The Toronto Stock Exchange (TSX) has published guidance on voting agreements entered into between security holders and TSX listed issuers in its Staff Notice 2023-0001. The Staff Notice codifies the informal policies of the TSX regarding its treatment of voting agreements that are considered to materially affect the control of an issuer.
Voting agreements
A voting agreement is an agreement whereby security holders agree to vote in favour of or against a specific proposal. Voting agreements are used in business combination transactions to assure a purchaser that a requisite number of security holders will vote their securities in support of a proposed transaction. Voting agreements may also be used in the context of director elections, where a security holder agrees to vote their securities in support of one or more director nominees, or in connection with other corporate actions.
The TSX will generally review voting agreements that are:
- entered into by a listed issuer in connection with a treasury issuance of listed or convertible securities to a covenanting security holder or its affiliates; or
- linked, directly or indirectly, to a transaction that is otherwise reviewable by the TSX under Part V (Special Requirements for Non-Exempt Issuers) or Part VI (Changes in Capital Structure of Listed Issuers) of the TSX Company Manual.
Voting agreements that materially affect control and require disinterested security holder approval
The TSX will generally accept a voting agreement if one of the following conditions are met:
- the listed issuer has obtained disinterested security holder approval for the voting agreement; or
- the voting agreement allows a covenanting security holder to abstain from, or not participate in, a security holder vote.
A listed issuer will be required to obtain disinterested security holder approval of a voting agreement that materially affects the control of the issuer. "Materially affects control" means the ability of any security holder or combination of security holders acting together to influence the outcome of a vote of security holders. Whether a voting agreement materially affects control of an issuer is a factual analysis and is affected by the issuer's individual circumstances and a variety of other factors. The TSX has indicated that it will take into account the following factors in determining whether the voting agreement would have a material effect on the control of an issuer:
- 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 block sufficient to influence the outcome of a vote (which may occur at as low as 10 per cent, but is typically regarded as more than 20 per cent, of the issued and outstanding voting securities of an issuer, 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.
Implications for issuers
Issuers and security holders that are considering entering into a voting agreement should consider whether such agreement materially affects the control of an issuer and would require disinterested security holder approval. In order to avoid the requirement to seek disinterested security holder approval of the voting agreement, more permissible voting agreements should be considered, such as negative voting agreements that allow covenanting security holders to abstain from voting in certain ways.
Of specific importance for issuers will be the treatment of voting agreements entered into in the context of private placements, whereby a purchase agreement under which securities are acquired from an issuer includes a provision that the purchaser will support management and vote the securities acquired by such purchaser in favour of management proposals. The TSX may consider such agreements to materially affect the control of an issuer, thereby triggering the requirement to obtain disinterested security holder approval of the agreement.
Voting agreements and other exchanges
Neither the TSX Venture Exchange nor the Canadian Securities Exchange have specific policies in respect of voting agreements. However, a voting agreement entered into in connection with a transaction may be considered to create a new "control person," within the meaning of the relevant exchange's policies, which would trigger the requirement to obtain security holder approval of a transaction.
The NEO Exchange takes the view that "materially affects control" means the ability of any security holder or combination of security holders acting together to influence the outcome of a vote of security holders, including the ability to block significant transactions. Therefore, a voting agreement entered into in connection with a transaction may be considered to materially affect the control of an issuer. The NEO Exchange generally requires security holder approval of a transaction that materially affects the control of an issuer.
For issuers listed on the TSX Venture Exchange, the Canadian Securities Exchange or the NEO Exchange, consideration should be given as to whether a voting agreement would create a new control person or would be considered to materially affect the control of an issuer pursuant to the policies of the respective exchanges, thereby triggering the requirement to obtain security holder approval for a transaction that would not otherwise require security holder approval.
Should you have any questions or require assistance in connection with the matters covered by this article, please feel free to reach out to a member of our Capital Markets Group or Governance, Activism & Investigations Group.