On July 13, 2015, the Toronto Stock Exchange (the “TSX”) published a Staff Notice with guidance on the listing requirements of the TSX in relation to applicants and issuers with significant connections to emerging market jurisdictions (“Emerging Market Issuers”). Emerging Market Issuers seeking a listing on the TSX as well as those Emerging Market Issuers presently listed should be aware of these listing requirements. The Staff Notice should be read in conjunction with the rules in the TSX Company Manual (the “Manual”). The TSX Venture Exchange (the “TSX-V”) also has a new policy on Emerging Market Issuers, which is intended to complement policy requirements that apply to all issuers seeking a listing on the TSX-V.
Both the TSX and TSX-V publications are the result of a comments review following a joint Consultation Paper on Emerging Market Issuers distributed by the TSX and TSX-V on December 17, 2012. The focus is on jurisdictions outside of Canada, the United States, the United Kingdom, Western Europe, Australia, and New Zealand.
To determine whether an applicant or issuer is an Emerging Market Issuer, the TSX and TSX-V consider the following factors:
- Residency of mind and management;
- Jurisdiction of the primary business operations and assets;
- Jurisdiction of incorporation;
- Nature of the business; and
- Corporate structure.
The TSX has identified greater potential risks associated with Emerging Market Issuers, including: (1) a lack of management knowledge regarding securities laws and TSX requirements; (2) communication issues due to language barriers among management and board of directors and/or advisors; (3) lack of auditor or audit committee expertise and experience in financial reporting and audit practice and procedures in the context of international audit engagements; (4) inadequate internal controls; (5) complexity of corporate and capital structures; and (5) uncertainty or complexity in establishing validity of title to principal operating assets.
TSX Guidance for Original Listing of Emerging Market Issuers
Emerging Market Issuers submitting an original listing application to list on the TSX should be aware of the following guidance:
1. Pre-filing Meetings
Emerging Market Issuers should arrange a pre-filing meeting with the TSX in order to introduce TSX to the issuer, discuss questions that the issuer has about the listing process, identify the procedural requirements the TSX expects will apply to the issuer’s application, and identify possible issues the TSX may have with the proposed listing.
The TSX has mandatory requirements for management, as described in the Manual, and applicants for listing must meet these. The TSX considers the following factors when assessing whether or not the directors, officers, and significant security holders will run the business of the company appropriately and in the best interests of investors: public company experience, independence, local business knowledge, communication, CFO suitability requirements, and audit committee qualifications.
Of particular importance for Emerging Market Issuers is that the CFO and the chair of the board of directors have North American public company experience. In addition, where an issuer has a large or controlling shareholder who holds a key position in management, independent oversight of management by the board of directors is critical. The TSX has indicated that adequate independent oversight may be demonstrated by having an independent director acting as chair of the board, at least one independent director with relevant experience in the emerging market jurisdiction and at least two independent directors with North American public company experience, at least one of whom is resident in Canada.
The TSX may require a change of auditors as a condition of listing where it is not confident that an auditor will be able to fulfill its responsibilities for an issuer. Emerging Market Issuers may also be required to give notice for any proposed change of auditors as a condition of listing. Generally, auditors for Emerging Market Issuers must have demonstrated satisfactory expertise in the jurisdiction where the principal operations of the issuer are carried out. Additionally, because of complexities that surround the financial reporting of Emerging Market Issuers, TSX expect that auditors review interim period financial statements at the time of listing and may require ongoing review of interim statements on an ongoing basis after listing.
4. Internal Controls
Applicants should have a comprehensive internal control system related to financial reporting prior to listing on the TSX. The TSX may also require the CEO and CFO to confirm in writing that the issuer’s internal controls provides reasonable assurance of reliable financial reporting and preparation of financial statements in accordance with IFRS or GAAP. In exceptional circumstances, the TSX may require the internal controls be evaluated by independent auditors (other than the current auditors of the issuer).
The TSX regards sponsorship by one of its participating organizations as another important factor in the consideration of a listing application. The sponsorship requirements are set out in Sections 312, 317, 322, and 326 of the Manual. Emerging Market Issuers should be ready to provide sponsorship along with an original listing application.
6. Related Party Transactions
Related party transactions attract additional scrutiny by the TSX and specific rules and requirements are covered in Part 5 and Subsection 604(a) of the Manual. Emerging Market Issuers may be required to have a related party transactions policy that would address factors such as independent director oversight, public disclosure, and regulatory filings.
7. Non-traditional Capital or Corporate Structure and Ownership of Principal Assets
Applicants that use non-traditional corporate structures must provide the TSX with an explanation as to why this particular structure is necessary. The protection of current security holders is a primary concern. Further, the TSX may require a legal opinion addressing its structural concerns. These Applicants must make comprehensive disclosure in the core disclosure document prepared in connection with listing, along with any associated risks.
8. Background Research
The TSX conducts local background searches on key management, board members, and significant security holders for all applicants. A local corporate search may also be conducted. Applicants pay for the expenses related to these searches.
Emerging Market Issuers may be required to implement policies addressing the following matters: related party transactions; whistle blowing; anti-bribery, anti-corruption and ethical business conduct; local disbursements; governance and disclosure.
TSX-V Policy 2.10 – Listing of Emerging Market Issuers
The guidance with respect to the specific requirements that are applicable to the listing of Emerging Market Issuers in TSX-V Policy 2.10 is very similar to the guidance provided in the Staff Note published by the TSX. Policy 2.10 provides a more detailed explanation of these requirements.