TD joins the exemption order crowd

For the second time this year, a Canadian bank has been given permission by the Ontario Securities Commission to buy back a good chunk of its own shares via private agreements with an arms- length third-party seller.

This week, Toronto- Dominion Bank joined the parade and plans to purchase, for cancellation, up to 3,166,667 of its shares between now and December 2016. The shares the bank purchases under the socalled issuer bid exemption order count toward its normal course issuer bid. ( TD’s NCIB allows it to purchase 9.5 million shares. Through the private placements it’s allowed to buy back onethird of its NCIB.)

TD’s move comes a few days after CIBC was granted a similar exemption. The bank is allowed to make “private agreement purchases,” of its own shares with an arms-length third party sell- er. The bank has an upper limit of 2,666,667 shares that it’s allowed to purchase — or one- third of the 8 million shares it’s allowed to buy back under its NCIB.

Under t he order t he banks are r e quired to meet t wo conditions: the price paid for the shares bought will be at “a discount to the prevailing market price” and details of the buy back, specifically the shares purchased and the “aggregate price paid,” have to be filed on SEDAR.

So what are the issues here? From the issuer’s perspective, private sales agreements represent an efficient way to acquire a large number of shares. It does that by removing the uncertainty of timing and cost volatility associated with open market purchases. And it doesn’t pay full market price.

From the perspective of the investor, the mechanism allows it to sell part or all of its holdings in one shot. Accordingly it sells its stake quickly — but not for full market price.

One negative is that the program is not available to all shareholders — unlike a regular NCIB where the buyback occurs as part of regular trading. ( Under a NCIB, buy-backs are limited to onequarter of average daily volume.)

The OSC said the ability of issuers to purchase their own shares at a discount to t he prevailing market price “is beneficial to all shareholders since the amount saved by the i ssuer can be otherwise allocated.” The regulator noted the issuers who have been granted these types of orders “have very liquid securities.” Accordingly, the OSC argues that other shareholders who wish to sell their shares through the TSX are able to do so at the higher prevailing market price “and the purchase of the shares under the order will not affect the market price of the shares since the purchase is occurring offexchange and not through TSX facilities).”

In 2015, the OSC gave 39 exemption orders. Among them: ❚ Magna International. In November 2015 the auto parts company was granted an order, that was a followup to earlier orders ( November 2014 and August 2015) allowing it to buy back shares from three armslength sellers. The earlier orders came with tighter rules: while Magna was allowed to buy back no more than onethird of the shares available for purchase under its NCIB, it couldn’t purchase more than one million shares in any given week; ❚ Canadian Pacific Railway. In November 2014, the OSC gave it permission to purchase, through private agreements, up to 1.2 million of its shares from a third-party seller. That agreement followed earlier agreements that started in March 2014.