The Office of the Superintendent of Financial Institutions ("OSFI") has released a number of new/revised Transaction Instructions that apply to the undertaking of various transactions by federally-regulated entities ("FREs"). These updated Transaction Instructions provide for several new requirements that have evolved over the years, including particularly as a result of the financial crisis and the regulatory responses that followed it. We provide below a summary of the requirements from two of the more significant Transaction Instructions, namely, Amalgamations (Index A No. 12) and Issuance of Shares or Membership Shares in Consideration of Property (Index DA No. 1), and refer to a third, Sale of all or Substantially all Assets by Deposit-taking Institutions (Index A No. 10), to mention a point of interest.

Amalgamations (Index A No. 12)

The Bank Act, Insurance Companies Act, Trust and Loan Companies Act, and Cooperative Credit Associations Act which govern federally-regulated entities provide for two types of amalgamations: long-form and short-form. Under a long-form amalgamation, applicants (i.e. the amalgamating entities, in all cases) are required to obtain approval of the amalgamation agreement effecting the amalgamation (i) from the Superintendent of Financial Institutions (the "Superintendent"), and then (ii) from the applicants' shareholders, policyholders, and/or members, as the case may be. However, if certain eligibility requirements are met the applicants may proceed by way of short-form amalgamation. In the case of a horizontal short-form amalgamation, the applicants are eligible for the short-form process if they are incorporated under a federal Act, are wholly-owned subsidiaries of the same holding body corporate, and do not have any participating policyholders. In the case of a vertical short-form amalgamation, the applicants are eligible for the short-form process if the amalgamating subsidiary (or subsidiaries) is incorporated under a federal Act, is wholly-owned by the parent company, and does not have any participating policyholders. The advantages of a short-form amalgamation are that the amalgamation need only be approved by the applicants' boards of directors and no amalgamation agreement is needed, nor therefore would need to be approved by the Superintendent. Both long-form and short-form amalgamations require the approval of the Minister of Finance (Canada) (the "Minister").

Summary of Requirements

Requirements Applicable to All Amalgamations

OSFI's Amalgamations (Index A No. 12) Transaction Instructions set out the requirements that applicants must meet in support of an amalgamation; those that apply to all amalgamation applications and which remain largely unchanged between the previous and new version of the Transaction Instructions include, among other items:

  • the rationale for the proposed amalgamation;
  • for an applicant that is neither an FRE nor an entity seeking to continue as an FRE prior to the amalgamation, evidence that it exists and details regarding its financial status and business activities (although note that the new Transaction Instructions provide for a new requirement to report any prior sanctions or offences);
  • pro forma balance sheet and capital position (and liquidity position for a deposit-taking institution ("DTI")) for each FRE applicant before the amalgamation;
  • pro forma balance sheet and capital position (and liquidity position for a DTI) for the amalgamated entity immediately following the proposed amalgamation together with a discussion of all elements used to calculate (i) the various capital, leverage, and liquidity ratios, for a DTI, (ii) the Life Insurance Capital Adequacy Test, for a life insurance company, or (iii) the Minimum Capital Test, for a property and casualty insurance company (although note that this requirement in the new Transaction Instructions is more detailed than in the previous version and refers to the specific capital adequacy tests for DTIs and property and casualty insurance companies, and the new ones applicable to life insurance companies, January 1, 2018); and
  • an integration plan for the amalgamated entity.

The new Amalgamations Transaction Instructions also contain the following additional requirements:

  • details of any regulatory approval or notification other than required by OSFI (e.g. under the Competition Act);
  • if applicable, a description of the transactions in connection with the amalgamation (e.g. a transfer of assets, outsourcing arrangement, etc.);
  • organizational chart; and
  • if there are any new directors or senior officers, an OSFI Security Information Form.

Requirements Applicable to Long-form Amalgamations

The requirements in the Amalgamations Transaction Instructions that apply to long-form amalgamation applications are now broken down into two parts: (a) those that apply for the Superintendent's approval of the amalgamation agreement and (b) those that apply for the Minister's issuance of letters patent.

The requirements that apply for the Superintendent's approval include (i) details regarding the due diligence that has been carried out in respect of the applicants (which was not required under the previous version of the Transaction Instructions) and (ii) in the case of an amalgamation under the Insurance Companies Act, details regarding the identity of and rationale for selecting the proposed independent actuary who will prepare a report on the amalgamation agreement for submission to the Superintendent, and a draft copy of the report. Previously, only a copy of the report was required to be submitted. The requirements that apply for the Minister's issuance of letters patent include, among other items and where applicable, a copy of the materials sent to the shareholders, policyholders and/or members of each applicant.

