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On November 24, 2021, the TSX Venture Exchange (“TSXV” or the “Exchange“) published a bulletin outlining a number of amendments made to TSXV Policy 4.4 – Incentive Stock Options (the “Former Policy“). The amendments (the “New Policy“) came into effect the same day the bulletin was published.

Some of the most significant changes made to the Former Policy include:

• The expansion of more than one type of security-based compensation;
• Additional categories of security-based compensation plans;
• The introduction of effective compensation tools to advance the interests and flexibility of issuers; and
• Permission of the exercise of stock options on a “cashless” and “net exercise” basis.

Expansion of security-based compensation

The Former Policy was limited in that it only addressed stock options. The New Policy expands this to now include various security-based compensations, such as:

• Deferred share units (“DSUs“)
• Performance share units (“PSUs“)
• Restricted share units; (“RSUs“); and
• Stock appreciation rights (“SARs“).

Despite this expansion, it is, however, important to note that capital pool companies (“CPCs“) and issuers listed on the NEX are only permitted to grant stock options, and are restricted from granting any other types of security-based compensation. Additionally, CPCs must also comply with Policy 2.4 – Capital Pool Companies Requirements, which include compliance with the “rolling” 10% limit, discussed further below.

Additional categories of security-based compensation plans

The Former Policy allowed for two types of stock option plans – the “rolling” stock option plan and the “fixed” stock option plan (the “Previous Plans“). The “rolling” stock option plan permits issuers to reserve for issuance under the exercise of stock options up to a maximum of 10% of the issued shares (of the issuer) at the time of grant, rather than as of a specific date. The “fixed” stock option plan permits issuers to reserve for issuance under the exercise of stock options up to a maximum of 20% of the issued shares (of the issuer) as of the date of implementation of the plan. These two plans remain to be available to issuers.

The New Policy has expanded the number of available security-based compensation plans from two to four. As a result, an issuer is now permitted to choose one of the following categories:

1. “rolling up to 10%” (section 3.1(a)): a “rolling” security-based compensation plan(s) under which the number of listed shares of the issuer that are issuable pursuant to all such security-based compensation plan(s) in aggregate is equal to up to a maximum of 10% of the issued shares of the issuer as at the date of grant or issuance of any security-based compensation under any of such security-based compensation plan(s); or
2. “fixed up to 20%” (section 3.1(b)): a “fixed” security-based compensation plan(s) under which the number of listed shares of the issuer that are issuable pursuant to all such security-based compensation plan(s) in aggregate is a fixed specified number of listed shares of the issuer up to a maximum of 20% of the issued shares of the issuer as at the date of implementation of the most recent of such security-based compensation plan(s) by the issuer; or
3. “rolling up to 10% and fixed up to 10%” (section 3.1(c)): a “rolling” stock option plan under which the number of listed shares of the issuer that are issuable pursuant to the exercise of stock options is equal to up to a maximum of 10% of the issued shares of the issuer as at the date of any stock option grant, and “fixed” security-based compensation plan(s) (other than stock option plans) under which the number of listed shares of the issuer that are issuable pursuant to all such security-based compensation plan(s) (other than stock option plans) in aggregate is a fixed specified number of listed shares of the issuer up to a maximum of 10% of the issued shares of the issuer as at the date of implementation of the most recent of such security-based compensation plan(s) (other than stock option plans) by the issuer; or
4. “fixed stock option plan up to 10%” (section 3.1(d)): a “fixed” stock option plan under which the number of listed shares of the issuer that are issuable pursuant to the exercise of stock options is a fixed specified number of listed shares of the issuer up to a maximum of 10% of the issued shares of the issuer as at the date of implementation of the stock option plan by the issuer.

Categories (a) and (b) reflect the two plans that existed under the Former Policy.

Category (c) is an entirely new hybrid category, designed to provide additional flexibility to issuers in meeting their compensation needs.

Category (d) is effectively a subset of category (b) in that it permits a fixed number up to 10% and is limited to stock options only, and no other types of security-based compensation. Importantly, this is the only category of a security-based compensation plan that an issuer may implement after listing without shareholder approval, provided that the criteria set out in section 5.2(a) has been satisfied, including the absence of a “net exercise” provision, discussed further below.

