The Continuing Saga of the Toronto Stock Exchange

Davis LLP Securities & Corporate Finance Bulletin


The announcement in the spring of 2011 of the proposed merger of the holding companies of the Toronto and London stock exchanges, the TMX Group Inc. and the London Stock Exchange Group plc, respectively, resulted in widespread debate in Canada and a large number of mixed reactions, including the widely publicized proposal from Maple Group Acquisition Corporation. Despite the Maple Group proposal, the TMX Group affirmed its commitment to the TMX/LSE merger and initially rejected the Maple Group proposal. As a result, on June 13, the Maple Group launched a formal bid for the TMX Group.

The promoted benefits of the TMX/LSE merger included increased access to international capital markets for Canadian issuers, as well as the prospect of decreased operating costs for the exchange operators. There were still numerous and substantial fears, however, that the merger would result in the loss of control of an iconic Canadian entity and submission to foreign regulation for Canadian issuers and markets. Others worried that the needs of smaller and mid-size Canadian issuers would be ignored as a result of the merger.

The Maple Group bid sought to take advantage of those fears, especially that the TMX/LSE merger would have resulted in a "foreign take-over" of the Toronto Stock Exchange, and accordingly, in its public media campaign, the Maple Group highlighted the fact that the Maple Group bid would keep the Toronto Stock Exchange Canadian-owned. The Maple Group bid was also promoted as a better financial offer for TMX Group shareholders. However, the Maple Group bid raises its own unique set of issues. The principal concern is that it may represent a return to a monopolistic system of securities trading in Canada.

The result of all the debates and publicity was that just one day prior to the TMX Group shareholder meeting scheduled for June 30, the proposed TMX/LSE merger was abandoned. The two exchanges stated that based on an early tally of proxy votes, the TMX shareholders were not expected to give the two-thirds majority required to approve the deal. The TMX Group indicated that going forward, it would review opportunities, including the Maple Group bid.

As has been extensively reported, the proposed TMX/LSE merger was very controversial in the Canadian financial sector. Although the transaction was initially billed as a "merger of equals", numerous Canadian concerns were expressed that control of the merged entity would have ultimately rested with the LSE Group. Many commentators pointed out that the minimum number of director nominees coming from the TMX Group could have been reduced after three years.

The Maple Group was originally composed of a consortium of some of Canada's banks and major pension plans. The Maple Group has subsequently announced that additional financial institutions have joined the consortium.

If it is successful, the Maple Group plans to combine the TMX Group with Alpha Group, an alternative trading system for Canadian securities, and The Canadian Depository for Securities Ltd., the stock clearing system which manages the clearing and settlement of trades and the safekeeping of securities in physical and electronic form in Canada. This has led some commentators to suggest that the choice is now about whether the Canadian markets will remain competitive. The Maple Group consortium members have significant existing equity ownership positions in Alpha and CDS.

There are many uncertainties and conditions associated with the Maple Group bid. For example, the Maple Group bid is conditional upon securities regulatory approvals and Competition Bureau clearance of the combination of Alpha and CDS with the TMX Group. There has also been limited information made available regarding the values of Alpha and CDS, which are not publicly traded companies.

The TMX Group is a very experienced market exchange operator. Along with the TSX and the TSX Venture Exchange, the TMX Group is also the owner of the Montreal Exchange (which trades derivatives), the Natural Gas Exchange in Calgary and it is the majority owner of the Boston Options Exchange.

However, the TMX Group finds itself in the middle of a larger and continuing global trend in stock exchange consolidations, resulting in various political and economic debates. Earlier this year, the Australian government moved to block the Singapore Exchange's bid for the Australian Securities Exchange. In addition, the Deutsche Boerse, operator of the Frankfurt Stock Exchange, and NYSE Euronext, operator of the New York Stock Exchange, have agreed to merge. Then the Nasdaq OMX Group, operator of the NASDAQ stock market in the U.S., and the IntercontinentalExchange made an unsolicited take-over bid of their own for NYSE Euronext. However, the Nasdaq/ICE bid was later withdrawn after it became clear, following discussions with the Antitrust Division of the U.S. Department of Justice, that it would not obtain the necessary regulatory approvals.

a) The Maple Group Bid
If the Maple Group bid is successful, the Maple Group intends to ultimately pursue an integrated acquisition transaction to acquire 100% of the TMX Group shares. As previously mentioned, once the TMX Group is under the control of the Maple Group, it is intended to be combined with Alpha and CDS. Most of the Maple Group's original investors would generally have the right to nominate a director to the board of Maple Group, subject to certain conditions.

b) TMX/LSE Merger
If the proposed TMX/LSE merger had gone through, TMX Group shareholders would have held 45% of the shares in the new entity, with the remaining 55% held by LSE Group shareholders. The shares of the merged entity were to be listed on both the Toronto and London stock exchanges. The merged entity was to be called the LTMX Group plc.

Although the Maple Group bid will not be subject to review under the Investment Canada Act, the transaction is notifiable to the Commissioner of Competition under the Competition Act because the applicable financial thresholds for pre-merger notification are exceeded. Furthermore, the proposed consolidation of the TMX Group with Alpha and CDS is likely to raise substantial concerns in terms of the potential anti-competitive impact of such a consolidation. Unlike the Investment Canada Act, which involves ministerial review, clearance of a proposed merger under the Competition Act is undertaken by the Competition Bureau.

The Maple Group transaction will also be subject to the approval of provincial securities regulatory authorities and TMX Group shareholders. In addition, in order to combine Alpha and CDS with the TMX Group, the Maple Group will have to also obtain approvals from the shareholders of Alpha and CDS.

In the court of public opinion, the Maple Group has also had to deal with criticisms that its acquisition of the TMX Group could be viewed as a return to the days when the TSX was privately controlled.

In the meantime, the Maple Group has extended the expiry date of its bid to September 30, 2011 and has stated that this extension will help it obtain the necessary regulatory approvals from the securities regulators and the Competition Bureau. It has also been reported that if the Maple Group is unable to obtain the various necessary approvals by September 30, it would likely further extend its bid. In turn, reports stating that the Competition Bureau is only expected to rule on the proposed transaction by October 2011 at the earliest, mean that the Maple Group bid will need to be extended further.

Unlike the proposed TMX/LSE merger, the Maple Group bid has not generated a great deal of discussion on the effects on issuers listed on the TSX and TSX-V, mainly because the TSX and TSX-V would remain Canadian-controlled.

Some commentators have noted, however, that as the proposed combination of Alpha and CDS with the TMX Group would result in a lessening of competition for the TSX and TSX-V, issuers on those exchanges may be disadvantaged, as competition is viewed as a potentially important factor in keeping listing and trading costs down.

The coming period will be crucial with respect to the future of the TMX Group. Given the numerous issues that the Maple Group bid has raised, it is still too early to predict how it will proceed, especially with regard to both the public and regulatory scrutiny it is facing. Political pressures can play a significant role in the regulatory approval process however and, as discussed above, opinions remain divided about the benefits of the proposed transaction. There has also been recent media speculation that if the Maple Group is unsuccessful in its pursuit of the TMX Group, the LSE Group may re-enter the picture. In any event, it will be interesting to see how these issues develop and are dealt with by TMX Group shareholders, the Canadian business community, the media and various levels of government.

If you have any questions concerning this bulletin, please contact the authors or your usual lawyer at Davis LLP.

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Authors

Robert Black
416.365.3405

Sarah Bode
416.365.3422

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