The two companies joining forces say the change will attract new investors and a growing pool of capital, lower the cost of capital, and enhance the profile and reputation of Canada’s markets. The idea is that the larger company would provide easier access to markets, heighten trading activity and lead to improved liquidity, and enhance mutual recognition between securities regulators.
But lawyers involved with the mining and securities sector view the merger with trepidation as many unknowns remain.
TMX CEO Thomas Kloet told the Toronto Board of Trade on April 4 the proposal is for a pooling of ownership at the holding company level — not a merger of the exchanges themselves. “It is a critical distinction,” he said. “Each of our regulated exchanges — Toronto Stock Exchange, TSX Venture Exchange, Montreal Exchange, the CDCC derivatives clearing house and Natural Gas Exchange — will operate as before.”
From Toronto, a Canadian resident will lead the combined group’s global listings business. “The effort to attract, retain, and nurture listings, for companies of all sizes, will be directed from Toronto for the entire group — worldwide,” Kloet added.
The company maintains TSX and TSX Venture Exchange together are the No. 1 destination for mining and energy companies in the world, with close to 2,000 listings on two markets, representing almost $1 trillion in market capitalization. Expanding the exchanges’ reach and breaking down barriers will only create new Canadian opportunities, said Kloet.
“Europe, including the U.K., represents almost $13 trillion of funds under management, with deep ties to Asian and other markets,” he said. “Our ability to attract those investors to Canada, to market Canadian issuers in Europe, and to facilitate access to capital for Canadian companies will be enhanced significantly — a key component of our business plan.”
Toronto serving as headquarters of the global market aspect of the joint company is being touted as a big plus for Canada. Gavin Dirom, president of the Association for Mineral Exploration British Columbia, says it’s appropriate for Canada to lead the world. “We will be leading [London], not the other way round,” he says. Overall, Dirom says members are seeing the merger as having a net benefit for the industry. “This has happened on other exchanges,” Dirom says. “We haven’t heard a lot of negative outcomes as long as day-to-day business is occurring in the same way.”
John Manley, CEO of the Canadian Council of Chief Executives, addressed the merger and its effects on Canadian industries in a March 9 speech at the select committee the Ontario legislature established to discuss the merger. Manley said one of the key questions before the committee is whether or not the merger would affect the availability of capital for Canadian-listed companies, including those in the mining industry.
“Some supporters of this merger have suggested that it will benefit Canadian companies by increasing liquidity and by elevating the international profile of Canadian-listed firms, making it easier for them to raise capital,” he said. “Some critics of the deal have claimed the reverse — that over time capital and listings will be drawn to London. My own belief is that capital and business activity will be attracted to Ontario and to Canada if, and only if, we continue to be known as a place where investors’ interests are well served and where public policy creates an environment that rewards risk and entrepreneurial activity.”
Mining sector lawyer Crae Garrett, a partner in Calgary’s Macleod Dixon LLP office, says mining lawyers are divided in their opinion of the merger. It’s a view echoed by the Mining Association of Canada, which is not commenting on the situation as there is no member consensus on the issue, says communications director Marcela Diaz. The industry is also viewing the move with trepidation, adds Al Hudec, a senior securities practitioner at Farris Vaughan Wills & Murphy LLP.
Garrett says some colleagues in Eastern Canada believe there will be an increased cost to transactions, loss of work to London, England firms, and possibly a loss of work in London offices of Canadian firms as redundancies are eliminated. And, he cautions, it can’t just be a merger of business. “It’s a merger of process. There’s a government element,” he says. “Just because the exchanges become the same, it doesn’t mean the regulatory rules are the same.”
Dirom isn’t so sure. “We understand that the actual regulatory model doesn’t change in Canada,” he says. “Without that, it’s a non-starter. The regulatory system in Canada is for those listed in Canada.” He adds that for companies wanting to explore internationally, the merger likely won’t restrict access to capital for projects. Changes on how to get listed won’t be affected either. “If you’re local, you may not be able to get benefits, you may not have access,” says Dirom. Moreover, he says, the industry has been assured the venture exchange will be maintained. “Nobody’s been able to replicate that around the world,” he says.
Garrett suggests lawyers dealing with exchange issues might want to familiarize themselves with upcoming British anti-bribery rules and brush up on the U.S. Foreign Corrupt Practices Act. “If you are in-house counsel that is listed in the U.K. or has a U.K. presence . . . that’s in-house bread and butter, making sure people on the ground are complying with their rules.” However, he says, “from Macleod Dixon’s perspective, we’re in the bullish camp. We see great advantages to this. We see critical mass for the TSX. We think the TSX-V won’t be as effective.”
From Hudec’s vantage, there seems to be a wait-and-see approach as to how things will play out in the merger. He says the TSX already has 60 per cent of the world’s mining listings and one-third of mining financing is done through the TSX. “The TSX is the pre-eminent mining exchange for international exploration financing,” Hudec says. “We at Farris see a steady flow of international mining exploration companies visiting Canada to explore the relative merits of the TSX and the LSE and these companies regularly choose the TSX listing or an inter-listing over a listing on the [New York Stock Exchange] or the LSE.” As a result, there are almost 1,500 mining issuers listed on the TSX and TSX-V, with less than 200 listed on the LSE and AIM. The devil will be in the details,” Hudec added, “but Canada now has a very workable set of rules, and the advantage that they are well integrated with the U.S. rules, with Canadian issuers having preferred access to the U.S. capital markets relative to other countries. All this must be preserved if the merger is consummated.”
“Once you get into the nitty-gritty details, are you going to keep that predominance?” Hudec asked.
And, contrary to what Kloet might say, Hudec says he just doesn’t know if things will be business as usual if the merger gets done. “It’s not a foregone conclusion that it’s a done deal,” he says.
Further, Hudec agrees with Garrett that the regulatory side also remains an unknown. “We’ve got a set of workable rules with the U.S.,” he says. “If you add an overlay of European regulations, it could be a disadvantage.”
Manley, though, rejected the argument that there could be regulatory confusion. “Our securities regulations will continue to be made in Canada, and I have confidence in those regulators’ ability to ensure fair and efficient capital markets,” he says.