fixed 10% Plan”).

All plans, other than a Fixed 10% Plan, permit any type of Award to be granted thereunder, whereas a Fixed 10% Plan only permits the grant of Stock Options. In addition, all plans, other than a Fixed 10% Plan, permit Net Exercise (as defined and discussed in more detail below) of Stock Options (except for Investor Relations Service Providers‎¹‎

The following is a brief description of each of the four types of security based compensation plans permitted under the Amended Policy:

1. A Rolling 10% Plan permits an Issuer to reserve for issuance under the grant or exercise of Awards, as applicable, granted under the plan up to a maximum of 10% of the issued and outstanding shares of the Issuer at the time of grant. Shareholder and TSXV approval in respect of a Rolling 10% Plan is required for implementation, amendment (subject to limited exceptions) and annually. If an Issuer fails to get annual approval of a plan within 15 months after the last approval the Issuer will not be permitted to grant any more security based compensation until the necessary approvals are obtained.

    

2. A Fixed 20% Plan permits an Issuer to reserve for issuance under the grant or exercise of Awards, as applicable, granted under the plan up to a maximum of 20% of the issued and outstanding shares of the Issuer as of the date of approval of the plan. Shareholder and TSXV approval in respect of a Fixed 20% Plan is required for implementation and amendment (subject to limited exceptions).

    

3. A Hybrid Plan permits Issuers to adopt a combined “rolling” plan of up to a maximum of 10% under which an Issuer may reserve for issuance under the exercise of Stock Options up to a maximum of 10% of the issued and outstanding shares of the Issuer at the time of grant and a “fixed” plan for Awards (excluding the grants of Stock Options) under which the Issuer may reserve for issuance shares issuable up to a maximum of 10% of the issuer’s issued and outstanding shares as of the date of implementation of the most recent “fixed” plan. Shareholder and TSXV approval in respect of a Hybrid Plan is required for implementation, amendment (subject to limited exceptions) and, for the “rolling” portion of the plan, annually.

    

4. A Fixed 10% Plan is largely like the pre-existing “fixed up to 20%” category under the Former Policy, however in this case it permits a fixed number of up to 10% of the Issuer’s issued and outstanding shares only, and limited to grants of Stock Options only. TSXV approval in respect of a Fixed 10% Plan is required for implementation and amendment (subject to limited exceptions) and shareholder approval is only required in respect of an amendment (subject to limited exceptions). An Issuer may only adopt and amend a Fixed 10% Plan once within 24 months in order to avoid it being used in essence as a rolling plan and circumventing shareholder approval requirements.

New vesting requirements

All Awards (other than Stock Options and securities issued pursuant to a Stock Purchase Plan) are subject to a minimum one year vesting requirement. Stock Options granted to Investor Relations Service Providers must vest in stages over a period of not less than 12 months. The Amended Policy permits accelerated vesting only in very limited circumstances.

Eligible participants

The following are participants eligible to receive Awards under a security based compensation plan under the Amended Policy: directors, officers, employees, management, company employees and consultants, as well as eligible charitable organizations. It should be noted that Investor Relations Service Providers and eligible charitable organizations may only be granted Stock Options and no other types of Awards.

Cashless or net exercise

A significant change introduced by the Amended Policy, and one likely to be received well by market participants, is permitting Stock Options to be exercised using a “cashless exercise” or “net exercise”, whereas the Former Policy explicitly required that the exercise price of Stock Options was required to be paid in cash. A cashless exercise requires a broker lending a plan participant money to purchase the shares underlying the Stock Options, and then selling a sufficient number of underlying shares to cover the exercise price of the Stock Options in order to repay the loan made to the participant. The brokerage firm will receive an equivalent number of shares from the exercise of the Stock Options and the participant will receive the balance of shares or the cash proceeds from the balance of the shares. A cashless exercise will result in the number of Stock Options exercised, surrendered or converted, and not the number of shares actually issued by the Issuer, being included in calculating the relevant security based compensation plan limits.

Pursuant to a net exercise, Stock Options, excluding Stock Options held by any Investor Relations Service Provider, are exercised without the participant making any cash payment, resulting in the Issuer not receiving any cash from the exercise of the subject Stock Options. Instead, the participant will receive only the number of underlying shares that is the equal to the quotient obtained by dividing the product of the number of stock options being exercised multiplied by the difference between the VWAP‎²‎ of the underlying shares and the exercise price of the stock options by the VWAP of the underlying shares.

The introduction of cashless and net exercise of options is a positive development as it will permit the exercise of Stock Options which are “in the money” by eligible participants, without the holder being required to have the requisite funds to exercise such Stock Options, and more closely aligns with plans permitted by the TSX. 

CPCs and NEX Issuers

Capital pool companies (each, a “CPC”) and Issuers listed on NEX‎³‎ (including those Issuers on notice to have their listing transferred to NEX) are not permitted to grant or issue any security based compensation other than Stock Options. Where an Issuer is on notice to have its listing transferred to NEX, it is not permitted to grant Stock Options unless it has publicly disclosed that it is on notice to have its listing transferred to NEX. Notwithstanding the foregoing, CPCs may adopt a plan that permits the grant of Stock Options while it remains a CPC but permits the grant of additional types of Awards following completion of a qualifying transaction.

Security based compensation outside of a plan

In certain specified circumstances, the TSXV will consider an application of an Issuer to grant or issue security based compensation outside of a security based compensation plan, subject to disinterested shareholder approval, if required, which approval may be obtained at a meeting or by written consents. Such circumstances include services for services, compensation owed to non-arm’s length parties, one time payments as inducement or severance, and loans.

Transition

The Security Based Compensation Changes came into effect as of November 24, 2021. All security based compensation plans which have been filed with the TSXV prior to November 24, 2021 (a “Legacy Security Based Compensation Plan”), and all security based compensation granted, issued or amended before or after November 24, 2021 pursuant to such Legacy Security Based Compensation Plans (“Legacy Security Based Compensation”), will remain in force in accordance with their existing terms. However, any Legacy Security Based Compensation Plan that is to be placed before an Issuer’s shareholders for approval (including the yearly approval of a “rolling” security based compensation plan or the approval of an amendment), and other security based compensation plan that is implemented or amended, in each case after November 23, 2021, must comply with the New Policy. Further, all security based compensation which has been conditionally accepted by the TSXV prior to November 24, 2021 will remain in force in accordance with their existing terms. Any security based compensation that is granted, issued or amended after November 23, 2021, other than Legacy Security Based Compensation, must comply with the New Policy.

Additional information

For further information, please contact Robbie Grossman, Sydney Kert or any other member of our Capital Markets group.

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.

[1] “Investor Relations Service Provider” includes any consultant that performs investor relations activities and any director, officer, employee or management company employee whose role and duties primarily consist of investor relations activities.

[2] “VWAP” means the volume weighted average trading price of the Issuer’s Listed Shares on the Exchange calculated by dividing the total value by the total volume of such securities traded for the five Trading Days immediately preceding the exercise of the subject Stock Option. Where appropriate, the Exchange may exclude internal crosses and certain other special terms trades from the calculation.

[3] “NEX” means the market on which former TSXV and TSX issuers that do not meet the TSXV continued listing requirements for Tier 2 Issuers may continue to trade.