Canadian securities trading will never be the same now that a
consortium of investment companies has taken private the
Toronto Stock Exchange and associated entities. It creates real
potential for conflict, albeit mitigated by behavioral
remedies, however new efficiencies abound.
Heres how it all came
Maple Group Acquisition
Corporations C$3.8 billion ($3.81 billion) two-step
integrated transaction to acquire TMX Group, Alpha Group and
the Canadian Depository for Securities (CDS) was nearly
finished on July 31 when more than the 70% of required shares
were tendered in accordance with a partial takeover bid.
The TMX bid had to be a two-step process
for two reasons. First, TMX was still in talks with the London
Stock Exchange (LSE) when Maple unilaterally launched the
transaction. Second, TMX had a considerably large US
shareholder base, meaning a registration statement would be
required in absence of a court approved plan of arrangement. A
plan of arrangement cannot be imposed without approval of the
target companys board.
We couldnt use the multijurisdictional
disclosure system because Maple was not a reporting issuer as
it was a brand new company, said Vincent Mercier, counsel
to Maple and partner with Davies Ward Phillips & Vineberg.
At the time, we couldnt talk to TMX so we
couldnt get a supported plan of arrangement (required to
issue shares under section 3(a)(10) of the US Securities
The first step was to acquire between 70% and 80% of TMX
shares for cash at C$50 per share. Remaining shares can be
tendered for cash until tomorrow, Friday August 10.
Shareholders who do not redeem their shares will receive shares
in Maple (the new TMX) at a ratio of one-to-one in accordance
with the plan of arrangement, the second step of the
transaction. As of July 31, approximately 91% of shares had
been deposited, according to a TMX
The rules would not have allowed Maple to force a
different form of consideration at the back end (after the
first 70-80% was purchased for cash) without minority
shareholder approval and a formal valuation, said Torys
partner and counsel to TMX Sharon Geraghty.
This meant a no-action letter was required from Canadian
securities regulators. Exemptive relief was granted on the
condition the bid was extended for 10 days after the tender
offer to allow remaining shareholders an opportunity to receive
the C$50 per share payments.
Greater than two-thirds of shareholders have already
tendered shares, but the plan of arrangement will formally
complete after shareholders approve the plan and a court
decides it is a fair deal for TMX shareholders. Court approval
is needed to qualify the US shares for a registration exemption
under the Securities Act as well as convert existing TMX
options into options in the new company.
Impact on trading costs
Cross-margining could lower trading costs of Canadian
financial institutions by lowering the margins required on each
trade. At the moment, the Canadian Derivatives Clearing
Corporation is the central clearing counterparty for
exchange-traded derivatives and options, while CDS is the
clearinghouse for equities. Clearing could be done under one
roof after the deal closes.
If implemented, this type of programme could result in
significant reductions in required margin positions where
common members of both clearing houses hold off-setting
positions, a recognition of the lower risk involved in those
situations, Aaron Emes, another Torys partner who
represented TMX, said.
Trading costs have been a contentious issue in the TMX-Maple
discussion, despite possible benefits resulting from
cross-margining and simple economies of scale.
Before the Ontario Securities Commission conditionally
approved the deal on July 4, the Canadian Competition
Bureau had its reservations. It was concerned by the potential
for market manipulation of trading prices, and access to
clearing, settlement and depository services. However
approval followed on the same day, and the Alberta
Securities Commission and British Columbia Securities
Commission approved on July 11.
John Bodrug, a Davies Ward Phillips & Vineberg partner
who counseled Maple on competition issues, said more express
and explicit regulation of fees, restrictions on discounting
and bundling, and restrictions on Maple shareholders mandated
in recognition orders enhanced what was already broad
regulatory oversight of TMX by securities regulators.
The Investment Industry Association of Canada is working
with regulators to implement an oversight programme intended to
protect against anticompetitive practices relating to clearing
and settlement, trading, market information and regulatory
Michael Osborne, a partner with Affleck Greene McMurtry in
thinks stringent oversight falls short in ensuring equal
access at fair prices. Structural separation is almost
always a better way of achieving that aim than
regulation, he told IFLR.
Having a publicly traded TMX meant you had very
diverse ownership and there just wasnt quite the same
level of inherent temptation built into the structure, he
Market structures aside, the deal was heralded for gaining
all necessary approvals, completing a two-step acquisition
necessary in response to a TMX support agreement with LSE, and
keeping together what has been described an impressively
cooperative Maple consortium.
Davies Ward Phillips & Vineberg advised Maple and
devised the integrated tender offer deal structure. Torys was
counsel to TMX. Maple was also represented by McCarthy
Tétrault and Blakes in Canada, and Paul Weiss Rifkind
Wharton & Garrison in the US.