Updates to guidance for merging with an FCU should be considered
Authors
We believe that the Office of the Superintendent of Financial Institutions (OSFI) should consider updating existing guidance (or developing new guidance) in respect of certain applications from a provincial credit union wishing to become a federal credit union (FCU) to specifically contemplate a particularly unique scenario.
At present, a provincial credit union wanting to become an FCU under the Bank Act (BA) can seek to do so in one of two ways: (i) apply to the Minister of Finance (the Minister) for letters patent continuing it as an FCU under the BA1; or (ii) apply to the Minister for letters patent continuing it as an FCU for purposes of immediately amalgamating with another FCU in accordance with the BA.2
The option to amalgamate with an existing FCU presents a unique opportunity for smaller provincial credit unions: they can continue federally and reap the benefits for their members of becoming an FCU where they might not otherwise have the size, resources or capital to do so on their own. This option is less onerous for smaller provincial credit unions because they can leverage the policies, procedures, resources, systems and technology of the existing FCU.3 In this situation, an application by a provincial credit union to continue as an FCU under option (ii) would be made concurrently with an application to amalgamate pursuant to section 223(1.2) or (1.3) of the BA.4 We believe this is where the current guidance from OSFI in respect of these applications should be updated (or new guidance should be developed).
Alternatively, it may be possible for a provincial credit union to sell all or substantially all of its assets to an FCU5 (to the extent permitted under the provincial credit union’s governing statute), which may, in substance, have the same effect as amalgamating with an FCU but could potentially be affected significantly more expeditiously.
Continuance and amalgamation
OSFI assesses applications for continuance and makes recommendations to the Minister, who has the ultimate responsibility for approving the continuance and the amalgamation. In particular, OSFI has published an instruction guide entitled “Guide for Continuing a Local Cooperative Credit Society as a Federal Credit Union” (the Continuance Guide) to promote awareness and enhance the transparency of the assessment criteria and processes for continuance as an FCU.
Section I of the Administrative Guidance in the Continuance Guide refers to the dual application process where a provincial credit union seeks to continue as an FCU for the purpose of immediately amalgamating with an FCU. However, the Continuance Guide is drafted mainly from the perspective of a larger provincial credit union seeking to continue as an FCU without amalgamating with an existing FCU, and as a result it does not specifically identify the information requirements which may not be relevant or applicable in the context of a continuance and amalgamation.
In a continuance and amalgamation, we would expect that the application would be assessed by OSFI on an expedited basis given that the larger, existing FCU would have already submitted a fulsome application to OSFI and would already be subject to ongoing supervision by OSFI. As an example, section 2.4 of the Continuance Guide seeks information from the provincial credit union with respect to its risk appetite framework as an FCU; a detailed description of all risks to which it would be exposed as an FCU as well as the manner in which it would monitor and manage these risks; and copies of its proposed policies and procedures. Where that provincial credit union will amalgamate with an existing FCU immediately upon continuance, we believe it would be inefficient and impractical for the provincial credit union to be expected to prepare these documents given that OSFI should already be familiar with the existing FCU and would have already reviewed its risk appetite, risk monitoring and policies and procedures (which the provincial credit union would simply be adopting on the amalgamation).6
There is also duplication between the information requirements under the Continuance Guide and under OSFI’s “Transaction Instruction A No. 12 – Amalgamations” (Amalgamation Guide) and we believe it would not be appropriate to require both the provincial credit union and existing FCU to provide such information as part of concurrent applications. As a result, we have included—as Appendix A—a sample of what we believe an instruction guide could look like for a continuance and amalgamation (where a small provincial credit union is continuing and amalgamating with a larger FCU), based on the existing Amalgamation Guide and Continuance Guide.7, 8
We also believe that, from the perspective of the existing FCU, the current statutory regime is unnecessarily burdensome in that it would require the FCU to hold a special meeting of its members each time it seeks to amalgamate with a smaller provincial credit union. In particular, we would note that under the Insurance Companies Act (ICA), section 143(2) provides that the Minister has the flexibility to exempt a company from the requirement to send a notice of special meeting in respect of an amalgamation to the voting policyholders “… having regard to the size of the company and the companies or the body corporate with which it proposes to amalgamate.” There is no corresponding provision in the BA which could be used to exempt an FCU from the need to hold a special meeting of members to approve an amalgamation with a small provincial credit union, but arguably there should be since the policy reasons for including such a provision in the ICA should be the same as the BA. We would also note we have obtained this exemption for insurance companies amalgamating with smaller subsidiaries, which shows this is an exemption that has actually been applied in practice.
