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Structuring Financings For Issuers Proposing To "Migrate" To A Canadian Exchange Listing Or A Dual Listing

Date

May 7, 2008

AUTHOR(s)

Gary M. Litwack


We are contacted from time to time by issuers whose securities are listed on a non-Canadian exchange but not on a Canadian exchange (a Foreign Exchange Listed Issuer) about the requirements and ramifications of obtaining listing on the Toronto Stock Exchange (the TSX) or the TSX Venture Exchange (the TSVX) — either as a dual listing or as a "migration" (i.e. in replacement) of their existing listing and the structuring of proposed financings to be completed prior to obtaining a TSX/TSVX listing. We are also contacted by agents/underwriters of proposed financings by such issuers.

Certain of these Foreign Exchange Listed Issuers are Canadian companies that initially elected to "go public" and obtain an exchange listing only outside of Canada, while others have not yet had any nexus to Canada. Since Canadian exchanges are considered particularly significant for mining companies, and since the TSX and TSVX have been actively encouraging new listings by foreign entities, approaches by Canadian investment dealers to Foreign Exchange Listed Issuers appear to be increasingly welcome.

Canadian resale rules can result in complications in structuring financings for Foreign Exchange Listed Issuers contemplating a TSX/TSVX listing, so care must be taken to achieve the desired "level playing field" between Canadian and non-Canadian investors in such financings.

Application of Canadian Resale Rules Generally

Resale restrictions in Canada will only apply to securities that were issued in reliance on an exemption from Canadian prospectus requirements. Accordingly, where an issuer with no nexus to Canada has issued securities solely outside of Canada, Canadian resale restrictions will not generally apply. As a result, where a Foreign Exchange Listed Issuer constituted outside of Canada and with no historical nexus to Canada obtains a TSX/TSVX listing for its securities, its outstanding securities held by non-Canadians will generally be "freely tradeable" in Canada upon commencement of TSX/TSVX trading.

However, resale restrictions will apply to the securities of such issuers held by Canadians, and potentially to securities issued to non-Canadians under a financing in which the proposed TSX/TSVX listing is contemplated.

The 10% Rule

Among other potentially relevant considerations in structuring a financing for a Foreign Exchange Listed Issuer that will be seeking a TSX/TSVX listing is the 10% rule in Section 2.14 of National Instrument 45-102 Resale of Securities (NI 45-102). Under this 10% rule, securities purchased by Canadians on a prospectus exempt basis will be freely tradeable through an exchange or market outside of Canada so long as (a) the Foreign Exchange Listed Issuer was not a reporting issuer in Canada as of the date of original issuance of the securities, and (b) at such issuance date, after giving effect to that exempt financing, residents of Canada (i) did not own, directly or indirectly, more than 10% of the outstanding securities of the class or series and (ii) did not represent in number more than 10% of the total number of owners, directly or indirectly, of securities of the class or series.

NI 45-102 provides for the same result for "underlying securities" (such as shares issuable on the exercise of special warrants or the conversion of preferred shares) if the 10% rule was met on the date of issuance of the related "convertible" or "exchangeable" security.

Structuring Considerations

Terms for proposed financing by a Foreign Exchange Listed Issuer can include a requirement for a Canadian "liquidity event" under which the issuer agrees to achieve an exchange listing and "free tradeability" in Canada within a stated number of months after closing of the financing. In any event, depending on the pro forma holdings of securities of the issuer in applying the 10% rule under NI 45-102, the result could be that during the period until the Foreign Exchange Listed Issuer achieves free tradeability for Canadian purchasers under the financing (which would occur four months after TSX/TSVX listing, unless the issuer achieves "free tradeability" within a shorter period by qualifying a prospectus or potentially obtaining a discretionary ruling having the same result as qualifying a prospectus), all security-holders of the issuer will be permitted to resell their holdings outside of Canada (and, in fact, many if not all non-Canadian holders will be able to resell through the TSX/TSVX), while Canadians will not generally be able to resell. While this result may be acceptable to Canadian holders in respect of resales of securities by non-Canadians that were purchased under earlier financings, it may not be acceptable that non-Canadians purchasing under the same recent financing can resell but Canadian holders cannot.

In order to "level the playing field" for all investors under a financing by a Foreign Exchange Listed Issuer done in contemplation of a TSX/TSVX listing where Canadian holdings will exceed the 10% rule threshold, the use of special warrants or similar instruments should be considered. These instruments would be issued on the basis that they cannot be exercised until "free tradeability" in Canada is achieved (or at least until a prescribed period has elapsed). Doing so will level the playing field for Canadian and non-Canadian purchasers under the offering, while at the same time allowing the securities underlying the special warrants (and the holders) to be counted towards meeting TSX/TSVX listing criteria in terms of numbers of board lot holders and public float, if the issuer takes the steps required for free tradeability to coincide with the listing. Otherwise, all of the securities underlying the special warrants will become automatically exercised four months after TSX/TSVX listing (which is the end of the hold period under NI 45-102 that commences when the issuer becomes a reporting issuer as a result of the listing).

Maintaining the Existing Listing

If Canadian holdings will not exceed the 10% rule threshold under NI 45-102, such that Canadian holders would be permitted to resell their holdings through an exchange or market outside of Canada until "free tradeability" is achieved in Canada, it is important to ensure that the Foreign Exchange Listed Issuer is required under the financing documents to maintain listing and trading of its securities on or through the foreign exchange or market until "free tradeability" in Canada is achieved.

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