Major changes to Canadian Securities Exchange Policy 4

Major amendments to Canadian Securities Exchange (CSE) policies could result in significant changes in how new issuers are listed, and how existing issuers undertake transactions that fall within the CSE’s purview.

Effective April 3, 2023, the CSE implemented extensive changes to its policies. While these amendments feature changes to each of the CSE’s 10 policies, the most comprehensive changes are in:

  • CSE Policy 2 – Qualification for Listing (“Policy 2”)
  • CSE Policy 4 – Corporate Governance, Security Holder Approvals and Miscellaneous Provisions (“Policy 4”)
  • CSE Policy 6 – Distributions & Corporate Finance (“Policy 6”)

In this article, we will focus on the more substantive changes to Policy 4. Please see our previous articles on Policy 2 for information regarding the listing policies.

Policy 4 – Corporate Governance, Security Holder Approvals and Miscellaneous Provisions

Previously known as “Corporate Governance and Miscellaneous Provisions,” Policy 4 addresses the structure and procedures that a board of directors must comply with in order to undertake its role as an informed monitor of a corporation’s affairs.

The introduced amendments include additional requirements for annual shareholder meetings, securityholder approval for certain transactions, and specifications on director conduct in relation to a majority voting policy (a “Majority Voting Policy”).

Majority Voting Policy

As noted in our last article, the CSE introduced a new senior listing tier for larger issuers: “NV Issuers” (Non-Venture Issuers). With this new tier, the CSE also introduced additional guidelines and requirements in relation to such NV Issuers. Under Policy 6, every director of an NV Issuer must be individually elected by a 50% +1 majority of the votes cast (the “Majority Voting Requirement”). An NV Issuer must also adopt a Majority Voting Policy, unless it satisfies the Majority Voting Requirement in another way – whether it be pursuant to the articles, bylaws or other similar instruments.

If a director fails to meet the Majority Voting Requirement in relation to their election, the Majority Voting Policy must provide that they will immediately tender their resignation, which will then be accepted by the board within 90 days of the director tendering their resignation, absent exceptional circumstances.

NV Issuers that are majority-controlled are exempt from the Majority Voting Requirement.

Other securityholder approvals

Policy 4 now outlines situations in which shareholder approval is necessary for offerings. Here is an overview of some additional requirements:

In relation to offerings of securities, for non-NV Issuers shareholder approval will be required if the number of securities for a proposed offering is more than 100% of the outstanding securities, or if a new control person is created and the number of securities offered is over 50% of the total amount of outstanding securities. This threshold is decreased to 25% for NV Issuers.

Securityholder approval is also required in circumstances where:

  • the issuance price is lower than the market price less the maximum permitted discount (regardless of the number of shares to be issued);
  • issuances of securities to related parties of a NV Issuer in the past 12 months exceeds 10% of the total number of securities or votes outstanding; or
  • a listed issuer decides that the issuance will affect the control of the listed issuer in a material way.

There are several exceptions to the requirements for securityholder approval, including:

  • if there are no related persons participating in the offering,
  • an agreement to complete the offering has been made with the listed issuer,
  • the listed issuer is experiencing serious financial difficulty, or
  • if the offering is decided to be in the listed issuer’s best interest as determined by an independent audit committee belonging to the listed issuer or by most of its independent directors.

If the listed issuer proposes to use an exemption, it must issue a news release five days in advance of the offering.

Shareholder approval is now required for certain acquisitions and dispositions, including, but not limited to:

  • dispositions of all or substantially all of the assets, business or undertaking of the issuer,
  • acquisitions of assets from a related person or a group of related persons of a NV Issuer holding more than 10% interest in the assets to be acquired and where the total securities issuable pursuant to such acquisition will exceed 5%, and
  • acquisitions where the total consideration issuable will exceed: 50% of the issued and outstanding shares if it also creates a new control person; or 100% of the issued and outstanding shares if it will not create a control person (the threshold is 25% for NV Issuers).

Finally, consolidations where the ratio is greater than 10 to one – or where, when combined with other consolidations in the previous 24 months that were not approved by shareholders, will result in a consolidation ratio of greater than 10 to one – will now require shareholders approval.

Audit committees

Policy 4 now supplements the requirements related to audit committees.

The amendments clarify that audit committees have the responsibility of managing the relationships between the issuer and external auditors on behalf of shareholders. This includes overseeing external auditors’ compensation, recommending nominations to the board of directors, and determining external auditors’ compensation. The audit committee is also responsible for overseeing the work of external auditors when issuing or preparing an auditor’s report or related work, aligning with the existing requirements under National Instrument 52-110 – Audit Committees.

Directors and officers

According to the new Policy 4, directors with a history of involvement in listed issuers that fail to pursue the business objectives disclosed in a listing disclosure document may face subsequent objections from the CSE to act as directors or officers of further listed issuers. Therefore, directors and officers must be mindful of the disclosed business objectives of the listed issuer after its listing.

For more information about the changes to the CSE’s policies or how they may affect you, please contact one of our corporate finance and securities team members.

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.