Business acquisitions: Canada’s securities regulators propose new rules to reduce regulatory burdens

New rules are on the horizon to ease public companies’ obligations to report detailed information about business acquisitions. Canada’s securities regulators are proposing to relax the financial tests for determining whether an acquisition is significant enough to require a business acquisition report (BAR).

The proposed rules would facilitate a greater proportion of acquisitions being completed without a company having to specially prepare historical financial statements of the target and pro forma financial statements⁠—which can be challenging and time-consuming, particularly when the required statements are not readily available or raise accounting or GAAP reconciliation issues.

The proposed rules would also benefit companies in their capital raising efforts, as fewer public offerings that are undertaken in close proximity to an acquisition would require prospectus disclosure of the target’s and pro forma financial statements.

Comments on the BAR proposals are due by December 4.

Changes to the significance tests

The new rules would require a BAR only when a business acquisition triggers at least two of the three significance tests⁠—the asset test, the investment test, and the profit or loss test⁠—at a 30% level. The existing rules require a BAR if any one of the three tests is triggered at a 20% level.

Aside from the increase to 30% and the new double trigger, the nature of the three significance tests would not change. Stated briefly,

• the asset test is triggered when a target’s assets exceed the specified percentage of the acquiring company’s assets;
• the investment test is triggered when an acquiring company’s investment in the target exceeds the specified percentage of the acquiring company’s assets; and
• the profit or loss test is triggered when a target’s profit or loss exceeds the specified percentage of the acquiring company’s profit or loss.

Impact on cross-border transactions

The proposed changes to Canada’s significant acquisition rules are part of a broader effort to reduce securities regulatory burdens. In 2018, the regulators published a staff notice announcing six burden reduction priorities⁠—including reforming the BAR rules. The 30% test and double trigger would make the Canadian rules different from the U.S. rules. Fortunately, many cross-border transactions⁠—including acquisitions and public offerings by Canadian MJDS companies⁠—only have to comply with home country requirements.

The SEC is also undertaking a regulatory burden reduction initiative and its rules on business acquisition reporting are expected to be amended. Key outstanding SEC proposals¹ include:

• supplementing the significance tests by taking into account the acquiror’s revenue and worldwide equity market value; and
• limiting pro forma adjustments to
  • transaction accounting adjustments under U.S. GAAP or IFRS-IASB, and
  • discretionary adjustments for synergies and transaction effects that are reasonably estimable, have occurred, or are reasonably expected to occur.

Venture issuers

The Canadian reforms would not affect venture issuers. The BAR rules for venture issuers were relaxed in 2015. Venture issuers only need to file a BAR if an acquisition triggers the asset test or the investment test at a 100% significance level.

Informing the market about material information

The proposed changes do not affect public companies’ obligations under stock exchange rules and securities laws to issue news releases and file material change reports to inform the market about important developments.

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¹ The SEC’s proposals relating to significant acquisitions are described in greater detail in Torys’ article “U.S. Changes Affecting Your Business: Capital Markets Update”.

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