How the new TMX was created

Author: | Published: 9 Aug 2012
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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.

Here’s how it all came together.

Maple Group Acquisition Corporation’s 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 company’s board.

“We couldn’t 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 couldn’t talk to TMX so we couldn’t get a supported plan of arrangement (required to issue shares under section 3(a)(10) of the US Securities Act).”

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 news release.

“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.

Regulatory approvals

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 Competition Bureau 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 infrastructure.

Michael Osborne, a partner with Affleck Greene McMurtry in Toronto, 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 wasn’t quite the same level of inherent temptation built into the structure,” he added.

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.