CSA Revisits Primary Business Financial Disclosure Expectations

The Canadian Securities Administrators (CSA) has released a notice and request for comment (Notice) proposing clarifications to primary business financial disclosure expectations. The purpose is to harmonize, across CSA jurisdictions, the interpretation of the financial statement requirements in respect of an issuer’s “primary business” in a long form prospectus and highlight the requisite disclosure of historical financial information for an acquired business within the context of an initial public offering (IPO).

CONTEXT

The Notice has been published in furtherance of the CSA’s burden reduction project (see our May 2017 Blakes Bulletin: Canadian Securities Administrators Seek to Reduce Regulatory Burdens for Reporting Issuers and our April 2018 Blakes Bulletin: CSA Announce Policy Projects to Reduce Regulatory Burden for Public Companies), as well as the OSC’s separate, but complementary, burden-reduction project (see our November 2019 Blakes Bulletin: Burden Reduction: OSC Addresses 199 Problems).

BACKGROUND

Long form prospectuses (including for IPOs) are required to include certain financial statements of the issuer and for any business or businesses acquired, or proposed to be acquired, if a reasonable investor reading the prospectus would regard the primary business of the issuer to be the business or businesses acquired, or proposed to be acquired (collectively, the Primary Business Requirements).

The purpose of the Primary Business Requirements has been to provide investors with three years (non-venture issuer) or two years (IPO venture issuer) of annual financial statements (plus any applicable interims) of the business an investor is investing in, even if this financial history spanned multiple legal entities over the relevant time period.

For example, if a non-venture issuer (Issuer A) was formed in 2015, has a December 31 year-end and was filing a long form prospectus for its IPO in April 2021, the prospectus would be required to include annual financial statements of Issuer A for the years ended December 31, 2018, 2019 and 2020. In addition, if Issuer A acquired a business from Vendor B in September 2019, which a reasonable investor reading the prospectus would regard as comprising part of the primary business of Issuer A, then financial statements must also be included in the prospectus for the period of Vendor B’s ownership of the business from January 1, 2018, until the date of acquisition by Issuer A in September 2019.

Published commentary from the Ontario Securities Commission (OSC) has provided that there is generally no significance test for determining the requisite disclosure for such acquisitions. The only exception is if the business is over 100 per cent when compared to the primary business of the issuer. In this case, it is important for investors to have the financial history of this business even though it is not the same as that of the primary business of the issuer.

Accordingly, even if the business was acquired from Vendor B on January 2, 2018, and represented only one per cent of the assets or pre-tax net income of Issuer A, Issuer A would still be required to include financial statements in the prospectus for the period of Vendor B’s ownership of the business (i.e., one day). However, Issuer A could seek exemptive relief on a discretionary basis from the applicable CSA member through a formal application process.

In practice, when a prospective non-venture IPO issuer has made acquisitions in the three financial years preceding the IPO prospectus filing, the issuer and its advisors will often consult with CSA staff to ascertain what historical financial statements must be included in the prospectus and confirm whether one or more of the acquired businesses comprised part of the primary business of the issuer. However, the CSA acknowledges that sometimes such discussions result in inconsistent interpretations that add time, cost and uncertainty for issuers.

The proposed changes in the Notice aim to reduce the regulatory burden resulting from uncertainty about the interpretation of the Primary Business Requirements, without compromising investor protection.

PROPOSED NEW GUIDANCE

While the rules in National Instrument 41-101 and the form requirements in Form 41-101F1 will remain the same, the CSA is proposing to replace the existing regulatory commentary on the Primary Business Requirements by amending Companion Policy 41-101CP.

A key aspect of this new guidance is providing clarity as to when the Primary Business Requirements require the inclusion of financial statements in long form prospectuses for acquisitions by making reference to the existing significance tests that trigger business acquisition report filing 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).

In particular, the Notice provides the following examples of when a reasonable investor would regard the acquired business to be the primary business of the issuer, thereby triggering the Primary Business Requirements:

• An acquisition that exceeds the 100 per cent significance threshold calculated under the BAR Requirements (failing which, the BAR Requirements must be followed, where applicable)

• An acquisition that is less than the 100 per cent significance threshold calculated under the BAR Requirements but still changes the primary business of the issuer, as disclosed in the prospectus

• A reverse take-over

• A qualifying transaction for a capital pool company under the policies of the TSX Venture Exchange, or

• A qualifying acquisition or qualification transaction by a special purpose acquisition corporation under the policies of a recognized exchange

Despite this guidance, issuers still need to consider the facts of each situation, including the facts of the business acquired or proposed to be acquired, and determine whether a reasonable investor would regard the primary business of the issuer to be the acquired business or related businesses.
 
The CSA also reminds issuers that for securities legislation purposes, an acquisition may constitute an acquisition of a business even if the acquired set of activities or assets does not meet the definition of a “business” for accounting purposes.
 
In addition, the disclosure in the prospectus, including financial statements and applicable management discussions and analyses, must satisfy the requirement that the long form prospectus contains full, true and plain disclosure of all material facts relating to the securities being distributed.
 
The CSA has indicated that the types of additional financial information that might be necessary will vary on a case-by-case basis. These include property or business valuation reports, forecasted cash flow information and additional disclosure about an acquired business, such as key financial information. Helpfully, the Notice includes several detailed examples for consideration.
 
In addition to long form prospectuses, the CSA’s guidance in the Notice also applies to other instances where the Primary Business Requirements are relevant. An example of this would be where securities legislation and/or exchange requirements require prospectus-level disclosure prepared in accordance with the long form prospectus form requirements (e.g., in an information circular relating to certain restructuring transactions).

Other Proposed Updates

Further to the Notice, the CSA are also proposing amendments to Companion Policy 41-101CP to give guidance on the following:

• When an issuer can use an optional test under the BAR Requirements to calculate the significance of an acquisition for purposes of assessing whether the acquisition is a primary business

• When and for what time periods financial statements would be required in certain circumstances

• When the CSA may require additional information to meet the requirement for full, true and plain disclosure of all material facts and the nature of that information

• When the CSA would not consider an acquisition of mining assets to be a business

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