Shareholder Approval

Every security-based compensation plan must be obtained at a shareholders meeting; this approval cannot be in writing. The circumstances that warrant shareholder approval include:

• Every amendment to a security-based compensation plan, except for amendments that are made to fix typographical errors, or to clarify existing provisions without altering their scope, nature and intent;
• Implementation (for all categories of plan except for plan (b) which is the “fixed up to 10%” plan); and
• Annually for plan (a), which is the “rolling up to 10%”, and the rolling portion of category (c), the “rolling up to 10% and fixed up to 10%” plan.

If all security compensation arrangements are included in one plan (i.e. an omnibus plan), and the omnibus plan includes a “rolling up to 10%” option plan, then the whole omnibus plan needs to be put before shareholders for approval on an annual basis. However, if the rolling option plan and the other security compensation arrangements (i.e. RSUs/DSUs/PSUs) are included in separate plans, and there is no increase to the number of securities made available under the other security compensation plan, then only the rolling option plan needs to be put before shareholders.

Disinterested Shareholder approval, on the other hand, is required for every security-based compensation plan that could result in:

• The aggregate number of listed shares of the issuer that are issuable pursuant to all security-based compensation granted or issued to insiders (as a group) exceeding 10% of the issued shares of the issuer;
• The aggregate number of listed shares of the issuer that are issuable pursuant to all security-based compensation granted or issued in any 12 month period to insiders (as a group) exceeding 10% of the issued shares of the issuer; or
• The aggregate number of listed shares of the issuer that are issuable pursuant to all security-based compensation granted or issued in any 12 month period to any one person exceeding 5% of the issued shares of the issuer.

Vesting Period

No security-based compensation, other than stock options and securities issued pursuant to a stock purchase plan, may vest before the date that is one year following the date it is granted or issued, although vesting may be accelerated in limited circumstances.

Stock options to investor relations service providers must vest in stages over a minimum of 12 months, with certain limits.

Cashless Exercise/Net Exercise

Under the Former Policy, the exercise price of a stock option was required to be paid in cash. The New Policy now permits stock options to be exercised using either a “cashless exercise” or a “net exercise” option. A “cashless exercise” is one where a brokerage firm facilitates the exercise of an option, and the issuer still receives the exercise price in cash. A “net exercise” is one where there the participant receives the shares based on a five-day volume weighted average trading price calculation, provided that the participant is not an investor relations service provider. When a “net exercise” option is elected, the issuer needs to account for the full amount of options being exercised under the option plan.

TSXV Approval

In certain circumstances, the TSXV may approve an issuer’s grant of security-based compensation outside of a security-based compensation plan, subject to disinterested shareholder approval where required. Such circumstances include securities for service, compensation owed to non-arm’s length parties, one-time payments as inducement or severance and loans.

Policies and Forms

The New Policy has resulted in the following changes to the Exchange’s corporate finance manual (the “Manual“):

Policy 4.4 – Incentive Stock Options has been amended and renamed Policy 4.4 – Security-based Compensation (the “Security-based Compensation Policy“);

Policy 4.7 – Charitable Options in Connection with an IPO (“Policy 4.7“) has been repealed as the Security-based Compensation Policy includes the substantive contents of Policy 4.7;

Form 4G – Summary Form – Incentive Stock Options has been amended and renamed Form 4G – Summary Form – Security-based Compensation (the “New Form 4G“); and

Form 4F – Certification and Undertaking Required from a Company Granted an Incentive Stock Option (“Form 4F“) has been repealed as the New Form 4G includes the substantive contents of Form 4F.

Transition

All security-based compensation which has been conditionally accepted by the Exchange prior to November 24, 2021, remain in force in accordance with their existing terms. Any security-based compensation that is granted, issued or amended after November 23, 2021, other than legacy security-based compensation, must comply with the security-based compensation policy.

This publication is intended for general information purposes only and should not be relied upon as legal advice.