TSXV Revises Rules for Security Based Compensation: Implications for the 2022 Proxy Season and Beyond

In November 2021, the TSX Venture Exchange (the “Exchange”) announced a significant overhaul of its policy on equity incentive plans. The new policy, Policy 4.4 – Security Based Compensation (the “New Policy”) replaced the old Policy 4.4 – Incentive Stock Options (the “Former Policy”) effective as of November 24, 2021.

With many annual shareholders’ meetings approaching, issuers listed on the Exchange should consider whether their equity incentive plans need to be amended in light of the changes reflected in the New Policy.

Any equity incentive plan that is put before shareholders for approval after November 23, 2021 is required to be compliant with the New Policy, including existing rolling equity incentive plans being considered annually by shareholders.

We have highlighted the key changes between the New Policy and the Former Policy which issuers listed on the Exchange should be aware of heading into the 2022 proxy season:

Types of Security Based Compensation

While the Former Policy addressed only stock option plans, the New Policy provides issuers with greater certainty on how the Exchange regulates other types of security based compensation, such as deferred share units, performance share units, restricted share units and stock appreciation rights. In short, the New Policy generally applies many of the same rules to other types of security based compensation as it does to stock options. Notably, capital pool companies and NEX issuers remain limited to stock option plans under the New Policy.

Categories of Security Based Compensation

While the Former Policy permitted only two types of stock option plans, the New Policy permits the following four categories of security based compensation plans:

• Rolling up to 10%. Similar to a category available under the Former Policy, this category allows for the adoption of one or more security based compensation plans under which the aggregate number of listed shares issuable is equal to or less than 10% of the issued shares at the date of the grant or issuance of any security based compensation.
• Fixed up to 20%. Also similar to a category available under the Former Policy, this category allows for the adoption of one or more security based compensation plans under which the aggregate number of listed shares issuable is equal to or less than 20% of the issued shares on the date of implementation of the equity incentive plan.
• Rolling up to 10% and fixed up to 10%. This new hybrid category allows an issuer to adopt an equity incentive plan permitting the grant of stock options to acquire up to 10% of the issued shares on the date of the grant and, separately, the grant of all types of security based compensation allowing for the issuance of up to 10% of the number of shares outstanding on the date of implementation of the equity incentive plan.
• Fixed Stock Option Plan up to 10%. This new category is effectively a subset of the “fixed up to 20%” category but has been singled out by the Exchange because it is the only type of equity incentive plan an issuer can adopt without shareholder approval. Only stock options (and not other forms of security based compensation) can be issued under this type of plan. The Exchange will also only allow the amendment of an equity incentive plan under this category once in a 24-month period.

Cashless or Net Exercises

Historically, the Exchange has required the exercise price of an option to be paid in cash. Under the New Policy, security based compensation plans are permitted to include cashless and net exercise features. Such features – which have been permissible on other stock exchanges, including the Toronto Stock Exchange, for some time – allow a holder of options to exercise those options by either reducing the number of shares issued based on a formula tied to the market price of the listed shares or by allowing a brokerage firm to sell a portion of the shares to cover the exercise price.

Minimum Vesting Period

All forms of security based compensation other than stock options are now subject to a minimum one-year vesting requirement following the date of the grant. Certain exceptions may be included in a security based compensation plan to permit accelerated vesting in the case of the death of a participant or for those who cease to be eligible in connection with a change of control, take-over bid, RTO or other similar transactions.

Addition of Charitable Options

The New Policy includes the substantive contents of Policy 4.7 – Charitable Options in Connection with an IPO, which has now been repealed. Stock options (but not other forms of security based compensation) can be granted to certain eligible charitable organizations, whether the grant is made before or after an issuer’s IPO. Such grants may not account for more than 1% of the issued and outstanding shares of the issuer, but grants to eligible charitable organizations do not count towards the limits generally applicable to security based compensation plans.

Other Security Based Compensation

In certain specified circumstances, the Exchange may permit an issuer to grant security based compensation outside of a security based compensation plan. Such circumstances include: where securities are issued for services; where compensation is owed to non-arm’s length parties; and as a one-time payment as an inducement or severance. Any issuance to a non-arm’s length party not expressly permitted under Policy 4.4 or Policy 4.3 – Shares for Debt must be subject to disinterested shareholder approval prior to the issuance of such shares.

All security based compensation plans filed with the Exchange prior to November 24, 2021, or any awards granted, issued or amended pursuant to such plans before and after that date, remain in force in accordance with their existing terms. All security based compensation plans filed with the Exchange or put before shareholders for approval after November 23, 2021, and subsequent awards granted or issued under those plans, will need to comply with the New Policy.

The Capital Markets Group at Aird & Berlis LLP is ready to assist with any matter or question related to the New Policy. If you require any assistance with the foregoing, please contact us.