Legal Updates

On November 24, 2021, the TSX Venture Exchange (the “Exchange”) released a bulletin announcing long-anticipated updates to Exchange Policy 4.4 – Incentive Stock Options (the “Former Policy”). The amendments to the Former Policy took effect immediately and come in the form of a newly named Policy 4.4 – Security Based Compensation (the “New Policy”). 

The New Policy creates greater flexibility and opportunity to advance the interests of Exchange-listed issuers by:

a. expanding the Former Policy to include a wider variety of compensation securities;
b. including two additional categories of security-based compensation plans;
c. permitting the exercise of stock options on a “cashless” or “net exercise” basis; and
d. codifying certain pre-existing unwritten rules of the Exchange governing security-based compensation plans and grants.

New Types of Compensation Securities

Whereas the Former Policy only addressed stock options as an issuable compensation security to Exchange-listed issuers, the New Policy expands the scope to include a wider variety of compensation securities, such as deferred share units (“DSUs”), performance share units (“PSUs”), restricted share units (“RSUs”) and stock appreciation rights (“SARs”) (collectively, “Compensation Securities”). Historically, Compensation Securities were permitted by the Exchange subject to certain unwritten policies, some of which are codified by the New Policy.

A change from the unwritten rules practiced under the Former Policy is that the New Policy provides that no Compensation Securities, other than stock options and securities issued pursuant to a stock purchase plan, may vest before the date that is one year following the date they are granted or issued; previously, securities such as RSUs were often permitted to vest immediately. In addition, the New Policy stipulates that persons providing investor relations services may only be granted stock options (as opposed to other forms of Compensation Securities), which must vest in stages over a period of not less than 12 months. Capital Pool Companies (CPCs) listed on the Exchange and issuers listed on the NEX (a separate board of the Exchange) are only permitted to grant stock options and no other types of Compensation Securities.

New Categories of Security-Based Compensation Plans

The New Policy was expanded to include two additional categories of security-based compensation plans. In addition to the two types of stock option plans permitted under the Former Policy – the “rolling” stock option plan (“Rolling Plan”) and the (20%) “fixed” stock option plan (the “20% Fixed Plan”), Exchange-listed issuers now have the option to choose from the below stock option plans:

a. a “Hybrid Plan” combining (i) a rolling stock option plan under which the number of listed shares that are issuable pursuant to the exercise of stock options (i.e., no other forms of Compensation Securities) is equal to up to a maximum of 10% of the issued shares of the issuer as at the date of any stock option grant, and (ii) a “fixed” security-based compensation plan (providing for the issuance of Compensation Securities other than stock options) under which the number of listed shares that are issuable is a fixed specified number of listed shares up to a maximum of 10% of the issued shares as at the date of implementation of such plan; and

b. a “10% Fixed Stock Option Plan” under which the number of listed shares of the issuer that are issuable pursuant to the exercise of stock options is a fixed specified number of listed shares up to a maximum of 10% of the issued shares as at the date of implementation of the stock option plan. This plan is limited to stock options (as opposed to other forms of Compensation Securities) and does not require shareholder approval under certain circumstances (for instance, provided it does not permit “net exercise” (as discussed below)).

Shareholder Approval

Apart from (in some circumstances) the 10% Fixed Stock Option Plan, every security-based compensation plan must be approved at a meeting of shareholders at the time it is to be implemented. Additionally, shareholder approval is generally triggered upon any amendment to the plan, as well as on an annual basis for Rolling Plans and the rolling portion of Hybrid Plans.

Cashless Exercise/Net Exercise

Under the Former Policy, the exercise price of a stock option was required to be paid in cash. The New Policy now permits stock options to be exercised using a “cashless” or “net exercise” option, which issuers and other market participants will no doubt consider to be a welcome (and some would say, overdue) change that will better facilitate the exercise of “in the money” stock options.

A “cashless exercise” involves a broker orchestrating the exercise of a stock option by lending the necessary money to the holder, who in turn uses such money to pay the exercise price and then sells (at least) enough of the shares to repay the broker, while the issuer still receives the exercise price of the stock option in cash.

A “net exercise” involves a holder receiving the number of underlying listed shares that is equal to the quotient by dividing the product of the number of options being exercised multiplied by the difference between VWAP (as defined in the New Policy) of the underlying listed shares and the exercise price of the subject options by the VWAP of the underlying listed shares. As such, no cash is paid by the holder or received by the issuer.

Security-Based Compensation Outside of a Security-Based Compensation Plan

The New Policy allows the Exchange to consider an application of an issuer to grant or issue security-based compensation outside of a security-based compensation plan and amends or supplements existing rules in this regard, including with respect to (a) securities for service arrangements under Exchange Policy 4.3 – Shares for Debt; (b) the settlement of outstanding debts through the issuance of securities under Exchange Policy 4.3 (including debt relating to management fees); (c) the issuance of listed shares as an inducement or as severance; and (d) loans from issuers to persons for the purposes of acquiring securities of the issuer.

Transitional Provisions

The New Policy is effective as of November 24, 2021. All security-based compensation plans filed with the Exchange prior to November 24, 2021 remain in force in accordance with their existing terms, but will need to comply with the New Policy the next time they are put to shareholders for approval (as will any plans being implemented or amended going forward).

If you have any questions regarding the changes to the Exchange’s security-based compensation policies, including pertaining to the various types of Compensation Securities available for issuance or the amendments required to be made to an existing plan due to the New Policy, please contact Michael Rennie at mrennie@wildlaw.ca or any other member of Wildeboer Dellelce LLP. 

This update is intended as a summary only and should not be regarded or relied upon as advice to any specific client or regarding any specific situation.

If you would like further information regarding the issues discussed in this update or if you wish to discuss any aspect of this commentary, please feel free to contact us.