LSE and TMX: ‘London Bridge’ shakes from staggering complexity

By Guest Contributor
February 11, 2011

Office workers are seen in the London Place business district near Tower Bridge in central London February 9, 2011. REUTERS/Toby MelvilleBy John Mackie

Feb. 10 (Westlaw Business) The blockbuster merger bridging the London and Toronto Stock Exchanges may have been announced, but this London bridge may yet fall under the sheer weight of staggering legal complexity. A broad group, from AIM to Borse Dubai, and from the Montreal Exchange to Borsa Italiana, stand to be impacted by these issues. And what a set of issues it is, ranging from post-Potash foreign investment concerns to restrictive provincial securities laws to undertakings regarding corporate governance. Even legacy contractual commitments from past acquisitions by the TSX must be considered. Global markets affecting everything from equities to derivatives to venture funding await.

Of course, if it does stay standing, the London-Toronto structure, reported to be a $4 trillion transaction, would bridge not only the LSE and TSX, but also the venture-oriented AIM and TSX Venture Exchange, and significant foreign players including Borsa Italiana and Borse Dubai. Together, the parties represent 20 trading markets/platforms across North America and Europe, with major positions in equities, derivatives, energy and fixed income. The list of markets within the group also includes the Montreal Exchange, and the Natural Gas Exchange.

Once united, the combined group would become the global leader in number of listings (over 6,700), with a dominant position in natural resources, mining, energy and clean technology. Listed companies would include not only domestic Canadian and UK businesses, but many others with origins around the world that have turned to these exchanges for their access to deep capital pools and their expertise in industries from commodities to shipping. The megalith would offer listing, trading and post-trade services, along with global information services and technology solutions.

Facing these complex issues and opportunities, it comes as little surprise that the parties turned to the A-list for help. London Stock Exchange Group (LSEG) is represented by Osler, Hoskin & Harcourt LLP and Freshfields Bruckhaus Deringer LLP, with Barclays Capital, Morgan Stanley & Co. Limited and RBC Capital Markets acting as financial advisers. TMX Group, the parent company of the TSX, has turned to Torys for legal advice, with Bank of America Merrill Lynch and BMO Capital Markets acting as financial advisers to the Canadian company.

The merger will be implemented by means of a plan of arrangement in Ontario, under which TMX shareholders will exchange one share of TMX for 2.9963 shares of LSEG, a UK incorporated company which will continue as the holding company of the merged group. Following the transaction, LSEG shareholders will own 55% of the combined entity, and TMX shareholders will own 45%.

The parties have indicated the group will be “jointly headquartered” in London and Toronto, with LSEG being renamed after closing. The various operating exchanges will continue under their existing names. The shares of LSEG will be listed on the London Stock Exchange, trading in pounds sterling, and will also be listed on Toronto Stock Exchange, trading in Canadian dollars. It’s somewhat ironic that, as in other M&A deals, the listings are identified as a condition of closing. It seems highly unlikely there would be an issue on that front.

Among the other conditions to the transaction are approval by LSEG and TMX shareholders (the latter by at least 66 ⅔% of the votes cast at a special meeting), along with Ontario court approval of the Plan of Arrangement. In addition, it is anticipated that approvals will be required under the Investment Canada Act and Competition Act (Canada), and the Hart-Scott-Rodino Antitrust Improvements Act. Securities regulators will also have a say in the transaction, with approvals required from the Ontario, Quebec, Alberta and B.C. Securities Commissions, along with the UK’s Financial Services Authority (FSA).

As a result of the decision by Ottawa last year to block BHP Billiton’s proposed acquisition of Potash Corporation of Saskatchewan, the Investment Canada Act approval is likely to receive a lot of attention from investors and the media. While the deal is touted as a merger of equals, the Board of the merged group will consist of fifteen directors, eight to be nominated by LSEG (of which it is envisaged three will be from Borsa Italiana), and seven to be nominated by TMX. Combined with the fact that 55% of the shares of the combined entity will be held by shareholders of LSEG, there would appear to be some basis for arguing that control of Canada’s principal exchanges is being transferred to non-Canadians.

Presumably conscious of the potential for foreign investment concerns about the transaction, the parties go to great lengths in identifying efforts to balance control of the new entity among LSEG and TMX. The Chairman of the TMX will assume the role of Chairman of the Board of the merged group, with the Chairs of the LSE and Borsa Italiana assuming roles as Deputy Chairs. In addition, the merged group will maintain joint headquarters in London and Toronto, and Montreal, Vancouver and Calgary have all been assigned expanded global roles.

