Ontario Committee Reports On TMX Merger

by Glen Shapiro, LawAndTax-News.com, New York

21 April 2011

A specially convened select committee of the Ontarian legislature, appointed to investigate the proposed merger of the TMX and LSE stock exchange groups, has published its report. Nine recommendations cover five key issues raised during the hearings, and, in particular, request that any such deal fulfil the promise of being a "merger of equals".

Convened in February to "consider and report its observations and recommendations concerning the impact and net benefit to Canada, including Ontario, its economy and people, Toronto's financial services sector and Northern Ontario's mining industry", the committee has at last released its findings, after a two week delay. The report's main thrust is that any such merger must take into account these specified issues, contained in the original mandate for the committee's creation. The report had been due for publication on April 7, but was not made available until April 19. Consultations took place throughout March, with prominent figures such as the respective CEOs of the TMX and LSE groups airing their views on the matter.

A particularly robust defence was presented by Thomas Kloet, CEO of the TMX Group. He argued during the hearings that the partnership would make a great contribution to both nationwide and provincial success, and enhance both competitiveness and the role TMX Group's exchanges would play on the international stage. In addition, he emphasized a raft of benefits listed companies could hope to derive, including the reaping of new financing opportunities and enriched access to capital.

Throughout his testimony, Kloet sought to reassure those concerned that the deal would not represent a "merger of equals", as had been promised. He pledged that no foreign regulator would have jurisdiction over Canadian exchanges, and that the deal would not result in a merger of the way in which the exchange operates. Instead, the exchange "will operate for all intents and purposes as before". Furthermore, Kloet pledged, Canadians would form a substantial cohort of the new company's managerial makeup. Thus: "A Canadian Chairman, Canadian directors and a powerful contingent of Canadian-based executives and leaders will be at the forefront of any future discussion".

According to the Investment Canada Act, a substantial corporate takeover cannot be approved by the government unless it is deemed to be of "net benefit" to the nation, and both Ontario's and Quebec's provincial regulators are required to approve substantial alterations in the ownership of the TMX Group. Although the committee has no power to enforce the views contained in its report, chairman Gerry Phillips expressed the hope that the suggestions would be taken into consideration. He stressed that: "The Committee sees its recommendations as an important step in obtaining a better understanding of the issues associated with a transaction that could have significant and long-term effects for the economy of this province".

The report notes that the proposed merger concerns an iconic Canadian company, a symbol of commerce and activity with a long history. It is perhaps not surprising, therefore, that the committee detected an underlying concern among those consulted that the deal could result in decisions being made which do not reflect the interests of Ontarians or Canadians. The fear is that: "Under the terms of the proposed merger the 'centre of gravity' in regards to the decision-making ability of Ontario and Canada, would move to London".

Thus, according to the committee, the most debated topics during the hearings were governance, control and regulatory issues. "Witnesses were not convinced that the proposal was a merger of equals, given the TMX Group’s minority ownership position (45% of the merged group) and minority board position". Concern was also expressed about one provision, which provides that, after four years, Canadian representation on the new board could be reduced, from seven of the total 15 members, to a minimum of three members.

In addition to the issue of the structure of the board of directors, the committee's recommendations also cover the role of regulatory bodies, strategic decision making, the impact on jobs in Ontario and Canada, and the impact on the mining sector.

The recommendations are as follows:

• There ought to be equal representation on the board of directors of the merged entity. The report states that the number of directors ordinarily resident in Canada should equal the number of directors ordinarily resident in the United Kingdom/Italy, with no limitation in time. As such, this provision should be written into the agreement;
• TMX Group shareholders should not be prevented from owning a majority of the shares of the LSE Group. This too, ought to be written into the agreement;
• The findings of the Ontario Securities Commission should be made public;
• The terms and conditions of any Ontario Securities Commission approvals should be incorporated into the Agreement;
• There must be no diminution in the role of the Ontario Securities Commission. The report makes clear that TMX Group businesses should continue to be subject to Canadian laws, in particular to the recognition orders of the Ontario Securities Commission and other provincial regulators. Moreover, such regulators should continue to oversee fundamental changes to TMX Group businesses, including any change in ownership. Finally, a merger agreement needs to ensure the autonomy of any TMX Group business in areas where it serves a de facto regulatory role, such as the role of the Toronto Stock Exchange;
• The agreement should contain an undertaking that the exchanges of the TMX Group continue to meet the needs of the Canadian capital markets;
• The agreement should ensure that the development and introduction of new technology, products and services will be carried out in, and be beneficial to, both Canada and the United Kingdom;
• An irrevocable commitment must be made to the effect that the operations, assets and key staff of the TMX Group and its businesses will continue to reside in Canada;
• The role of the TMX Group as the global leader in equity financing for the mining sector needs to be preserved. The agreement must address both measures to avoid any reduction in Canadian regulatory standards, and the necessity for ongoing improvements to services provided by the TMX Group to the mining sector. Such undertakings in the agreement ought to be regularly monitored and enforced by the Ontario Securities Commission.

In a joint statement, the TMX and LSE groups pledged to review the report in detail. The groups will continue an open dialogue with all stakeholders, as they work towards obtaining the required regulatory and shareholder approvals to complete the transaction.

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