Proposed amendments to the business acquisition report (BAR) requirements would implement a two-trigger test with an increased significance threshold of 30% for non-venture reporting issuers. The proposed amendments were published by the Canadian Securities Administrators (CSA) on September 5, 2019 and represent a positive development in the CSA’s goal of reducing regulatory burden for reporting issuers, as discussed in the CSA’s 2017 Consultation Paper, by narrowing the circumstances in which a business acquisition report, and the audited financial statements that would accompany a BAR, must be filed.
A Two-Trigger Test
Under the proposal, reporting issuers would only be required to file a BAR where two of the three existing significance tests set out in National Instrument 51-102 – Continuous Disclosure Obligations (NI 51-102) are triggered using an increased significance threshold of 30%. This so-called “two-trigger test” is the outcome of the CSA’s consideration of consultation feedback and an analysis of BARs filed and relief granted over a historical three-year period.
Currently, reporting issuers are required to file a BAR following the completion of a “significant acquisition”. An acquisition is considered to be significant where the result of any one of the three significance tests set out in NI 51-102 exceeds 20% (and in the case of a venture issuer, 100%). If a BAR is to be filed, it must include two years of comparative financial information for the acquired business (one year of which must be audited), as well as pro forma financial statements for the combined business, among other things.
Significant Benefits of the Proposed Amendments
The current BAR rules may limit reporting issuers in their ability to access Canadian capital markets, pursue acquisitions and raise acquisition financing. Experience has shown that it is often the case that an acquired business’ historical financial statements are not readily available, often requiring an issuer to incur additional costs, or, in appropriate circumstances, seek exemptive relief from the BAR requirements. Additionally, the current significance tests may overstate the significance of an acquisition from a practical, commercial, business or financial perspective, making the related disclosure confusing and less beneficial to investors, and ultimately not worth the time and cost to prepare. In its proposal, the CSA acknowledge these concerns noting that the BAR requirements may impose a burden on reporting issuers that is not coupled with an equal benefit to investors.
Accompanying the CSA’s request for comments, the Ontario Securities Commission (OSC) has published a qualitative and quantitative analysis of the anticipated costs and benefits of the proposed amendments. Notably, this analysis indicates that the adoption of the proposed amendments would result in significant cost savings for issuers. The OSC estimates that:
- The total cost reduction resulting from a decrease in BAR related exemptive relief applications that would be filed on an annual basis would equal between $71,370 and $93,850; and
- The total cost reduction resulting from a decrease in the number of BARs that would be filed on an annual basis would equal between $1,577,880 and $1,620,000.
In addition to direct economic impacts, the proposed amendments may also reduce issuers’ burdens in undertaking prospectus offerings, including initial public offerings, as the BAR requirements and significance tests form part of the prospectus requirements where an issuer has completed or will likely complete an acquisition and a BAR has yet to be filed.
Venture and Investment Fund Issuers
The significance threshold for ventures issuers will not be affected by the proposed amendments. Venture issuers are not required to apply the “profit or loss test” in determining whether an acquisition is significant and, since June 30, 2015, the significance threshold for venture issuers has been 100%. The same increased threshold has applied to prospectus disclosure of significant acquisitions as well as the “prospectus level disclosure” that is required for information circulars. Similarly, the proposed amendments will not impact investment fund issuers who are not required to comply with NI 51-102 generally.
The CSA is accepting comments on the proposed amendments until December 4, 2019. For further information, please see CSA Notice and Request for Comment Proposed Amendments to National Instrument 51-102 Continuous Disclosure Obligations and Changes to Certain Policies related to the Business Acquisition Report Requirements.