Written By Jon Truswell, John Piasta, Kris Hanc, Duncan D'Arcy and Bikaramjit Sandhu
On February 27, 2023, the Toronto Stock Exchange (TSX) published Staff Notice 2023-0001 (the Notice), providing guidance on how TSX addresses voting agreements entered into between a TSX listed issuer and one or more of its security holders. The Notice provides guidance on when TSX will review voting agreements and its conditions for acceptance.
Specifically, the Notice provides guidance on voting agreements that require a security holder to vote, or cause to be voted, its voting securities on certain matters as directed by management of the issuer or in favour of one or more management proposals. This will commonly require a security holder to vote in favour of management's director nominees, but may also require the security holder to vote as directed by management on additional matters (such as the appointment of auditors, compensation related matters or items of special business) and may also relate to transactions or corporate actions. Voting agreements may be entered into in connection with the granting of certain rights to a security holder—such as an investor rights agreement—or to facilitate the completion of a specific transaction. The voting requirement may be time-limited, indefinite or terminate based on the occurrence of a specific event, such as falling below a pre-determined ownership threshold or the completion of a specific transaction.
Material Effect on Control
TSX generally considers voting agreements to have a material effect on control of the issuer. Part I of the Manual defines "materially affect control" as "the ability of any security holder or combination of security holders acting together to influence the outcome of a vote of security holders." The Notice indicates that holdings of voting securities by a combination of security holders acting together may be considered to materially affect control, depending on the individual circumstances of the issuer. Whether a voting agreement materially affects control of an issuer is a factual analysis and is affected by an issuer's individual circumstances and a variety of factors.
Transactions that materially affect control of an issuer require the issuer to obtain majority approval from disinterested security holders.
Conditions for Acceptance
TSX will generally accept voting agreements if the issuer meets one of the following conditions:
- the issuer has obtained disinterested security holder approval for the voting agreement; or
- the voting agreement allows a covenanting security holder to abstain or not participate in a vote.
If the issuer does not meet either of the above conditions, TSX may still accept a voting agreement if it determines that the agreement will not materially affect control of the issuer. Whether a voting agreement materially affects control of an issuer is a fact-specific inquiry dependent on a variety of factors and TSX has identified the following factors that it will consider when making this determination:
- the proposed term of the voting agreement (i.e., is it time-limited, or based on the completion of a specific transaction—such as a lock-up agreement or voting support agreement in the context of a merger or acquisition—or does the voting agreement continue for a multi-year or indefinite period?);
- whether the voting agreement results in a voting block sufficient to influence the outcome of a vote (which may occur at as low as 10% and is typically regarded as more than 20% of the issued and outstanding voting securities of the issuer, on a non-diluted basis, including the securities controlled by management, including in connection with other voting agreements and any other security holders acting jointly and in concert);
- the context in which the voting agreement is being entered into; and
- the consequences to the covenanting security holder for breaching the voting agreement.
TSX will generally not review voting agreements that are:
- entered into by an issuer independent of a treasury issuance of listed or convertible securities to the covenanting security holder or its affiliates; or
- not linked, directly or indirectly, to a transaction that is otherwise reviewable by TSX under Part V or Part VI of the Manual.
Implications for Issuers and Shareholders
The Notice provides helpful guidance on TSX's requirements for approving voting agreement and gives TSX listed issuers and security holders greater certainty in determining the required approvals necessary when negotiating the terms of voting agreements. In circumstances in which a voting agreement is expected to materially affect control of the issuer, parties may favour more permissive voting covenants that allow security holders to abstain or not vote their shares to avoid the requirement to obtain disinterested security holder approval for the voting agreement.
A copy of the Notice in its entirety can be found here.
If you have any questions regarding voting agreements, please contact the Bennett Jones Capital Markets group.