While London will remain a “key centre for international listings and… the global centre for the Merged Group’s technology solutions business,” Toronto will be the centre for the group’s global primary markets (listings and other issuer services) business unit, across all of the equity exchanges.

In addition, though the CEO of the combined entity will be based in London, the President of the combined entity will manage the group’s business units out of Toronto, as well as driving the implementation of strategy. The global finance function of the merged entity, led by the company’s CFO, will be based in Toronto.

As the home of the Montreal Exchange and the Canadian Derivatives Clearing Corporation (CDCC), Montreal will also become the centre for the Merged Group’s global derivatives business. Calgary will become the centre for the global energy business, and Vancouver and Calgary will remain joint headquarters for the TSX Venture Exchange.

Another aspect of the announcement which suggests that the parties have done their homework is the commitment to make public all undertakings made under the Investment Canada Act prior to closing, and to report annually to the public on its adherence to same. In fact, the Schedules to the Merger Agreement detail the proposed undertakings, which align with the corporate governance structure announced. With the feds in the midst of a court battle with U.S. Steel over promises given at the time of that company’s acquisition of steel maker Stelco, sensitivities are high when it comes to undertakings given in the context of an Investment Canada review.

Canada’s federal government will be under enormous scrutiny in this transaction, in light of the recent Potash decision and the risk that a similar ruling in this case could leave foreign investors wondering whether Canada is closed for business. At the same time, the status of the TMX as a major player in Canada’s financial and commodities sectors suggests that a rubber stamp is not likely. Yet the real trouble for the parties may come from provincial securities regulators.

As acknowledged in the announcement, several provincial securities regulators must approve the transaction – a requirement driven not by the need for relatively normal course exemptions and the like applicable to a M&A transaction, but instead by the fact that the exchanges are subject to various recognition orders. Indeed, in the Schedules to the Merger Agreement, the parties identify thirteen separate consents, approvals and confirmations required from provincial securities regulators.

In the case of Ontario, for example, the OSC has recognized the TSX and TSX Venture Exchange as exchanges under the Securities Act, and would be required to agree to certain changes to that order for the deal to proceed. Another specific issue that the OSC will need to address is the fact that there is currently a requirement that no one shareholder own more than 10% of the shares of TMX, consistent with share ownership restrictions in the banking sector. Arguably, this is an issue both at the deal level (with LSEG acquiring the TSX) and post-deal, when it is likely that Borse Dubai would end up holding more than 10% of the combined entity, based on its current holdings of LSEG.

Unlike in the Potash case, where Saskatchewan’s influence on regulatory approvals was largely indirect, B.C., Alberta, Ontario and Quebec will thus have a direct say in whether this transaction proceeds (albeit through their securities commissions, raising the question as to what degree of influence each holds over those entities). Each will examine the deal from its own unique perspective, and in the context of prior agreements which facilitated (for example), the acquisition of the Montreal Exchange by the TMX two years ago. No doubt, the issue will be further exacerbated by the quasi-regulatory roles of the exchanges with respect to Canadian markets.

One likely repercussion of the proposed deal is that battle lines will be further entrenched in discussions regarding the proposed introduction of a national securities regulator in Canada. From the perspective of the LSEG and international observers, the notion that four provinces might have a say in the transaction from a regulatory perspective may seem bizarre. Yet those opposed to a national regulator will likely see this deal as a perfect example of why local (i.e. provincial) representation is needed to protect local interests.

Another arena in which the parties may face a battle is the Competition Bureau. Though the TMX maintains a fairly significant market share when it comes to exchange activities in Canada, one trend which has been seen in prior years is the movement of early-stage issuers to the AIM, rather than the TSX or TSX Venture Exchange, due to softer requirements vis-à-vis ongoing disclosure. With those organizations under common control, it will be interesting to see how the Bureau defines the capital market for developing companies (i.e. whether it includes AIM within the Canadian competitive environment).

Also of interest will be any attempt by LSEG to standardize requirements among, for example, the TSX Venture Exchange and AIM. If they should choose to do so, they could find themselves requiring approval from provincial securities regulators. In addition, this presumably opens up the risk of cannibalization of revenue, rather than the growth the parties are banking on.

Of note, this is not the only blockbuster exchange merger discussion just announced. For more information on the rumoured merger talks between Germany’s Deutsche Borse and NYSE Euronext.

While the parties are hoping that the LSE/TMX merger will become effective in the second half of 2011, it seems likely that shareholder, court and regulatory approvals may test this timing.

This article was first published by ThomsonReuters’ Westlaw Business Currents, a leading provider of legal analysis and news on governance, transactions and legal risk. Visit Westlaw Business Currents online at http://currents.westlawbusiness.com.

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