Sale of all or substantially all assets
While we have not researched extensively into all the provincial credit union regimes, under the Ontario Credit Unions and Caisses Populaires Act, 1994 (Ontario CU Act), a credit union may sell all or substantially all of its assets if authorized to do so by special resolution of its members.9 However, an agreement for such a sale must be approved by the Deposit Insurance Corporation of Ontario prior to seeking the approval of members.10 The Ontario CU Act does not restrict the types of entities that may acquire assets of a credit union but also does not provide any further details with respect to process on a sale of all or substantially all of the assets of a credit union or the treatment of the members of the transferring credit union post-sale.11 Where the intention is to effect a sale of all or substantially all of the assets of an Ontario credit union to an FCU as an alternative to continuing as an FCU and immediately amalgamating, we would expect the agreement of sale would include a mechanism whereby the FCU would issue membership shares to the former members of the Ontario credit union as consideration for their proportionate ownership interest in the provincial credit union.12
From the perspective of the FCU, this alternative may still require at least one approval under the BA (for the issue of membership shares in consideration of property13) and possibly a second depending on the size of the assets relative to the size of the assets of the FCU (approval for the acquisition of assets greater than 10% of the assets of the FCU14), but would not require a special resolution of its members to approve the acquisition (similar to a situation where an FCU were to acquire additional members organically, members do not have an approval right under the BA for asset acquisitions of this nature). In addition, each FCU is subject to a Business Commitment Letter from OSFI, which provides that to the extent there is a material changes to the FCU’s business plan, OSFI has the opportunity to assess the impact on the FCU’s risk profile. As a result, OSFI may still have an opportunity to assess the transaction from a prudential standpoint, but the FCU would not be burdened with having to call a special meeting of its members to approve the transaction.
Another alternative (in the absence of a legislative amendment exempting an FCU from obtaining member approval for amalgamations with smaller credit unions), could be for a provincial credit union to continue as an FCU and then immediately sell all or substantially all of its assets to the FCU (as opposed to amalgamating).15 As noted in the paragraph above, this may require additional BA approvals but would not require the FCU to obtain approval from its members. However, this alternative may not address the concerns of the provincial credit union respecting the extensive information requirements under the Continuance Guide and therefore may not be that practical unless OSFI follows a process more aligned with its guide to the sale of all or substantially all of the assets of a deposit-taking institution or take this scenario in account in the sample instruction guide in Appendix A.
Conclusion
We believe section 33(3) of the BA, which contemplates the continuance of a local cooperative credit society as an FCU followed by an immediate amalgamation with an existing FCU, was intended to provide an abbreviated process for small credit unions to amalgamate with larger FCUs on an expedited basis. However, the current guidance in respect thereof is not clear and does not reflect this interpretation. As a result, we believe OSFI should consider publishing a revised transaction instruction guideline which specifically contemplates this scenario.
In the absence of more clear guidance, we have identified other potential ways for a provincial credit union to effectively continue federally, without the significant regulatory hurdles associated with an application to continue as an FCU, such as through the sale of all or substantially all of the provincial credit union’s assets to an FCU. However, we believe it is in the interests of both OSFI and provincial credit unions seeking to become FCUs that the administrative guidance noted above be updated.
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1 Pursuant to section 33(2) of the BA.
