Canadian securities regulators relax financial tests for significant acquisition reporting

On August 20, Canadian Securities Administrators (CSA) adopted amendments to National Instrument 51-102 Continuous Disclosure Obligations (NI 51-102) that narrow the circumstances under which reporting issuers are required to prepare and file business acquisition reports. These amendments are part of the CSA’s broader efforts to reduce regulatory burdens on reporting issuers without compromising investor protection, and will become effective on November 18.

What you need to know

• The current 20% significance threshold will be raised to 30% for each of the asset, investment and profit or loss significance tests.
• At least two of the three significance tests must exceed the 30% threshold in order for an acquisition to constitute a significant acquisition (up from any one of three tests).
• The amendments do not align with more onerous significant acquisition reporting rules recently adopted by the Securities and Exchange Commission (SEC), but Canadian MJDS-eligible reporting issuers will only need to comply with the Canadian rules.
• The new rules will not apply to venture issuers, who will continue to be required to file a business acquisition report if an acquisition triggers the asset or investment test at a 100% significance level.

Relaxed significance tests

Canadian reporting issuers are required to file a business acquisition report after completing a “significant acquisition”, as defined in NI 51-102. Business acquisition reports, and in particular the historical financial statements of the target and pro forma financial statements that must be included as part of a business acquisition report, can be challenging and time consuming to prepare.

Under the existing rules, if an acquisition exceeds the 20% threshold according to any of the “asset test”, “investment test” or “profit or loss test”, the acquisition is significant and the issuer is required to prepare and file a business acquisition report. While there will be no amendments to the tests, the new rules adopted by the CSA make two important changes to the thresholds for reporting:

• the 20% threshold for each of the three significance tests has been increased to 30%; and
• at least two of the three significance tests must now exceed the 30% threshold (up from any one of three significance tests).

These two changes, taken together, will likely result in fewer acquisitions constituting “significant acquisitions” going forward. In addition, by requiring that at least two significance thresholds be exceeded, these changes will likely address the anomalous results that are occasionally produced by the profit or loss test due to one-time or infrequent events, which necessitate applications to securities regulators for exemptive relief.

Interestingly, these amendments do not follow the approach taken by the SEC, which in May amended the U.S. financial reporting regime for acquisitions and dispositions to include, among other items, revised investment and income tests, and an alternative revenue component where an acquisition exceeds the 20% threshold for the income test. Canadian MJDS-eligible issuers will, however, only be required to comply with the new Canadian significant acquisition reporting rules.

For acquisitions that remain significant according to these amended tests, the form of business acquisition report and the required financial statements remain unchanged. In addition, these amendments 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.

Venture issuers

The amendments to NI 51-102 adopted by the CSA do not affect venture issuers. Venture issuers only need to file a business acquisition report if an acquisition triggers the asset test or the investment test at a 100% significance level.

To discuss these issues, please contact the author(s).

This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.

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