Requirements Applicable to Short-form Amalgamations

The requirements in the new Amalgamations Transaction Instructions that apply to short-form amalgamation applications require, as previously, that applicants submit, among other items, a certified copy of the resolution of its board of directors approving the amalgamation. However, the new requirements also include, in the case of an insurance company, that the applicant provide (i) a confirmation that the company does not have any participating policyholders and (ii) details regarding whether it has any policies whose premium, amount of insurance, or surrender value are subject to change by the company.

Administrative Guidance

OSFI expands upon the above requirements in the Administrative Guidance section of the Transaction Instructions. We note the key points below.

First, OSFI notes that it is of the view that letters patent issued in connection with an amalgamation do not create a new entity; rather, they combine the applicants into a single FRE. We agree with this and it is provided for in the Insurance Companies Act. Accordingly, any conversion of a share of the applicants into shares of the amalgamated entity (a) does not trigger a significant interest approval in respect thereof, and (b) the amalgamated entity does not acquire or increase a substantial investment in, or acquire control of, any entity held by an applicant under the investment rules that govern the amalgamated entity.

Second, where an applicant controls or has a significant interest in the shares of an FRE, upon occurrence of the amalgamation the amalgamated entity is deemed to be acquiring that control or significant interest for which Ministerial approval is required (see for example sections 407(2) and 407.1(2) of the Insurance Companies Act).

Third, in respect of the various types of applicants OSFI is of the view that:

  • if one of the applicants is a mutual insurance company, then the amalgamated entity must be a mutual insurance company;
  • a fraternal benefit society is only permitted to amalgamate with another fraternal benefit society;
  • the short-form amalgamation process is not available to mutual insurance companies, fraternal benefit societies, or federal credit unions; and
  • a provincial entity may apply for letters patent of amalgamation if it concurrently applies for letters patent continuing it as an FRE for the purpose of amalgamating under the applicable governing statute immediately following the continuance.

Finally, OSFI is of the view that the related party rules do not prevent an FRE applicant from entering into an amalgamation agreement, or other agreement relative to the steps to be followed in respect of the amalgamation, with a related party applicant, assuming that the agreement does not result in the acquisition or disposition of property or the assumption of a financial obligation.

Issuance of Shares or Membership Shares in Consideration of Property (Index DA No. 1)

The Issuance of Shares or Membership Shares in Consideration of Property (Index DA No. 1) Transaction Instructions set out OSFI's requirements that apply to the issuance of shares and/or membership shares, as applicable, by an FRE in exchange for property.

The requirement to provide a description of the transaction(s) that includes the rationale for the transaction, a description of the property (including the basis of its valuation) being received as consideration, and the number and type of shares being offered (including the basis of their valuation) remains substantively unchanged between the new Transaction Instructions and the previous version. However, the components comprising the required analysis of the effect of the transaction on the financial position and risk profile of the applicants have been revised and now refer to the various capital adequacy and surplus tests for DTIs and insurance companies currently used by OSFI:

  • details of the projected effect of the transaction on the applicant's balance sheet (which details are expected to be in the form of a comparative pro forma balance sheet in the case of a material transaction); and
  • details of the projected changes to the applicants capital, leverage and liquidity position for a DTI (which details are expected to be in the form of a comparative pro forma capital, leverage and liquidity position where the transaction is material) together with a discussion of all elements used to calculate (i) the various capital, leverage, and liquidity ratios, in the case of a DTI, (ii) the Life Insurance Capital Adequacy Test, in the case of a life insurance company, or (iii) the Minimum Capital Test, in the case of a property and casualty insurance company.

Also, where the counterparty is a related party, the applicant must now provide a confirmation from a senior officer of the applicant that the transaction will not result in the applicant having ongoing financial exposure to a related party and that it will not have a detrimental effect on the applicant's financial position or risk profile. The Administrative Guidance section of the Transaction Instructions provides helpful guidance on the meaning of the terms "ongoing financial exposure" and "detrimental effect". In OSFI's view, ongoing financial exposure to a related party contemplates situations where an applicant holds a receivable, securities, or guarantee from a related party (or holds a guarantee for a related party's benefit). Furthermore, when assessing whether the transaction will have a detrimental effect on the applicant's financial position or risk profile, OSFI will consider the applicant's business, asset mix, capital, income and liquidity position.

Sale of all or Substantially all Assets by Deposit-taking Institutions (Index A No. 10)

We note also that the Sale of all or Substantially all Assets by Deposit-taking Institutions (Index A No. 10) Transaction Instructions were also recently revised and issued. Prior to August 2016, this Transaction Instructions applied to assumption reinsurance transactions by insurance companies. However, following the publication of the Reinsurance on an Assumption Basis (Index A No. 10.1) Transaction Instructions in August 2016 -- which now outline the requirements of assumption reinsurance transactions by insurance companies -- the new Sale of all or Substantially all Assets by Deposit-taking Institutions (Index A No. 10) Transaction Instructions no longer apply to insurance companies, but only to banks, federal trust and loan companies, and cooperative credit associations.