On September 5, 2019, the Canadian Securities Administrator (CSA) published a notice asking for comments on proposed amendments to National Instrument 51-102 (Continuous Disclosure Obligations) and other policies related to the Business Acquisition Report (BAR) requirements under Canadian securities laws.
Current BAR requirements
Any reporting issuer that is not an investment fund is required to file a BAR after completing an acquisition that is a "significant acquisition". There are three tests used to determine significance: the asset test, the investment test and the profit or loss test. The asset test measures the assets of the acquired business against the assets of the reporting issuer. The investment test measures the reporting issuer's investments in, and advances to, the acquired business against the assets of the reporting issuer. Lastly, the profit or loss test measures the income from continuing operations of the acquired business against the income from continuing operations of the reporting issuer.
An acquisition is a "significant acquisition" if:
- For a reporting issuer that is not a venture issuer, the result from any one of the three significance tests exceeds 20%; or
- For a venture issuer, the result of either the asset test or investment test exceeds 100%.
Shifting to a two-trigger test
The proposed amendments affect the determination of "significant acquisitions" for non-venture reporting issuers. Specifically:
- The threshold for the significance tests will be increased from 20% to 30%.
- Instead of any one of the significance tests meeting the threshold, a BAR will only need to be filed if an acquisition of a business triggers at least two of the significance tests.
At this time, the CSA is not proposing any amendments to the BAR requirements for venture issuers. This is largely due to the changes introduced in 2015 that increased the significance test threshold for venture issuers to 100% and removed the requirement that BARs filed by venture issuers contain pro-forma financial statements.
The amendments aim to reduce the burden on issuers
The proposed amendments stem from feedback that the CSA received. Specifically that the current BAR requirements may produce anomalous results and the BAR rules may limit reporting issuers in regards to acquisitions. Additionally, there were concerns that the preparation of a BAR entailed significant time and cost and that the information necessary to comply with the BAR requirements may be difficult to obtain. The CSA concluded that the current requirements may impose a burden on issuers that does not result in an equal benefit to the capital markets.
Ultimately, the proposed amendments are aimed at reducing the regulatory burden imposed on issuers by the BAR requirements without compromising investor protection.
OSC anticipates significant cost savings for issuers
Accompanying the request for comment, the Ontario Securities Commission published an analysis of the estimated costs and benefits of the proposed amendments. In its report, the OSC estimated that the cost reduction for issuers related to a decrease in BAR exemptive relief applications will be between $71,370 and $93,850 per year and the cost reduction for issuers related to a decrease in BARs will be between $1,577,880 and $1,620,000 per year. These estimates included auditor, legal, issuer and regulatory costs.
Feedback on the proposed changes
The CSA asks that any comments regarding the proposed changes be submitted in writing by December 4, 2019. Please contact any member of our Business Law group to discuss the proposed amendments and any comments that you may have for the CSA.
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