Do "positive" voting agreements, which typically require shareholders of public companies to vote in line with the recommendations of management, require disinterested shareholder approval?
The Toronto Stock Exchange (TSX), in a recently issued staff notice (2023-0001 – Voting Agreements, the "Notice"), affirmed as much while noting that it considers such agreements "to have a material effect on control of an issuer". As such, the TSX expects to review any such agreements under applicable sections of its TSX Company Manual and, in some cases, may require disinterested shareholder approval as part of such review.
The TSX indicated that such positive voting agreements, while most commonly seen in the context of the election of directors nominated by management, can also be seen within corporate transactions or other actions. In general, the Notice focuses on addressing "positive" voting agreements that require securityholders to vote in line with the recommendations of management.
When the TSX Will Review Voting Agreements
In many cases, the TSX will review a voting agreement to ascertain whether said agreement "materially" affects control of the issuer. In such reviews, the TSX is looking to see whether the combined force of securityholders can influence the outcome of a vote. If so, then the issuer may need to get approval of the transaction from "disinterested" securityholders before the TSX will accept the transaction.
The TSX will review voting agreements entered into as part of:
- Original listings under Part III of the TSX Company Manual (Original Listing Requirements)
- Transactions under Part V of the TSX Company Manual (Special Requirements for Non-Exempt Issuers)
- Transactions under Part VI of the TSX Company Manual (Changes in Capital Structure of Listed Issuers)
The Notice explains that if a voting agreement is entered into apart from an issuance of listed (or convertible) securities, then the agreement will not be reviewed. In addition, if the voting agreement is not linked to a transaction otherwise reviewable under Part V or Part VI, then that agreement is not subject to TSX review.
What Makes a Voting Agreement Acceptable to the TSX?
The Notice noted that when the TSX reviews a voting agreement, it will accept if one of two conditions are satisfied: 1) disinterested securityholder approval of the voting agreement, or 2) the existence of a provision that allows a covenanting securityholder to abstain from a securityholder vote. Otherwise, the TSX will consider the following four factors to gauge whether the agreement will have a material effect on control of the entity:
- the term of the voting agreement (including whether it is time-limited or transaction-based);
- whether the agreement creates a block big enough to influence vote outcome (which is typically more than 20% but could be as low as 10%);
- the context of the voting agreement; and
- the consequences if a securityholder breaches the voting agreement.
The TSX will also consider how the proposed voting agreement would work in connection with other voting agreements or securityholders who act in concert.
Take-Aways
TSX listed issuers and securityholders who are entering into voting agreements need to consider whether their proposed agreements could be viewed as "materially affecting control of the issuer" in the eyes of the TSX.
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