Business Is Business, But Some Acquired Businesses Are More Primary Than Others

In a welcome development, the Canadian Securities Administrators (CSA) has harmonized and updated its approach to interpreting the financial statement requirements in respect of an issuer’s “primary business” (Primary Business Requirements) in a long-form prospectus within the context of an initial public offering (IPO).

For background on this development, see our August 2021 Blakes Bulletin: CSA Revisits Primary Business Financial Disclosure Expectations.

AMENDMENTS AND THEIR PURPOSE

The rules and form requirements applicable to an IPO prospectus remain the same. However, the CSA amended Companion Policy 41-101CP to replace the existing regulatory commentary concerning when a reasonable investor would regard an acquired business to be the primary business of the issuer. The CSA has also withdrawn related outstanding guidance concerning the Primary Business Requirements. These changes (collectively, the Amendments) took effect on April 14, 2022.

The Amendments have been implemented to reduce the regulatory burden resulting from uncertainty about the interpretation of the Primary Business Requirements, without compromising investor protection.

REQUIREMENTS

An existing reporting issuer (i.e., a Canadian public company) undertaking a prospectus offering is required to include in its prospectus the financial statement disclosure of a “significant” business it has recently acquired or is undertaking to acquire. The financial statement disclosure must comply with the business acquisition report requirements under Canadian securities laws (BAR Requirements) (see our August 2020 Blakes Bulletin: The BAR Will Be Raised: CSA Increases Business Acquisition Report Triggers and Thresholds). Generally, this means providing the following in respect of the acquired business:

• Audited financial statements covering the most recently completed financial year

• Unaudited financial statements for the second most recently completed financial year, the most recently completed interim period and the comparable interim period in the prior year, and

• Applicable pro forma financial statements

However, pursuant to the Primary Business Requirements, the IPO prospectus must include the more onerous “issuer”-level financial statements in respect of the acquisition under certain circumstances. For example, this would apply if the issuer were filing a prospectus in connection with its IPO and had completed an acquisition of a business within its three most recently completed financial years. It would also apply if the issuer were undertaking a probable acquisition of a business and a reasonable investor would regard the acquisition of such business as the primary business of the issuer. Generally, this means providing the following in respect of the acquired business:

• Audited financial statements for the business covering each of the three most recently completed financial years

• Unaudited financial statements of the most recently completed interim period and the comparable interim period in the prior year, and

• In certain cases, applicable pro forma financial statements, if necessary for the prospectus to contain full, true and plain disclosure of all material facts concerning the offered securities

NEW GUIDANCE

The Amendments introduce new commentary clarifying the CSA’s position as to when a reasonable investor would regard a business that has been acquired, or is proposed to be acquired by an issuer, to be the primary business of the issuer. Pursuant to this new commentary, an IPO prospectus for an issuer that has completed an acquisition within its three most recently completed financial years or is undertaking a probable acquisition of a business will need to include:

• “Issuer”-level financial statements in respect of the acquisition if the acquisition:

  • Exceeds the 100 per cent threshold for any of the significance tests calculated under the BAR Requirements

  • Fundamentally changes the primary business of the issuer, as disclosed in the prospectus, or

  • A reasonable investor would otherwise regard the primary business of the issuer to be the acquired business or related businesses

• BAR-level financial statements in respect of the acquisition if the acquisition exceeds the 30 per cent threshold for any two or more of the significance tests calculated under the BAR Requirements, or

• In certain exceptional scenarios, such additional (financial) disclosure concerning the acquisition as may be necessary for the IPO prospectus to contain full, true and plain disclosure of all material facts relating to the securities being distributed, which may include:

  • Property or business valuation reports

  • Forecasted cash-flow information, and/or

  • Additional disclosure about the acquired business, such as key financial information that explains the financial performance and operations of that business prior to its acquisition

One important caveat to the foregoing applies where an issuer has not existed for long enough to have completed three financial years. In such cases, the issuer will be required to provide “issuer”-level historical financial statements of each predecessor entity that forms or will form the basis of the business of the issuer. For example, a real estate investment trust that has been recently formed for the purpose of acquiring an initial portfolio of properties. Even though these properties (as businesses) could be probable acquisitions, they will be considered to be predecessors of the issuer since it has not completed three financial years, and therefore, the Primary Business Requirements would not apply.
 
Helpfully, the Amendments include several detailed examples for consideration.
 
For further information, please contact:

Matthew Merkley       416-863-3328
Jacob Gofman            416-863-3334
Jeremy Ozier              416-863-5824
Alyssa Moses             416-863-2482

or any other member of our Capital Markets group.