Process
The negotiation and implementation of a PIPE transaction typically involves three stages.
Pre-announcement period
Prior to announcement, the parties wil enter into a confidentiality agreement and, in some instances, an exclusivity agreement. Both parties will typically engage legal counsel (internal and/or external) and may engage financial advisors. The investor and its advisors will then complete a due diligence review of the company, the scope of which will depend on the size of investment and the industry of the company, among other factors. The parties then negotiate and enter into a subscription or investment agreement, which will specify the terms of any new securities to be issued, the terms of any company protections or investor rights and any additional agreements to be entered into concurrently with, and conditional on, the closing of the PIPE transaction. Though less common, the parties may also use the pre-announcement period to file applications for conditional approval of the stock exchanges on which the company’s securities are listed for trading or to seek pricing certainty through the price reservation mechanisms of applicable stock exchanges.
Post-announcement period
Following execution of the subscription or investment agreement, the parties will publicly announce the transaction and, if not already completed, file applications for conditional stock exchange approval and seek any shareholder or other regulatory approvals required in connection with the transaction. In cases where a new insider is created or a board seat is granted, there may be a need for a “personal information form” to be filed with and cleared by the stock exchange prior to closing. In our experience, the clearance of personal information forms and related background checks can sometimes lengthen the overall deal timeline and should be factored in accordingly.
Closing and post-closing period
Once all conditions to closing have been satisfied, including receipt of all stock exchange and regulatory approvals, the investor will pay the subscription price to the company and the transaction will close in accordance with the terms of the subscription agreement. Finally, post-closing filings with stock exchanges, securities regulators and other regulatory authorities are made, as required.
Prospectus and approval requirements
The availability and terms of a PIPE transaction are limited by provincial securities laws and stock exchange rules. The terms of a PIPE transaction will also determine the nature of any corporate approvals required of the issuing company.
Distribution rules
Securities distributed by a company must be qualified by a prospectus unless an exemption is available under applicable securities law. A company will therefore need to satisfy itself that a prospectus exemption is available prior to issuing securities as part of a PIPE transaction. This will necessarily be a fact-specific exercise and will depend on the profile of the investor. In the context of a PIPE transaction, we frequently see companies relying on the “accredited investor” exemption, which permits the sale of securities to a person or company with a minimum asset or income base on a prospectus-exempt basis. Securities issued to an investor under an exemption will be subject to certain resale restrictions under applicable securities law.
Related party
In circumstances where a company seeks to complete a PIPE transaction with a related party, Multilateral Instrument 61-101 – Protection of Minority Security Holders in Special Transactions (MI 61-101) may impose additional disclosure and approval requirements, including the need for approval by a majority of disinterested shareholders.
Similarly, an investor may become a related party after consummating a PIPE transaction, with the result that certain subsequent transactions or arrangements between the company and the investor may be subject to additional disclosure and approval requirements.
Corporate law
Under Canadian corporate law, the board of the company will need to conclude that the transaction is in the best interests of the company. If the proposed transaction contemplates the creation of a new class of shares, the articles of the company will have to be amended. The creation of a new class of shares is a fundamental change which, depending on the jurisdiction, may require a special resolution of shareholders (approval by two-thirds of the votes cast at a meeting of shareholders). The articles of a company will sometimes provide the ability to create new series of preferred shares without the need for obtaining shareholder approval.
Stock exchange rules
If the company is listed on the Toronto Stock Exchange (TSX), the company will be subject to the rules of the TSX that require, among other things, the company to provide immediate notice to the TSX of any transaction involving the issuance of any of its securities other than unlisted, non-voting, non-participating securities. The notice typically takes the form of a letter addressed to the TSX seeking its approval to list the new securities and includes a copy of the subscription agreement and any other agreements to be entered into in connection with the transaction. The company may not proceed with the proposed transaction unless and until approved by the TSX.
