Companies are delisting from TSX at more than one per week

Sales to private equity, cost of listing fees, regulation and "short-termism" cited
More public companies are delisting from the Toronto Stock Exchange due to the costs and regulatory burdens. REUTERS/Mark Blinch
More public companies are delisting from the Toronto Stock Exchange due to the costs and regulatory burdens. REUTERS/Mark Blinch

THERE ARE THREE special shareholders meetings worth paying attention to this week: at Canam Group Inc., Lumenpulse Inc. and Mood Media, where stockholders are being asked to approve transactions that may result in these companies disappearing from the Toronto Stock Exchange.

Close to 70 companies, funds and trusts have delisted from the TSX in the past 12 months, and that doesn’t include instances in which two Canadian public companies joined with just one listing maintained.

So what gives? In its monthly public reports the TSX generally attributes a delisting to a failure to meet continued listing requirement, owing to an unsatisfactory financial status, for example; a request by the company itself; or a completed plan of arrangement, which may mean an acquisition by private equity, a numbered company, a foreign buyer or even the company being wound up.

But the real reasons are often to do with cost and regulation, say lawyers who work in the area. Listing fees on the TSX range from $100,000 to $200,000 a year depending on the size of the company, and that doesn’t include fees for lawyers and auditors whose services are needed to meet ongoing disclosure obligations.

For inter-listed companies there’s a double whammy; fees to list on a US exchange alone can be closer to US$300,000.

After applying last year for voluntary delisting from the TSX while remaining on the New York Stock Exchange, Dr. Donald Kramer, chairman of Nobilis Health Corp., said that “the directors of the company can no longer justify the expenses and administrative efforts” of remaining on both stock exchanges.

“At a high level, I think it’s fair to say being a public company in Canada today is more burdensome than it’s ever been,” says Chris Sunstrum, a partner in the corporate and securities group at Goodmans LLP. “It’s no secret there are more regulations being introduced at what seems like almost daily.” Canadian Securities Regulators recently launched a review of regulatory compliance and the burden it places on issuers, he notes, so they are not unaware of the strain.

Perhaps even more important in unraveling the reason behind the rate of delistings, say Sunstrum and other lawyers: pushback against so-called “short-termism” in which public companies are run to maximize quarterly profits for the benefit of entrenched management and boards rather than for long-term financial health.

Maxime Turcotte, a partner in the Montréal office of Stikeman Elliott LLP, says companies are saying, “‘Look, we don’t want the pressure of quarterly earnings and the short-term pressure that that puts on us.” In a public setting, if you miss expectation for two quarters, there’s a lot of pressure. The markets aren’t happy, boards are pressured.” The resulting volatility in share price invites the interest of hedge funds and shorts, which no company wants.

Turcotte expects a great many more privatizations, “because people think capital markets aren’t that easy to deal with anymore.” He points to the steep drop in initial public offerings as a key indicator; “the numbers speak for themselves,” he says. There were three IPOs on the Toronto Stock Exchange in 2016. With other sources of financing increasingly available from institutional investors, venture capital funds and private equity firms, “companies don’t necessarily need to go to capital markets anymore.”

Private Equity International, a monthly magazine published in London, estimates that the 300 largest private equity firms alone raised over US$1.3 trillion in capital since 2012. Says Sundstrom: “You’ve got companies looking for alternate sources of capital, you’ve got this huge source of capital interested in private investment targets; it’s impossible to imagine those two won’t converge.” He believes just how significant the convergence is will become clear “in the near future.”

In the very near future –– as in this week –– you can likely score three for private equity.

Shareholders in Quebec’s Canam Group — the largest fabricator of steel components in North America, which the Dutil family first listed on the Montreal Stock Exchange in 1984 — today voted in favour of taking the company private in a deal that will shift control to American Industrial Partners. Mood Media Corp. will become private as well if shareholders approve the offer by Apollo Global Management and GSO Capital Partners at Thursday’s special meeting. Shareholders of DH Corporation (the old Davis & Henderson cheque-printing company) have already approved the sale to Vista Equity Partners and its listing is expected to disappear from the TSX later this week.

And there are other sources of financing, too, involving a parent company or founder.

Shareholders in Lumenpulse, for example, are voting Friday on the sale to a group led by its founder, François-Xavier Souvay. If it is approved, the listing will disappear from the TSX. “As a private company, we will have the resources and flexibility to continue our growth,” Souvay explained when the transaction was announced in April.

The radio broadcaster Sirius XM Canada Holdings Inc. was delisted May 26 after being acquired by a group that included its US parent. And at a meeting on June 28, shareholders of Brookfield Canada Office Properties will be asked to approve a going-private transaction with parent Brookfield Property Partners.

The number of new TSX listings has offset delistings (the exchange had 2,210 listings as of May 31, compared to 2,214 on the same date in 2016), but the overwhelming majority of new ticker symbols are for exchange-traded funds and not corporations, the monthly reports show.

Melinda Park, a partner who practices in securities, capital markets and public companies at Borden Ladner Gervais LLP in Calgary, says that for many small-cap and mid-market companies, staying on the TSX doesn’t make sense. These companies can find themselves paying a lot in fees with little or no analyst coverage to show for it and very thinly traded stock.

Park, who has worked in these practice areas for 20 years, says that “something has fundamentally shifted” during that time. She believes a healthy market has three prongs, starting with vibrant retail support. A lot of institutions are buying and holding stocks –– which keeps prices flat –– or getting out of public markets altogether, she says. “So you need that frothy retail buying and selling” to keep a stock active and prices moving.

Second, a brokerage community engaged in the mid-market space is needed, “because a lot of the TSX stock grows, and it came from somewhere [before listing on the on the senior market]. It didn’t just Big-Bang theory itself out of nowhere.” Third, she says, a healthy market needs issuers who want to access capital through public markets.

Park sees these three prongs withering “to such an extent that issuers aren’t finding capital, or not in a way that’s accessible, and they’re not being introduced to capital by the brokerage community.”

Canadians should be deeply concerned about why companies are delisting at the rate of more than one a week, she believes.

“We should be worried about why we can’t keep them healthy. And by ‘we’ I mean the entire community; not just lawyers, not just the exchange, not just the securities commission, not just the auditors, not just the companies, not just the brokers. Collectively, we need to work together.”