2 Pursuant to section 33(3) of the BA. Also, pursuant to section 33(4) of the BA, two or more provincial credit unions may apply to continue under the BA as FCUs if they propose to be continued for the purpose of immediately amalgamating with each other in accordance with the BA.
3 Prior to amending the BA to include the FCU regime, the BA and Trust and Loan Companies Act (TLCA) already contemplated a continuance and amalgamation process. For example, Manulife Bank of Canada was formed through the combination of Regional Trust (a federal trust company), Huronia Trust (an Ontario trust company) and Cabot Trust (an Ontario trust company). Pursuant to section 31(2) of the TLCA, each of the Ontario trust companies continued as federal trust companies, and then the three companies amalgamated pursuant to section 228 of the TLCA (following which the amalgamated trust company continued as a bank pursuant to section 38(1) of the TLCA and section 33(1) of the BA). Given that a provincial entity could continue as a federal trust company or as a bank (and then amalgamate with an existing trust company or bank, respectively) under the respective statutes prior to the addition of the FCU regime, we would argue section 33(3) of the BA, which specifically contemplates the continuance of a local cooperative credit society as an FCU followed by an immediate amalgamation with an existing FCU, was an unnecessary addition to the BA unless it was intended to provide for an abbreviated process for small credit unions to amalgamate with larger FCUs on an expedited basis.
4 See section 33(5) of the BA.
5 Note that it is not possible under the BA for an FCU to sell all or substantially all of its assets to a provincial credit union.
6 However, in our experience, we would expect that OSFI will want a significant amount of due diligence to be undertaken by the FCU and that a robust integration plan will be presented with an application (clearly identifying the impact of the transaction on the risk profile of the FCU)—the speed with which OSFI will assess an application will be correlated to the quality of these submissions. For example, we would expect the FCU to have performed a thorough review of the credit files of the target, as well as self-assessments against the BA and all OSFI guidelines which demonstrate that the combined entity will be substantially or materially compliant by day one (along with an action plan to address any gaps to bring the combined entity into full compliance as soon as possible).
7 Note that we used the existing Amalgamation Guide as the starting point and layered in, where appropriate, sections from the Continuance Guide. We determined a number of sections from the Continuance Guide, such as section 2.1 (Financial Strength of Applicant); 2.2 (Business Plan); 2.3 (Management); 2.4 (Risk Management: Policies, Procedures and Risk Management Controls); 2.5 (Board of Directors and Committee); 2.6 (Internal Audit); 2.7 (Regulatory Compliance Management); and 2.8 (Information Technology) may not be necessary to port over as they were either duplicative of information requirements set forth in the Amalgamation Guide or excessive given that the smaller credit union would be adopting existing policies, practices, procedures and systems of the larger FCU.
8 Note that some of the deleted information requirements above may be more relevant depending on the relative size of the applicants (i.e., where the provincial credit union is larger than, or equal in size to, the FCU).
9 See section 204(1) of the Ontario CU Act. Pursuant to section 204(4), if the credit union has more than one class of shares, the special resolution shall be in the form of a special resolution passed by the holders of each class of shares.
10See section 204(5) of the Ontario CU Act.
11 Note that, while we have not undertaken an extensive review of provincial credit union legislation outside of Ontario, section 16 of the British Columbia Credit Union Incorporation Act only permits the sale of all or substantially all of the assets of a credit union to another credit union in British Columbia, and that the agreement of sale must specify, among other things, the services that the acquiring credit union offers to its members and proposes to extend to members of the transferring credit union; and the common bond of membership proposed for the acquiring credit union on and after the disposition becomes effective. We would note that in February 1999, a proposed merger between Surrey Metro Savings Credit Union (a British Columbia credit union) and Canada Trust (a federal trust company) was rejected by the members of Surrey. The transaction would have, in substance, resulted in substantially all of the assets of Surrey being transferred to Canada Trust, but would have been effected through a combination of a redemption of membership shares, a winding up of Surrey and a distribution of the assets of Surrey to its sole remaining shareholder, Canada Trust. We note this mainly to illustrate that, even in the absence of an express provision to transfer assets of a credit union outside of the province, there may be alternative approaches that could be used to reach the same result.
