Lawyers from Osler, Hoskin & Harcourt LLP suggest that a new Toronto Stock Exchange rule requiring a shareholder vote for dilutive acquisitions may drive up the importance of cash in deals, which may hinder some M&A activity, but boost financing demand.

Under the new rule, which took effect Tuesday, “companies listed on the Toronto Stock Exchange will be required to obtain buy-side shareholder approval for public company acquisitions that would result in the issuance of more than 25% of the issued and outstanding shares of an acquiring company on a non-diluted basis,” the law firm said in a note to clients.

“As a consequence of this new bright line requirement, any regulatory uncertainty that previously existed regarding the circumstances in which an acquiror shareholder vote might be required has now been eliminated. However, there are also expected to be significant implications for mergers and acquisitions practice in Canada,” it adds.

Among those effects, it points out that more deals may be done for cash to reduce the uncertainty of a shareholder vote. In turn, this need for cash-heavy deals, may lead to less M&A activity, particularly in the resource sector, and among small cap firms; and, it may require more equity and debt financings to support deals that are carried out.

“The new shareholder approval requirement may disproportionately affect resource issuers and companies with smaller market capitalizations. In this regard, the new TSX rule may serve to prevent some transactions from taking place, either because acquirors are not willing to expose themselves to the complication of a shareholder vote or the risk of shareholder rejection, or because shareholders in fact fail to approve some transactions. As a consequence, we may see somewhat less M&A activity taking place overall than would otherwise have been the case, particularly in market sectors where cash flow is inconsistent and/or financing is difficult to obtain,” it says.

“It is also possible that acquirors of public companies will go to extra lengths to seek to raise cash for acquisitions rather than assume the execution risk of a shareholder vote. This may encourage the development of an acquisition financing debt market in Canada analogous to the equivalent market in the United States. However, as debt capital markets continue to present challenging conditions we may, in the shorter term, see a move to an increased use of acquisition-related equity financings as a way of addressing the shareholder approval requirement,” it adds.

Additionally, the firm notes that transaction structures may be affected; and, that buyers may need to pay a premium to “account for the inherent risk and uncertainty introduced by the requirement to obtain shareholder approval.”

IE