The TSX may require the company to seek and obtain shareholder approval as a condition to the TSX’s approval of a transaction, if, in the opinion of the TSX, the transaction does any of the following:
- materially affects the control of the company
- provides consideration to insiders in aggregate of 10% or greater of the market capitalization and has not been negotiated at arm’s length
- enables securities to be sold at prices lower than permitted under the TSX pricing rules
- includes the issuance of convertible securities or warrants containing anti-dilution provisions that may result in securities being issued at prices lower than the TSX’s pricing rules
- involves the issuance of more than 25% of the company’s outstanding listed securities (on a non-diluted basis) before the date of closing where the price per security is less than market price
Where shareholder approval is required, such approval must be obtained from holders of a majority of the company’s securities at a duly called meeting. A meeting may be avoided if the company provides the TSX with written evidence that holders of more than 50% of the company’s securities are familiar with the terms of the proposed PIPE and are in favour of such transaction. In these circumstances, any written evidence or related materials supporting shareholder approval must be pre-cleared by the TSX.
The TSX Venture Exchange (TSX-V) imposes similar rules and obligations in respect of PIPE transactions for companies listed on the TSX-V. There are, however, some notable differences between the TSX-V and the TSX in their regulation of the terms of a PIPE. For example, the TSX-V does not permit the price per share to be lower than the maximum discount of the market price, whereas the TSX may permit a greater discount where shareholder approval is obtained.
Regulatory issues
While PIPE transactions can often be completed without triggering mandatory regulatory filings or approvals, factors such as the number of securities issued, the size of the transaction and the nature of the business are important considerations in determining whether a PIPE triggers notification, review or approval under the Competition Act (Canada) or the Investment Canada Act.
Regulatory filing requirements can lengthen the deal timeline and should be factored in accordingly, particularly when the investor’s stake approaches control levels, the investor has other holdings in the sector, the company operates in highly concentrated markets or the investment raises possible national security considerations.
Parties should also consider whether industry-specific statutes may apply, including those that limit foreign ownership or require additional regulatory approvals.
Securities
The type and terms of securities to be issued to the investor by the company as part of a PIPE transaction are typically negotiated on a deal-by-deal basis, but often involve the issuance of common or preferred equity, convertible securities, warrants or other equity-linked securities. Generally, a company will prefer to issue common equity, while an investor may want preferred or convertible equity to ensure an additional level of investor protection and priority over the company’s other shareholders in receipt of dividends and upon liquidation.
Pricing rules
The TSX and TSX-V rules provide for the following limits on the discount that may be offered on securities issued in a PIPE:
| Market price | Maximum discount |
|---|---|
| Up to $0.50 | 25% |
| $0.51 to $2.00 | 20% |
| Above $2.00 | 15% |
The TSX and TSX-V also have specific pricing requirements in respect of the issuance of convertible securities and warrants.
The transaction must generally close within a specified period of time. For securities to be listed on the TSX, the transaction must close within 45 days of the date on which the market price of the securities being issued is established (or, if a shareholder meeting is required, within 135 days). For securities to be listed on the TSX-V, the transaction must close within 30 days of the date the company reserves the proposed offering price. The applicable exchange may approve an extension on a case-by-case basis to align with a longer regulatory timeline or a concurrent transaction.
Investor insider reporting obligations
A PIPE transaction may result in an investor becoming subject to restrictions and ongoing compliance obligations under Canadian securities laws. The nature and extent of these restrictions and obligations will be a function of the investor’s percentage security holdings.
- If an investor acquires voting or equity securities of a company that result in the investor owning 10% or more of the outstanding voting or equity securities of the company, the investor will be an insider and subject to the insider trading and “early warning” requirements under applicable securities laws. The insider reporting requirements include creating an insider profile and reporting future acquisitions and dispositions of the applicable securities in a timely manner. The early warning requirements include issuing a news release and filing a public report, a one-business-day moratorium on further acquisitions and further reporting upon (i) acquisitions and dispositions of 2% of voting or equity securities, (ii) falling below the 10% ownership threshold or (iii) any change in a material fact contained in the public report. Certain eligible institutional investors may be able to avail themselves of the more lenient alternative monthly reporting regime. Investors will also become subject to insider reporting requirements at this threshold.
- If an investor acquires voting or equity securities of a company that results in the investor owning 20% or more of the outstanding voting or equity securities of the company or holds enough shares to “materially affect” the control of a company future (i) dispositions of securities by the investor must be made pursuant to a prospectus or a prospectus exemption and (ii) acquisitions of securities by the investor may trigger the requirements of the Canadian take-over bid regime in the absence of a take-over bid exemption.
