On November 24, 2021, the TSX Venture Exchange (the “TSXV”) announced amendments to its Policy 4.4 – Incentive Stock Options (the “Former Policy”), which is now known as Policy 4.4 – Security Based Compensation (the “Amended Policy”). The Amended Policy provides for a more comprehensive framework than the Former Policy, which only addressed stock options, and provides issuers with enhanced flexibility to structure their security based compensation arrangements. These changes will require that you either amend or replace your existing stock option plan at your next AGM in order to comply with the Amended Policy.
The following is a summary of the key changes, which took effect on November 24, 2021:
1. Additional Types of Security Based Compensation
The Amended Policy was expanded to permit a number of different types of security based compensation arrangements (the “Awards”) beyond stock options, including deferred share units, performance share units and restricted share units. Many of the rules in the Amended Policy that apply to stock options also apply to other types of Awards, although there are differences. For example, all Awards, except for stock options and securities issued pursuant to a stock purchase plan, are subject to a minimum one year vesting requirement. In addition, investor relations services providers may only be granted stock options, which must vest in stages over a period of not less than 12 months.
2. Types of Permitted Plans Under the Amended Policy
The Former Policy only contemplated two types of plans: (1) a “rolling” Stock Option plan up to 10% of your outstanding shares; and (2) a “fixed” Stock Option Plan of up to 20% of your outstanding shares. The Amended Policy now permits four types of plans:
a) A Rolling 10% Plan permits issuers to reserve for issuance under the grant of Awards up to a maximum of 10% of the issuer’s issued and outstanding shares at the time of grant. Shareholder and TSXV approval are required for implementation and amendment (subject to limited exceptions) and annually.
b) A Fixed 20% Plan permits issuers to reserve for issuance under the grant of Awards up to a maximum of 20% of the issuer’s issued and outstanding shares as of the date of the plan. Shareholder and TSXV approval are required for implementation and amendment (subject to limited exceptions).
c) A Hybrid Plan permits issuers to adopt a combined (i) “rolling” plan, which permits issuers to reserve for issuance under the grant of stock options up to a maximum of 10% of the issued and outstanding shares of the issuer at the time of grant and (ii) a “fixed” plan for Awards (excluding stock options), which permits issuers to reserve for issuance under the grant of Awards (excluding stock options) up to a maximum of 10% of the issuer’s issued and outstanding shares as of the date of the fixed plan. Shareholder and TSXV approval are required for implementation and amendment (subject to limited exceptions) and annually.
A hybrid plan can either take the form of one omnibus plan or two separate plans.
Note that if an issuer adopts two separate plans (a rolling 10% plan for stock options and a fixed 10% plan for other Awards), annual shareholder and TSXV approval will only be required for the rolling 10% plan. Although the fixed plan will not require annual shareholder and TSXV approval, it will still require shareholder approval for implementation and any amendments. As such, we would recommend the adoption of two separate plans as opposed to a hybrid plan.
d) A Fixed 10% Plan permits issuers to reserve for issuance under the grant of stock options up to a maximum of 10% of the issuer’s issued and outstanding shares as of the date of the plan. TSXV approval is required for implementation and amendment (subject to limited exceptions), and shareholder approval is only required for an amendment (subject to limited exceptions). An issuer may only adopt and amend a Fixed 10% Plan once every 24 months.
3. New Vesting Requirements
All Awards (other than stock options and securities issued pursuant to a stock purchase plan) are subject to a minimum one year vesting requirement. Stock options granted to investor relations service providers must vest in stages over a period of not less than 12 months.
4. Cashless or Net Exercise
The Former Policy required the exercise price of stock options to be paid in cash, whereas the Amended Policy permits stock options to be exercised using a “cashless exercise” or “net exercise”.
A cashless exercise requires a broker lending a plan participant money to purchase the shares underlying the stock options, and then selling a sufficient number of underlying shares to cover the exercise price of the stock options in order to repay the loan. The brokerage firm will receive an equivalent number of shares from the exercise of the stock options, and the participant will receive the balance of shares or the cash proceeds from the balance of the shares. A cashless exercise will result in the number of stock options exercised, surrendered or converted, and not the number of shares actually issued by the issuer, being included in calculating the relevant security based compensation plan limits.
Pursuant to a net exercise, stock options, excluding those held by any investor relations service provider, are exercised without the participant making any cash payment. Instead, the participant will receive only the number of underlying shares that is the equal to the quotient obtained by dividing the product of the number of stock options being exercised multiplied by the difference between the volume weighted average trading price (the “VWAP”) of the underlying shares and the exercise price of the stock options by the VWAP of the underlying shares.
All security based compensation plans which have been filed with the TSXV prior to November 24, 2021 (a “Legacy Security Based Compensation Plan”), and all security based compensation granted, issued, amended or conditionally accepted by the TSXV before or after November 24, 2021 will remain in force.
However, any Legacy Security Based Compensation Plan that requires shareholder approval or amendment after November 23, 2021, including yearly approval of a rolling stock option plan, must comply with the Amended Policy. Additionally, if an issuer fails to obtain annual approval of a rolling plan within 15 months after its last approval, it may not grant anymore security based compensation until such approval is obtained. Please note that additional time required for amending/adopting the company’s equity incentive plans and obtaining TSXV approval will need to be budgeted accordingly prior to the shareholders’ meeting date.
For more information on the TSXV’s Amended Policy and its recent changes, visit: https://www.tsx.com/listings/tsx-and-tsxv-issuer-resources/tsx-venture-exchange-issuer-resources/tsx-venture-exchange-corporate-finance-manual/tsxv-corporate-finance-manual-policies