Canada: Canadian Public Company M&A Disclosure: Key Considerations From The CSA's 2016 Continuous Disclosure Review Program

Last Updated: July 25 2016
Article by Heidi Gordon

Most Read Contributor in Canada, September 2018

The Canadian Securities Administrators recently released the results of its continuous disclosure review program for the fiscal year ended March 31, 2016, which includes findings and guidance related to disclosure regarding forward looking information, non-GAAP financial measures, information circulars and material contracts – all of which have particular significance in the M&A context.

On July 18, 2016, the Canadian Securities Administrators (CSA) published a summary of the results of their annual continuous disclosure review of reporting issuers for fiscal year 2016, in CSA Staff Notice 51-346 – Continuous Disclosure Review Program Activities for the fiscal year ended March 31, 2016 (Staff Notice). The Staff Notice includes information about areas where common disclosure deficiencies were noted, with examples in certain instances, to help Canadian public companies address these deficiencies and to illustrate their view of best practices.

Although the Staff Notice is of general significance to Canadian public companies looking to fine-tune the quality of their public disclosure, there are a handful of considerations that emerge from the Staff Notice that are particularly relevant in the M&A context. As such, the discussion below provides important reminders to Canadian public companies contemplating M&A activity in the near future. In addition to the matters discussed below, the Staff Notice also includes a discussion of certain M&A specific matters that relate to financial statement disclosure, including how to identify and account for contingent consideration in business combinations, and goodwill and intangible assets recognized in business combinations.

Forward Looking Information

When a Canadian public company makes disclosure of a proposed acquisition, that disclosure will generally involve disclosure regarding possible events, conditions or financial performance that is based on assumptions about future economic conditions and courses of action and includes future oriented financial information with respect to prospective financial performance, financial position or cash flows that is presented either as a forecast or a projection. This is what is known as "forward looking information."

Although the Staff Notice focuses on MD&A, in the context of a proposed acquisition, this often includes disclosure throughout the public company acquiror's public disclosure record, including press releases, information circular (where securityholder approval of the transaction is required) and MD&A. Such disclosure will often discuss the expected results or benefits to the public company acquiror upon completion of the acquisition. For example, the public company acquiror might issue a press release announcing that it has entered into an acquisition agreement to acquire a business, stating that "the transaction is expected to be accretive to AcquireCo's earnings per share" and that the acquisition is "expected to result in significant synergies for AcquireCo."

In the Staff Notice, the CSA notes that companies sometimes fail to provide required disclosure relating to forward looking information. In particular the CSA notes that even where issuers disclosed forward looking information in their MD&A, news releases and other continous disclosure documents, issuers do not always update this information as required. Given the prominence of forward looking information in the context of acquisitions, before any forward looking information disclosure is made, Canadian public company acquirors should turn their minds to the CSA requirements, including the obligation to provide updates to previously disclosed forward looking information.

Non-GAAP Financial Measures

When a Canadian public company makes disclosure of a proposed acquisition, that disclosure will often include non-GAAP financial measures. A non-GAAP financial measure is a numerical measure of an issuer's historical or future financial performance, financial position or cash flow that is not specified, defined or determined under the issuer's GAAP and is not presented in an issuer's financial statements (e.g. EBITDA).

In the context of a proposed acquisition, like forward looking information, non-GAAP financial measures also often appear throughout the public company acquiror's public disclosure record. These non-GAAP financial measures can be found in statements that are forward looking, for example, "following the closing of the acquisition, AcquireCo's annual EBITDA is expected to be $5 million," or discuss the acquiror and the target on a pro forma basis, for example, "had the acquisition closed last year, AcquireCo's annual EBITDA would have been $5 million."

As explained further in CSA Staff Notice 52-306 (Revised) Non-GAAP Financial Measures, released earlier this year, in its disclosure, an issuer should present with equal or greater prominence to that of a non-GAAP measure, the most directly comparable measure specified, defined or determined under the issuer's GAAP and presented in its financial statements. In the Staff Notice, the CSA notes that some issuers failed to adhere to this guidance, and that issuers often highlight the non-GAAP measure, sometimes in bold print and mention the most directly comparable GAAP measure in a less prominent location in the disclosure, most often when the GAAP measure is less favourable than the positive non-GAAP financial measure. Although disclosure of non-GAAP financial measures can often be viewed by issuers as critical to providing meaningful disclosure to investors, particularly in the M&A context, disclosure of non-GAAP financial measures is likely to be of continued interest to the CSA, and therefore should be top of mind for public company acquirors.

Management Information Circulars

Some acquisitions by Canadian public companies require that an information circular be sent to the company's securityholders (for example, where securityholder approval of the transaction is required under corporate or securities law), and in certain situations, heightened disclosure requirements apply to such information circulars. For example, an issuer must provide prospectus-level disclosure in its information circular about certain entities if securityholder approval is required in respect of a "significant acquisition" under which securities of the acquired business are being exchanged for the issuer's securities, or in respect of a "restructuring transaction" under which securities are to be changed, exchanged, issued or distributed.

In the Staff Notice, the CSA notes that some issuers failed to comply with heightened disclosure requirements in information circulars. For example, the CSA found that some issuers who spin out a new entity or complete a reverse take-over transaction fail to provide in their information circulars a full description of the proposed business of the company and related financial information. Canadian public companies contemplating an M&A transaction should be mindful of their disclosure obligations with respect to information circulars, including whether prospectus-level disclosure is required, and if so, that it must include disclosure of, among other things, financial statements, executive compensation and risk factors.

Material Contracts

Often the acquisition agreement entered into in connection with a Canadian public company's acquisition of a target will constitute a "material contract" required to be filed on the issuer's SEDAR profile page. Although an issuer will often file a redacted version of such an agreement, redactions of provisions in a material contract are only permitted under certain circumstances.

In the Staff Notice, the CSA notes that issuers tended to make prohibited redactions in material contracts, including redactions of key terms necessary for an understanding of the impact of the contract on the issuer's business, and that issuers tended to fail to provide a description of the type of information redacted. The CSA has taken the publication of the Staff Notice as an opportunity to remind issuers that: (i) redactions are only permitted where the issuer reasonably believes that disclosure of the provision would be seriously prejudicial to the interests of the issuer or would violate confidentiality provisions; (ii) an issuer may be asked by the CSA to explain the basis for considering the disclosure of the provision seriously prejudicial; and (iii) issuers should consider their disclosure obligations when negotiating material contracts with third parties.


The Staff Notice is an important resource for Canadian public companies. Failure to comply with Canadian securities law disclosure requirements, whether in the M&A context or otherwise, can result in requirements to take action to improve and/or amend disclosure, enforcement proceedings or being cease traded or placed on the default issuer list. Disclosure regarding forwarding looking information, non-GAAP financial measures, information circulars and material contracts are of particular interest to the CSA, and should be thoughtfully considered by Canadian public companies.

If you are interested in a discussion of other considerations covered by the Staff Notice that relate to continuous disclosure matters more generally, see the recent post by my colleagues Rene Sorell, Sonia Struthers, Fraser Bourne and Mason Gordon, which can be found on our firm's blog, Canadian Securities Regulatory Monitor.

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