12 We would also expect OSFI and the provincial regulator to require the provincial credit union to publish disclosure about deposit insurance similar to the disclosure required under the Disclosure on Continuance Regulations (Federal Credit Unions). We would not expect the FCU to qualify for the special transitional relief under the Canada Deposit Insurance Corporation Act (CDIC Act) that is available to continuing FCUs, but we do expect that the Canada Deposit Insurance Corporation (CDIC) would insure all of the assumed deposit liabilities from the provincial credit union up to $100,000 per member (assuming those deposits meet the eligibility criteria in the CDIC Act).
13 See section 79.1 of the BA. Section 79.1(2) requires membership shares to be issued for money or, with the approval of the Superintendent, in exchange for property. In this scenario, the property would be coming from the former provincial credit union but the FCU would be seeking approval to issue its membership shares to the members of that credit union, which raises an interesting legal issue.
14 See section 482 of the BA.
15 Following the sale of all of its assets, it could then seek to discontinue out of the BA and wind-up.
Le mois dernier, le Canada a publié sa première Stratégie industrielle de défense (la Stratégie), qui souligne l’engagement du Canada à développer une base industrielle de défense solide et à stimuler la croissance économique. Ces efforts pourraient aussi comprendre le renforcement de l’état de préparation à la biodéfense et aux contre-mesures médicales, ce qui pourrait constituer des débouchés pour le secteur canadien des sciences de la vie en raison de l’importance accordée aux capacités nationales en ce sens et de la nécessité d’atténuer les risques d’urgences sanitaires.
Développement de contre-mesures médicales au Canada
Comme indiqué dans les bulletins précédents, le quatrième pilier de la Stratégie est axé sur la « sécurisation des chaînes d’approvisionnement pour les intrants et les biens clés » par le renforcement de la production nationale et le stockage de ressources. L’accent est mis tout particulièrement sur les contre-mesures médicales, en précisant que nos « alliés ont établi un lien explicite entre l’état de préparation à la biodéfense et aux contre-mesures médicales et leur sécurité économique et nationale, en élaborant de nouvelles stratégies et de nouveaux mécanismes pour faire progresser ces travaux ». Les contre-mesures médicales désignent divers produits réglementés pouvant être utilisés pour protéger la population lors d’une situation d’urgence de grande ampleur, comme l’éclosion d’une maladie ou une attaque impliquant des armes chimiques, biologiques ou nucléaires. Il peut s’agir de vaccins, de médicaments thérapeutiques et produits biologiques, de dispositifs de tests diagnostiques, des équipements de protection individuelle ou industrielle, et d’autres dispositifs médicaux. Les contre-mesures médicales sont essentielles à la réduction et à l’atténuation des dommages lors d’une urgence de santé publique.
Exploiter les voies réglementaires mises en place lors de la pandémie de COVID-19
Pendant et après la pandémie de COVID-19, le Canada a mis en place plusieurs nouvelles voies réglementaires comme mécanismes d’accélération des approbations de produits médicaux, ce qui pourrait offrir au gouvernement des options pour déployer des contre-mesures médicales afin de faire face aux risques pour la santé publique. Au début de la pandémie, Santé Canada a émis diverses ordonnances provisoires pour permettre l’importation et la vente de médicaments et de dispositifs médicaux qui n’avaient pas eu l’approbation des voies réglementaires traditionnelles. Or, Santé Canada a plutôt fait confiance aux voies d’approbation réglementaire et de l’exemption de certaines exigences en homologation de produits des pays impliqués dans la transaction. Beaucoup de ces règles provisoires ont depuis été officiellement intégrées à la réglementation en vertu de la Loi sur les aliments et drogues et ont été appliquées bien après la COVID-19. Conformément au Règlement sur les aliments et drogues, Santé Canada tient à jour la Liste des maladies qui menacent la santé publique et utilisera une procédure d’autorisation modifiée pour les médicaments d’urgence de santé publique pouvant traiter les affections figurant sur la liste. De même, le Règlement sur les instruments médicaux a établi une liste d’instruments médicaux répondant à un besoin urgent de santé publique, ce qui permet à Santé Canada d’autoriser la commercialisation de ces instruments de manière accélérée. Ces outils réglementaires sont utilisés automatiquement quand une situation médicale présente un grand risque pour la santé publique au Canada et nécessite une action immédiate pour contrer ce risque.
