Proposed merger between the Montréal Exchange and the Toronto Stock Exchange: The Caisse supports the project but would like the AMF to obtain certain undertakings from the new TMX Group



    MONTREAL, Feb. 12 /CNW Telbec/ - On December 10, following the
announcement of the proposed merger between the Toronto Stock Exchange and the
Montréal Exchange to form the TMX Group, the Caisse de dépôt et placement du
Québec issued a press release stating that while it found the proposal
interesting, it had a number of concerns.
    After examining the documents made public since then and after obtaining
additional information, the Caisse has concluded that this project offers
advantages for all the parties and therefore generally stands behind its
initial endorsement. The Caisse has a stake of about 8% in the Montréal
Exchange.
    However, the Caisse would like the Autorité des marchés financiers (AMF)
to obtain formal undertakings from the TSX Group with regards to certain
specific aspects such as the continuity of operations in Montréal and the
governance structure of the new TMX group.
    The Caisse also undertakes to support the new group as both a client and
shareholder with a view to making it a stronger, more viable institution in an
intensely competitive market.

    Business continuity in Montréal

    Over and above the existing undertakings of the proposed transaction, the
undertaking of the TSX Group to the AMF stating that the trading of
derivatives and related products will remain in Montréal should be clearer and
firmer. In fact, the Caisse believes that the TSX Group should also provide an
undertaking to the AMF to the effect that all future derivatives activities,
initiatives and developments in Canada or elsewhere will be under the
responsibility of the Montréal Exchange (which will become a division of the
TSX Group) and will be managed from Montréal.

    Governance structure of new TMX Group

    The Caisse believes that the undertakings regarding the appointment of
directors should include the obligation to appoint directors who are residents
of Québec and who have relevant derivatives experience and expertise. The AMF
should insist that the TSX Group (and then TMX) have its board of directors
define an expertise and experience profile for its members. AMF would have to
approve this profile and sign off on any changes.

    Break fees

    The break fee for the proposed merger is $45.7 million. While it believes
that such provisions do not always serve the interests of shareholders, in
this particular situation, the Caisse is not making the fee a reason to oppose
the merger.

    Documentation

    The brief, which will be filed by the Caisse with the Autorité des
marchés financiers, is appended to this press release.

    The Caisse de dépôt et placement du Québec is a financial institution
that manages funds primarily for public and private pension and insurance
plans. As at December 31, 2006, it held CA$143.5 billion of net assets. One of
the leading institutional fund managers in Canada, the Caisse invests in the
main financial markets as well as in private equity and real estate. For more
information: www.lacaisse.com.


    
         Memoir on the Proposed Merger Between the Montréal Exchange
                       and the Toronto Stock Exchange

    On December 10, following the announcement of the proposed merger between
the Toronto Stock Exchange and the Montréal Exchange to form the TMX Group,
the Caisse de dépôt et placement du Québec issued a press release stating that
it found this proposal interesting. After examining the documents made public
since then and after obtaining additional information, the Caisse has
concluded that this project offers advantages for all the parties and
therefore stands behind its initial endorsement. However, the Caisse would
like the Autorité des marchés financiers (AMF) to obtain formal undertakings
from the TSX Group with regards to certain specific aspects such as the
continuity of operations in Montréal and the governance structure of the new
TMX group.

    Background to the proposed transaction

    Beginning in the mid 1990s and to a greater extent since 2000, there has
been a global shift towards stock market consolidation. It began with mergers
between stock exchanges within a country and expanded to global alliances
between the exchanges of different countries. For example, Euronext and the
New York Stock Exchange (NYSE) merged in 2006, while America's electronic
stock exchange, NASDAQ, and its counterpart in Dubai partnered to buy Sweden's
OMX Group. More recently, the Chicago Stock Exchange announced it was in talks
to purchase the NYMEX, which if successful, would be one of the biggest
mergers between global stock exchanges. The merger of the Toronto and Montréal
exchanges fits along these lines. This consolidation has a number of strategic
advantages insofar as the Montréal Exchange would add to its ability to
develop a world-class centre of excellence in the booming derivatives market.
    The Montréal Exchange operates according to the vertical business model,
in which the exchange conducts trading as well as clearing and settlement
operations. Derivatives exchanges built on this model are the most prized on
the market. In Canada, the growth potential is still excellent, particularly
for standard products.
    From the look of it, this transaction only makes sense if the Montréal
Exchange assumes all the responsibilities of the TMX Group for derivatives by
consolidating and expanding the technical expertise and IT systems already in
place at the Montréal Exchange. The clearing activities currently performed by
the Montréal Exchange add considerable value to the derivatives operations and
must remain in Montréal. Toronto, for its part, would hold on to the equities
market. In fact, such an orientation is the logical aftermath to the
agreements reached in 1999 and later between the Montréal and Toronto
exchanges whereby the former handled the derivatives market and the latter
took over stock trading.
    The consideration offered to Montréal Exchange shareholders appears fair
based on comparable transactions and on the undertakings the TSX must make.
    However, the Caisse has some concerns that the Autorité des marchés
financiers (AMF) should take into account before approving the merger.
    These concerns pertain to business continuity covenants as regards the
Montréal Exchange and to the governance structure of the new entity, the TMX
Group.

    Business continuity covenants

    Based on the documents published on the proposed merger, the two stock
exchanges agree that the activities associated with the trading of derivatives
and related products, including clearing and the proposed Montréal Climate
Exchange, will remain in Montréal.
    The documents contain the following undertakings by the Toronto Stock
Exchange (more specifically, by the TSX Group) and by the new entity that the
Montréal Stock Exchange will become.
    The TSX Group has provided written undertakings to the AMF that include
provisions to the effect that:

    - It will do nothing to prevent the Montréal Exchange from remaining the
      Canadian national exchange for the trading of derivatives and related
      products and the sole exchange responsible for developing the Montréal
      Climate Exchange into a leading market for exchange-traded
      environmental products;

    - Current MX operations involving the trading of derivatives and related
      products will remain in Montréal.

