The Toronto Stock Exchange (the TSX) has recently published a Staff Notice on the pricing of stock options (Options) granted prior to an initial public offering (an IPO).
Subsection 613(h)(i) of the TSX Company Manual states that Options granted under a security based compensation agreement may not be granted with an exercise price which is lower than the market price at the time the Option is granted. In the context of an IPO, the TSX considers the market price of the listed securities to be the offering price of the applicable security (the Offering Price).
The Staff Notice states Options granted within the three months immediately prior to the filing of a preliminary prospectus will be granted with an exercise price that is at or above the Offering Price of the applicable security. The TSX believes these three months serve as a sufficient proxy for the period during which an issuer has knowledge of an upcoming IPO and therefore should not be pricing Options below the Offering Price.
Exception to the Rule
However, the Staff Notice states that the TSX would consider accepting Options with an exercise price that is discounted to the Offering Price provided that such price is not lower than the price at which the applicable securities were recently issued to arm’s length parties in a material financing, notwithstanding that such price may be lower than the Offering Price.
A copy of the TSX Staff Notice to Applicants, Listed Issuers, Securities Lawyers and Participating Organizations is available here:
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