Time to Address TSX Conflicts of Interest and Refocus Regulatory Priorities
Canada falls below international best practice in maintaining shareholder rights particularly in the matters that are under the jurisdiction of the TSX.
The OSC leaves broad areas of shareholder rights to the TSX. But the TSX is both a regulator and a “for profit” company. The TSX (now part of the TMX Group Inc.) (symbol X-TSX) was allowed to continue to regulate listed companies even after it demutualized and became a listed company. There is an inherent conflict between (a) the “for profit” listed company status of the TSX where its responsibility is to maximize profits for its shareholders and (b) the TSX acting as a regulator of listed companies where the public interest should be paramount.
It is our position that the TSX/TSX-V listed company regulatory function should either operate as a separate entity within the TSX with its own board of directors or at the very least the regulatory function should operate independently of the business side of the TSX with appropriate Chinese Wall and other checks and balances. The world’s leading stock exchanges like NYSE, HKEx and ASX separated the regulatory function from the business side when they went public. In the UK, the Financial Services Authority (FSA) simply took listed company regulation away from the London Stock Exchange and it is now a division of the FSA.
In this communiqué we highlight two rule changes that serve to demonstrate how the conflict of interest may impact Canadian investors. In the first case, the introduction of a highly dubious financial product by the TSX (which will generate revenue for the TSX) is accomplished quickly despite inadequate analysis and opposition from investor advocates. In the second case, the TSX has been slow to protect shareholder rights even though its standards are clearly below those of other major markets and despite a consensus among investors for improving shareholder rights.
TSX Rules – The Fast Track for Profits
From publication of a draft rule and comment paper to receipt of final approval from the OSC, the TSX demonstrated how quickly it could make significant changes to its listing rules (the Company Manual) – a mere four months.
This speedy rule-making was completed to introduce into Canada of a new, complex and questionable investment vehicle called a Special Purpose Acquisition Corporation (“SPAC”). SPACs are widely referred to as “blank cheque” companies. The introduction of “blank cheque” companies to Canada required amendments to the listing rules of the TSX. The TSX announced its intention to amend its listing requirements and published its proposal together with draft rules for public comment on August 15, 2008. Even though we were in the midst of a serious financial crisis, the TSX clearly put a rush on this initiative as comments were due no later than September 15, 2008.
Promoting listings of these “blank cheque” issuers represents a significant lowering of the standards for the quality of businesses that can list on the TSX. Further, the TSX proposal did not include any analysis of the financial impact of “blank cheque” offerings on investors. Neither did the TSX demonstrate that there was a need for this product in the Canadian capital markets. FAIR commented on the TSX Proposal for SPACs in its submission to the TSX and OSC. FAIR called for a proper analysis of the regulatory issues and questioned whether the introduction of a new and risky investment vehicle destined to be sold to retail investors was in the best interests of the capital markets. Other investor advocates opposed the listing of “blank cheque” companies calling them another “toxic product” to be peddled to retail investors.
The submissions of investors clearly made little or no impression on the TSX. Once the short 30 day comment period ended, the TSX quickly sought OSC endorsement of its SPAC proposal. To FAIR’s surprise and disappointment, the OSC approved the rule change permitting the listing of “blank cheque” companies without conducting its own public consultation even though SPACs represented (i) a departure from principles of securities regulation that had been endorsed by Canadian regulators for many years and (ii) a lowering of existing regulatory standards for public offerings.
For decades the policy for the OSC and other Canadian regulators has been to not issue a receipt for a prospectus for a company seeking to raise money where the company had no existing business. The OSC was of the view that “blank cheque” IPOs were not in the public interest. In recent years Canadian securities commissions carved out a relatively small exception (with a $2 million limit) for Capital Pool Companies (CPCs) after careful consideration and public consultation. Until the TSX SPAC proposal was approved, a public offering of a “blank cheque” company that did not fit the CPC requirements was not permitted. The new SPAC rules throw the gates wide open for financing and listing of “blank cheque” companies. The approval for this significant policy change was given without any public consultation by the securities commissions.
TSX Rules – The Slow Track for Shareholder Rights
In October 2007, the TSX requested comments from investors and other interested parties on their proposed review of shareholder approval requirements for shareholder dilution from major acquisitions by listed companies. In this case, the TSX provided a two month period in which to provide comments. Several institutional investors and the Canadian Coalition for Good Governance provided comments in support of a shareholder approval requirement for acquisitions of a significant size (representing 20% of outstanding shares or higher). More than a year elapsed from the close of the comment period and the TSX had still taken no action on this important shareholder rights initiative. In January 2009, FAIR wrote to the CEO of the TSX making a submission in support of a shareholder approval requirement and urging timely action by the TSX.
Seeking shareholder approval for significant dilution and major acquisitions is consistent with governance standards in the U.S., U.K., and other major markets and with global best practice and international standards for shareholder rights set by organizations like the OECD (See the OECD Principles of Corporate Governance.)
On Friday, April 3, 2009, the TSX published a Request for Comments in connection with a proposal to amend its rules to require shareholder approval where shares exceeding 50% of the current issued and outstanding shares are being issued in an acquisition of another listed company. While it took the TSX seventeen months after the end of the original public consultation to come forward with a proposal, comments on this proposal are due within 30 days (i.e. May 4, 2009). FAIR will be filing a submission urging the TSX to adopt a threshold consistent with international best practice. We urge investors to submit written comments to the TSX.
Why has the TSX deferred action on this important shareholder rights initiative for so long particularly when (a) its shareholder rights standards fall below international best practice and (b) there have been several cases (including HudBay and Goldcorp) where shareholders urged the TSX to require shareholder approval? Every such request to the TSX had been rejected.
Appearance of Conflict of Interest
The timeline required to settle each of these two regulatory initiatives raises questions. It is clear that the SPAC initiative (which will generate revenue for the TSX and the financial industry) was put on the fast-track and moved through the regulatory process in four months, despite the fact that objections to SPACs were submitted to the TSX and the OSC by investor advocates and despite the inadequate analysis of the impact of SPACs on retail investors and on Canadian investor protection standards.
Meanwhile, a TSX rule change which would enhance investor protection remains unsettled after 18 months. A final resolution is probably another six months away but it may not bring Canada’s shareholder rights standards up to international best practice. Where once Canada was a leader in setting standards we are now lagging behind other major markets and international best practices.
What inferences should one draw from the TSX actions (or lack of action)? Is it fair to conclude that generating profits for the TSX (and market participants) is the clear priority of the TSX while the needs and interests of investors and the Canadian capital markets are of lesser importance?
It is Time for Some Answers
The TSX must address the conflict of interest and be more responsive to the needs of shareholders. The OSC and other Canadian Securities Commissions must address the separation of listed company regulation from the “for profit” motivation of the TSX. Action to correct this serious deficiency in our regulatory framework will enhance shareholder confidence in the TSX and in our equity markets, a confidence that has been eroded in recent years.