    As for the new entity that the Montréal Exchange will become, its
undertakings to the AMF include provisions to the effect that:

    - The head office and executive offices of the new entity as well as
      those of the Canadian Derivatives Clearing Corporation will remain in
      Montréal;

    - The most senior executive of each of these two entities will live and
      work in Montréal;

    - The new entity will keep the name Montréal Exchange.

    The AMF will continue as the lead regulator in respect of the operations
of the Montréal Exchange and the Canadian Derivatives Clearing Corporation.
The TMX Group will remain subject to a 10% ownership restriction, and any
amendments to this restriction will require the approval of both the AMF and
the Ontario Securities Commission.
    These undertakings will be recorded in the appropriate legal documents.
    The undertaking of the TSX Group to the AMF stating that the trading of
derivatives and related products will remain in Montréal should be clearer and
firmer. In fact, the Caisse believes that the TSX Group should also provide an
undertaking to the AMF to the effect that all future derivatives activities,
initiatives and developments in Canada or elsewhere will be under the
responsibility of the Montréal Exchange (which will become a entity of the TSX
Group) and will be managed from Montréal. This more formal undertaking should
be stipulated in the covenants and in the corporate documents of the entities
involved. This undertaking should also include the cancellation of certain
undertakings already made by the TSX Group.
    In this context, the Caisse would like the AMF to take the necessary
measures and, if necessary, couple its approval with solid and legally
enforceable conditions to ensure that the Montréal Exchange's current and
future activities remain in Montréal.
    These undertakings should not be voidable by shareholders or a board of
directors or allow, without the prior approval of the AMF, the sale, merger or
any other similar transaction involving the Montréal Exchange and its
operations. The AMF should ensure that all the entities concerned by decisions
regarding the operations of the Montréal Exchange and the Canadian Derivatives
Clearing Corporation are subject to conditions that will ensure these
activities permanently remain in Montréal. As well, no sale of assets
associated with derivatives and clearing operations should be permitted
without the prior approval of shareholders and the AMF. Formal undertakings in
this regard are also in order.

    Governance rules

    The TSX Group has also made undertakings to the AMF as regards the
composition of the new TMX Group's board of directors. Once the merger goes
through, the Group's board of directors will consist of five members appointed
by the Montréal Exchange. This undertaking also includes provisions allowing
these directors to be reappointed for three years following the transaction.
These directors will be deemed Québec residents, whether or not they live in
Québec. Twenty-five percent of the nominated directors of the TMX Group will,
without limit as to time, be residents of Québec.
    The Caisse believes that this commitment should include the obligation to
appoint directors who are residents of Québec and who have relevant
derivatives experience and expertise. The AMF should insist that the board of
directors of the TSX Group (and then TMX) define an expertise and experience
profile for its members. This profile should contain an acceptable definition
of "Québec resident" and set out the nature of the expertise and experience
required for the candidates living in Québec. It should also require the AMF's
approval and the latter should have to sign off on any changes to these two
aspects. As well, as is customary, the profile should be posted on the Group's
website.
    Moreover, the proposed merger documents indicate that a director living in
Québec will be appointed to each board committee. However, this commitment
applies for three years only, which is definitely not long enough.
    These undertakings should include solid and legally enforceable conditions
to ensure that these elements are not modified at a meeting of shareholders or
by the board of directors without the AMF's permission. These conditions
should apply to all the entities of the proposed corporate structure with
decision-making power as regards matters of the board of directors and its
operation.

    Break fees

    Lastly, the Caisse is generally concerned about break fees associated with
merger and acquisition transactions. These fees allow buyers to protect
themselves against sellers who seek a better offer or cut off negotiations.
Such clauses also give the seller assurance that if the buyer is unable to
complete the transaction, the seller will be compensated. This is therefore a
defensive measure that can, however, hinder competition between potential
buyers if the amounts involved are excessively high.
    An excessive break fee can therefore prevent a third party from making a
better offer or make a transaction more costly for a third party and thus
reduce the value offered to shareholders. In this particular case, the break
fee for the merger is $45.7 million. In light of the circumstances and the
specific terms and conditions of this transaction, the Caisse is not making
this fee a reason to oppose the merger.
    However, the Caisse would like to emphasize that such clauses do not
always serve the interests of shareholders, particularly when the break fees
are so high that they reduce the number of bids. And although in this
situation the Caisse does not consider the break fee a reason to oppose the
merger, it is still concerned by the issue of break fees in general and their
inordinate amounts.

    Conclusion

    The Caisse would like to reiterate that it considers the merger
interesting and beneficial for the parties concerned. To the best of its
knowledge and based on the information it has collected, it agrees with this
transaction and will continue to support the activities of the new TMX Group
both as a client and a shareholder.
    That said, the Caisse would like the AMF to obtain more extensive, clearer
and firmer undertakings than the ones proposed to date by the TSX Group as
regards governance and in order to ensure that derivatives and clearing
operations remain in Montréal.
    




For further information:

For further information: Annie Vallières, Media Relations, (514)
847-5493


Custom Packages

Browse our custom packages or build your own to meet your unique communications needs.

Start today.

CNW Membership

Fill out a CNW membership form or contact us at 1 (877) 269-7890

Learn about CNW services

Request more information about CNW products and services or call us at 1 (877) 269-7890