New TSX Venture Exchange rules re: securities-based compensation – More (not only!) options

The TSX Venture Exchange (TSXV) has amended its policies regarding securities-based compensation, providing for more options and greater flexibility for issuers.  The most significant changes include that the policy now:

• covers a variety of types of security-based compensation rather than only stock options, and 
• permits four types of security-based compensation plan rather than only two types of stock option plan, including one category of plan that does not require shareholder approval for implementation. 

The key differences between the old securities-based compensation rules and the new rules are highlighted below.

Types of security-based compensation

The former TSXV policy only addressed stock options. It has now been amended to cover a variety of types of security-based compensation, such as deferred share units, performance share units, restricted share units and stock appreciation rights.  It should be noted that capital pool companies and issuers listed on the NEX may only grant stock options and no other types of security-based compensation.

Categories of security-based compensation plans

The former TSXV policy permitted only two types of stock option plan:

(a) a “rolling up to 10%” plan where the maximum number of options at any time is equal to 10% of the issued shares; and

(b) a “fixed up to 20%” plan reserving for issuance a specified number of shares, up to a maximum of 20% of the issued shares.

The amended policy now permits four types of plan – both (a) and (b) above (but expanded to include additional types of security-based compensation, not just stock options) plus:

(c) a hybrid “rolling stock option plan up to 10% and other fixed up to 10%” category under which the “rolling” stock option plan provides that the maximum number of options issuable is 10% of the issued shares and the “fixed” security-based compensation plan provides a fixed specified number of shares up to a maximum of 10% of the issued shares; and

(d) a “fixed stock option plan up to 10%” plan that permits a fixed specified number of shares up to 10% of the issued shares and is limited to stock options only, but does not require shareholder approval for implementation.

Other amendments and key terms to note

• Shareholder approval of a security-based compensation plan is required for:
  • implementation (for all categories of plan except the “fixed stock option plan up to 10%”);
  • amendment (for all categories of plan);
  • annually (for “rolling up to 10%” and the rolling portion of the hybrid category).
• Under the former policy, the exercise price of a stock option was required to be paid in cash.  The new policy permits stock options to be exercised using “net exercise” (where there is no cash payment to the issuer and the participant receives the shares based on a formula using the five-day volume weighted average trading price of the underlying shares) or “cashless exercise” (where a brokerage firm facilitates the exercise of an option but the issuer still receives the exercise price in cash).
• In certain circumstances, the TSXV may approve an issuer’s grant of security-based compensation outside of a security-based compensation plan, subject to disinterested shareholder approval where required.  Such circumstances include securities for service, compensation owed to non-arm’s length parties, one-time payments as inducement or severance and loans.
• The policies and forms in the TSXV Corporate Finance Manual impacted by the amendments are as follows:
  • Policy 4.4 Incentive Stock Options has been amended and renamed Policy 4.4 Security Based Compensation; 
  • Policy 4.7 Charitable Options in Connection with an IPO has been repealed as Policy 4.4 includes the substantive contents of Policy 4.7, being stock options granted to eligible charitable organizations;
  • Form 4G Summary Form – Incentive Stock Options has been amended and renamed Form 4G Summary Form – Security Based Compensation; and
  • Form 4F Certification and Undertaking Required from a Company Granted an Incentive Stock Option has been repealed as the new Form 4G includes the substantive contents of Form 4F.

Transition

The policies regarding these new rules became effective November 24, 2021. All security-based compensation plans filed with the TSXV prior to such date remain in force in accordance with their existing terms.  Any such plan to be placed before shareholders for approval or any plan that is implemented or amended after November 23, 2021, must comply with the new security-based compensation policy.