If you believe the market price of your securities is lower than the true value of your business and your future prospects, you may want to consider repurchasing your own securities through a normal course issuer bid (“NCIB”).
NCIBs offer an easier alternative to substantial issuer bids for reporting issuers looking to acquire their own securities. However, you must meet certain obligations to avoid having your bid halted or facing other penalties and additional costs.
In the first of this two-part blog series, we’ll provide an overview of the securities laws, policies and rules that govern NCIBs for issuers listed on the Toronto Stock Exchange (“TSX”).
First Thing to Know – Issuer Bids Will Soon Be More Expensive
The federal government’s 2022 Fall Economic Statement included a new proposed 2% tax on the net value of share buybacks beginning January 1, 2024. Now may be an ideal time for you to repurchase and cancel securities before you incur additional costs on these transactions.
There are a few reasons to pursue an issuer bid. You may believe the current price of your shares does not reflect the value of your business, or you may want to offset share dilution when you are issuing new shares as a result of stock options being exercised.
Issuer bids are regulated by Part 2 of National Instrument 62-104 – Take-Over Bids and Issuer Bids (“NI 62-104”). An NCIB provides an exemption to the more complex issuer bid requirements.
The NCIB Exemption
You may rely on the NCIB exemption if your bid is made in the normal course through the facilities of a designated exchange in accordance with their policies and rules, or another published market as long as you comply with the following:
- the bid is for less than 5% of the outstanding securities of a class of securities;
- the aggregate number of securities acquired by you or any person acting with you within any 12-month period does not exceed 5% of the outstanding securities of that class at the beginning of the 12-month period; and
- the value of the consideration paid for any of the securities is not more than the market price plus reasonable brokerage fees or commissions actually paid.
The NCIB rules in Part 4 of NI 62-104 rely heavily on the bylaws, rules, regulations and policies of the exchange on which the issuer’s shares are traded (particularly in the case of the TSX and TSX Venture Exchange (“TSXV”).
You may also face jurisdictional requirements and must ensure appropriate corporate authorization has been granted to proceed with an NCIB. Subject to additional requirements in your bylaws or articles, you will at the very least be required to obtain a directors’ resolution authorizing the NCIB before proceeding.
NCIBs on the TSX
The TSX Company Manual considers an issuer bid an NCIB when, over a 12-month period, the bid will not exceed the greater of: (a) 10% of the public float on the date of acceptance by the TSX; or (b) 5% of such class of securities issued and outstanding on the date of acceptance by the TSX (excluding any securities held by or on behalf of the issuer on this date).
Section 629 of the TSX Company Manual sets out the special rules applicable to NCIBs. Importantly, an NCIB cannot extend for a period of more than one year after the TSX authorizes purchases to begin.
Commencing a TSX NCIB
Prior to commencing an NCIB on the TSX, you must: (i) file a Form 12 Notice of Intention to Make a Normal Course Issuer Bid (“Form 12 Notice”); and (ii) issue a press release indicating your intention to make an NCIB, subject to TSX approval.
You must submit the following to the TSX when seeking acceptance of an NCIB:
- a draft Form 12 Notice;
- a draft press release announcing the NCIB;
- a detailed calculation of the average daily trading volume (for issuers that are not investment funds);
- a detailed calculation of your public float if you intend to purchase securities based on your public float; and
- a draft Automatic Security Purchase Plan (“ASPP”) if you intend to enter an ASPP as part of the NCIB.
Form 12 Notice
The Form 12 Notice includes information about the securities you plan to acquire during the NCIB and how you will acquire them, as well as the duration of the NCIB. Rule 629(b) specifically contemplates that you should not apply for the maximum number of securities that may be purchased, only the number that your board has determined may be acquired. You will work with the TSX to ensure that the information in the draft Form 12 Notice is acceptable before you file the final form executed by an officer or director.
The TSX also requires you to summarize the material information contained in the Form 12 Notice in your next annual report, information circular, quarterly report or other document mailed to security holders.
The TSX will not accept a Form 12 Notice if you will not meet the criteria for continued listing on the TSX, assuming all purchases contemplated in the Form 12 Notice are made.
A press release indicating your intention to make an NCIB, subject to TSX approval, must summarize the material aspects of the Form 12 Notice, including the number of securities you intend to repurchase, the method of disposition of the securities, the reason for the bid and details of any previous purchases in the preceding 12-month period.
The press release is frequently provided to the TSX for approval with the draft Form 12 and must be released as soon as the Form 12 Notice is accepted by the TSX. A final copy of the press release must be filed with the TSX and the applicable securities regulators.
NCIB purchases may begin two clear trading days after both the Form 12 Notice has been accepted by the TSX and the press release is issued.
An ASPP is an agreement between you and a broker that will conduct the purchase of your securities. When you conduct an NCIB using an ASPP, a draft of the ASPP must be submitted to the TSX for review.
Typical Timeline to Commence
You must file the draft Form 12 Notice, press release and other required documents at least seven business days prior to beginning the NCIB. The TSX will typically provide comments within three business days. You must file final documents three business days or two clear trading days prior to the commencement date.
During the NCIB
During the NCIB, you must stay within certain purchase limits and follow reporting requirements. If you fail to satisfy these requirements, the TSX may suspend the NCIB.
Purchasing Securities under the NCIB
You will be subject to certain short-term purchase limits, including:
- if you are not an investment fund, your share buybacks, when aggregated with all your other purchases during the same trading day, cannot be more than the greater of: (a) 25% of the average daily trading volume of the listed securities of that class; and (ii) 1,000 securities; or
- if you are an investment fund, your share buybacks, when aggregated with all your other purchases during the preceding 30 days, cannot be more than 2% of the outstanding listed securities of that class on the date of acceptance of the Form 12 Notice by the TSX.
If you are acting on your own behalf, you are also subject to certain rules when purchasing securities under the NCIB. These additional rules consider price limitations, prearranged trades, private agreements, sales from control, purchases during a circular bid, undisclosed material information, block purchases, and purchases at the opening and closing.
If you are not acting on your own behalf, you must appoint one broker to make purchases. You must inform the TSX in writing of the name of the responsible broker and registered representative. You must also provide the broker with a copy of the Form 12 Notice and instructions to make purchases in accordance with the TSX Company Manual.
If you are cancelling securities purchased through the NCIB, you must withdraw the securities from CDS and ensure they are cancelled on the transfer agent’s register in a timely manner.
Reporting Purchased Securities
Once you have begun purchasing securities through an NCIB, you must file a report stating the number of securities purchased during the month, the volume-weighted average price you paid and whether the securities were cancelled, reserved for issuance, or otherwise dealt with. These reports must be filed within 10 days of the end of each month in which any purchases are made and should include securities purchased through the facilities of the TSX or otherwise.
Amending an NCIB
Amending an NCIB is similar to commencing an NCIB. You must file an amended Form 12 Notice and a press release. You may amend your Form 12 Notice by increasing the number of securities sought if that number does not exceed:
- the 10% of the public float or 5% of outstanding share limits established in the NCIB definition; or
- provided that you have increased your number of issued securities subject to the bid by at least 25%, the limits set out in the NCIB definition calculated as of the date of the amended notice.
In our next blog, we’ll cover NCIBs for issuers listed on the TSXV, the NEO Exchange and the Canadian Securities Exchange. In the meantime, if you have any questions about share buybacks or raising capital, the lawyers in our Corporate Finance & Securities group would be pleased to assist you. Contact us to learn more.
Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.