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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.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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