After almost fifteen years of undisturbed reign, the Business Acquisition Report (BAR) requirements for non-venture issuers are about to be relaxed.
Proposed amendments will require that non-venture issuers file a BAR only if two of the three existing significance tests are triggered, as opposed to only one, and the triggering threshold for such significance tests will be increased from 20% to 30%.
The main objective is to eliminate any unnecessary burden on the reporting issuers and avoid the anomalous outcomes of the past, without compromising investor protection.
In 2015, the CSA had already reduced the burden on venture issuers by increasing the BAR significance test threshold from 40% to 100% and by removing requirement that BARs contain pro forma financial statements.
A Fair Compromise
The so-called “two-trigger test” is the result of a consultation process led by the Canadian Securities Administrators (CSA).
Comments received by the CSA ranged from the complete elimination of the BAR requirements to reconsidering certain aspects of the significance tests, while others indicated that the BAR contains relevant information that is not provided elsewhere.
The profit or loss test was especially criticized for often producing anomalous results when compared to the other two tests (the asset test and the investment test).
Based on the feedback received and its analysis of relevant data, the CSA chose to replace the “one-trigger test” by a “two-trigger test”. In particular, the CSA deemed the two-trigger test to be more efficient in dealing with the anomalous results than the removal of the profit and loss test or other alternatives.
Currently, a reporting issuer that is not a venture issuer must file a BAR after completing a significant acquisition if any one of the three significance tests set out in National Instrument 51-102 Continuous Disclosure Obligations (NI 51-102) exceeds 20%.
A BAR describes the transaction, the consideration paid, the source of funds and the issuer’s plans for the business, and most importantly, it includes historical financial statements for the acquired business and pro forma financial information.
The preparation of a BAR entails significant time and cost, and the information necessary to comply with the BAR requirements may, in some instances, be difficult to obtain, therefore limiting reporting issuers’ ability to access capital markets, complete acquisitions and raise financing. Notably, the targets’ historical financial statements are often not available in the requisite form and take time to prepare.
The amendments will also be a welcome change for private companies in the process of going public, as they often complete various acquisitions in the months leading to an IPO, some of which may be considered significant. The BAR requirements incorporated into the IPO prospectus rules can therefore add considerable time and cost to the IPO process.
Significant Cost Reduction
The proposed amendments are expected to result in fewer BARs being filed overall.
The analysis of BARs filed and relief granted over a historical three-year period conducted by the Ontario Securities Commission (OSC) revealed that issuers could save approximately $15 M over a ten year period if the amendments become law.
The OSC estimates that the costs incurred by an issuer for a BAR related exemptive relief application could be up to $18,770 while the costs incurred by an issuer for the filing of a BAR could be up to $67,570. Such estimates are based on average hourly rates taking into account different levels of seniority and skill of the professionals involved in each activity. However, we know that the costs for the filing of a BAR can be significantly higher, depending on the scope of the work required to prepare the historical financial statements, including, as applicable, reconciliation to Canadian GAAP measures, preparation of carve-out financial statements, and translation costs.
The CSA indicates that it will continue to monitor international regulatory developments, including those in the United States. The U.S. Securities and Exchange Commission is currently proposing to revise its disclosure requirements for financial statements relating to significant business acquisitions and dispositions in order to facilitate more timely access to capital and reduce the complexity and costs associated with such disclosure. For further information, please see Amendments to Financial Disclosures about Acquired and Disposed Businesses.
The comment period on the CSA proposed BAR amendments will close on 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.