Le rôle de la Stratégie dans le renforcement du régime réglementaire de la santé au Canada
La stratégie prévoit que le Canada adoptera une approche proactive en matière de planification en amont des crises sanitaires. Le gouvernement entend s’assurer que les produits médicaux sont déjà disponibles au Canada afin qu’ils puissent être distribués rapidement en cas d’urgence. D’autres modifications récentes au Règlement sur les aliments et drogues permettent de prépositionner au Canada tous les médicaments d’urgence en santé publique, ce qui signifie qu’ils peuvent être importés dans des installations d’entreposage canadiennes avant que leur mise sur le marché n’ait été autorisée. La Stratégie s’appuie sur ces fondements, en faisant référence à l’organisme existant Préparation aux crises sanitaires Canada (PCSC), un organisme opérationnel spécial au sein d’Innovation, Sciences et Développement économique Canada (ISDE), et à un nouveau Fonds des sciences de la vie, lesquels « collaborent avec des partenaires internationaux et de soutenir l’élaboration et la production de contre-mesures médicales ». PCSC supervise la Stratégie en matière de biofabrication et de sciences de la vie du Canada, qui vise à développer un secteur national des sciences de la vie fort et compétitif doté de capacités de biofabrication de pointe, en mettant l’accent sur la capacité à se préparer et à faire face aux futures priorités et crises sanitaires. Dans cette optique, il y aura des occasions pour les fabricants de nouer des collaborations de recherche et des accords commerciaux ou d’approvisionnement liés aux contre-mesures médicales financées par des programmes fédéraux.
Étroitement lié aux capacités nationales, le pilier III de la stratégie implique « Investissement ciblé pour renforcer un secteur canadien de la défense novateur », avec la promesse que le gouvernement fédéral « soutiendr[a] la recherche et le développement, protéger[a] la propriété intellectuelle, soutiendr[a] les petites et moyennes entreprises, investir[a] dans les compétences et la formation, et encourager[a] les exportations afin de créer un secteur de la défense agile et concurrentiel à l’échelle mondiale ». La nécessité de favoriser le développement de la propriété intellectuelle (PI) et la conservation des droits du Canada est mentionnée à plusieurs reprises dans la Stratégie. Par exemple, la Stratégie prévoit l’établissement de partenariats officiels avec l’industrie canadienne qui « [assureront] la propriété et le contrôle nationaux de la propriété intellectuelle (PI) et des capacités essentielles. » La Stratégie reconnaît l’immense talent des établissements canadiens et la précieuse recherche qui y est menée actuellement et qui est déjà financée par des subventions de recherche d’organismes tels que le Conseil de recherches en sciences naturelles et en génie et les Instituts de recherche en santé du Canada, et fait aussi référence à l’engagement de 1,6 milliard de dollars pour de nouveaux fonds de recherche dans le budget de 2025. Cette prise de conscience de la nécessité de promouvoir et de soutenir l’innovation au Canada laisse présager des possibilités de financement, notamment dans les domaines où le Canada accuse un retard en matière de production nationale et où des engagements d’investissement et de fabrication au Canada peuvent être pris.
Prochaines étapes
Dans les prochains mois, nous prévoyons que le gouvernement du Canada publiera d’autres directives et des mesures de suivi. L’équipe de défense des conservateurs poursuivra sa couverture de perspectives sur la défense au Canada en publiant une analyse supplémentaire pour donner des précisions sur l’incidence de la Stratégie sur de multiples secteurs.