ASSET TRANSACTION GREATER THAN 10% OF ASSETS

Document Properties

  • Type of Publication: Transaction Instructions
  • Revised: May 2013
  • Index DA No: 18
  • Category: Deemed Approval

Legislative Authorities

Information Requirements

The applicant is generally expected to provide:

  1. a description of the transaction or series of transactions (the “transaction”), including:

    1. the rationale for the transaction (e.g., in the normal course of business or as part of, or in the course of, a restructuring),
    2. the type of asset or assets (“asset”) involved,
    3. the names of the parties to the transaction and, if applicable, a description of the nature of the applicant’s affiliation with any of them,
    4. in the case of an acquisition of an asset, a description of the consideration to be paid by the applicant or its subsidiary, including the terms of payment, and
    5. in the case of a transfer of an asset, a description of the consideration to be received by the applicant or its subsidiary, including the terms of payment, and the use or the proposed use of the proceeds;
  2. a breakdown of each element of the formula set out in the applicable Legislative Authority, demonstrating that the value of the transaction exceeds the 10 per cent threshold set out in the formula;

  3. a description of the impact the transaction will have on the applicant’s current business strategy and, if the transaction will result in a material impact, a revised business strategy; and

  4. an analysis of the effect the transaction will have on the financial position and risk profile of the applicant, including:

    1. a comparative pro forma balance sheet (pre- and post-transaction) including relevant assumptions,
    2. a comparative pro forma capital position (pre- and post-transaction) that confirms compliance with the applicant’s internal capital target and with OSFI’s requirements applicable to the applicant, together with relevant assumptions, and in the case of:
      1. a deposit-taking institution, a breakdown of all elements used to calculate the Capital Adequacy Requirements, including the risk-based Tier 1 capital ratio, the risk-based total capital ratio and the assets to capital multiple,
      2. a life insurance company or fraternal benefit society, a breakdown of all elements used to calculate the Minimum Continuing Capital and Surplus Requirements, including the Tier 1 capital and total capital required, or
      3. a property and casualty insurance company, details of the Minimum Capital Test or the Mortgage Insurer Capital Adequacy Test, as applicable,
    3. a confirmation that, following the transaction, the applicant will be in compliance with its liquidity policy, and
    4. a revised internal solvency assessment process document (for example, ICAAP or FCT), including a summary of anticipated material impacts of the proposed acquisition on the applicant.

Administrative Guidance

  1. Most transactions that federally regulated entities and their subsidiaries (collectively referredto as an “FRE”) enter into involve some form of acquisition or transfer of an asset. However,OSFI is of the view that the words “acquire assets” and “transfer assets” in the provisions setout in the Legislative Authority generally refer to:

    1. the purchase of assets and the sale of assets by an FRE (collectively referred to as “Purchase and Sale Transactions”); and
    2. the acquisition of assets and the transfer of assets in connection with the purchase and sale, respectively, by an FRE of a business or a line of business (e.g., in connection with the FRE assuming deposit, policy or other liabilities of, or ceding its liabilities to, another person) (collectively referred to as “Business Transactions”).

    Examples of Purchase and Sale Transactions include the acquisition of property by the FRE in return for the issuance of its shares, and the acquisition or transfer by the FRE of:

    1. shares or other ownership interestsFootnote1;
    2. debt obligations on the secondary market;
    3. real property; and
    4. receivables, including the acquisition or transfer of receivables by an FRE from or to a pool of securitized receivables originated by the FRE, in return for a decrease or an increase, as the case may be, of the FRE’s co-ownership interest in the pool.

    Examples of Business Transactions include the FRE entering into an assumption reinsurance arrangement and selling part of a branch network to another FRE.

  2. Transactions that are not Purchase and Sale Transactions or Business Transactions, and therefore that do not count toward the 10% threshold under the provisions set out in the Legislative Authorities, include services provided or purchased by an FRE (collectively referred to as “Service Transactions”) and transactions relating to an FRE’s capital (collectively referred to as “Capital Transactions”).

    Examples of Service Transactions include the FRE:

    1. accepting deposits;
    2. clearing and settling payments;
    3. making loans, extending credit and acquiring debt obligations on the primary market;
    4. exchanging foreign currency;
    5. insuring risks; and
    6. reinsuring risks on an indemnity basis, except where this transaction is a Business Transaction (e.g., where 100% of the risks of a business or a line of business are reinsured and the reinsurer undertakes to “service” the related policies).

    Examples of Capital Transactions include the FRE:

    1. issuing its shares for cash consideration;
    2. paying dividends;
    3. redeeming its shares or purchasing its shares for the purpose of their cancellation;
    4. reducing its stated capital; and
    5. distributing its remaining property on its dissolution.
  3. The provisions set out in the Legislative Authorities exempt certain assets from the calculation and application of the 10% threshold. The enumerated exempt assets include, among others, assets that are frequently traded and easily valued, such as government securities and money market instruments, and shares of, or ownership interest in, an entity for which approval of the Minister or Superintendent is required under the substantial investment rulesFootnote2. The assets of a segregated fund maintained by an FRE that is an insurance company or a fraternal benefit society are also exempt from the calculation and application of the 10% thresholdFootnote3.

  4. Paragraph 6(1)(c) of the National Housing Act generally provides that an FRE that is designated as an approved lender by the Canada Mortgage and Housing Corporation (“CMHC”) may, notwithstanding any restrictions on the power of the FRE contained in any other statute, dispose of or acquire loans insured by CMHC together with the security taken in respect of those loans. The effect of this provision is that while the disposal or acquisition of such insured loans by an FRE that is designated as an approved lender counts toward the 10% threshold, the FRE may proceed with such transaction without approval under the provisions set out in the Legislative Authorities.

  5. The provisions set out in the Legislative Authorities apply to acquisitions and transfers between an FRE and any single “person” over a rolling twelve month period. For greater certainty, acquisitions and transfers between a federally regulated entity and any of its subsidiaries, as well as those between the subsidiaries of a federally regulated entity, are subject to these provisions. For example, if a federally regulated entity acquires, for cash, shares issued from treasury by its subsidiary, this would constitute a Purchase and Sale Transaction from the federally regulated entity’s standpoint and a Capital Transaction from the subsidiary’s standpoint.

  6. In making the calculation of the 10% threshold, the FRE should not double count. For example, the acquisition of real estate valued at $400,000 by the FRE in return for a $400,000 cash payment should count as $400,000 towards the calculation and not $800,000.

  7. When assessing an application, OSFI will generally:

    1. take into account the impact of the transaction on the applicant’s asset mix, capital, income, liquidity position, and risk profile:
      1. in the case of a federally regulated financial institution, to ensure that the overall solvency of the applicant will not be unduly threatened, or
      2. in the case of a bank or insurance holding company, to ensure that the applicant will continue to be able to provide adequate financial support to its federally regulated financial institution subsidiary; and
    2. assess the soundness and feasibility of the applicant’s revised business strategy if the transaction will result in a material change to that strategy.
  8. Transactions with related parties are also subject to the self-dealing rules. Asset transactions that are subject to the Superintendent’s approval under the self-dealing rules are exempted from the calculation and application of the 10% threshold.Footnote4

  9. Where the FRE’s business plan contemplates a series of transactions with a single person over any 12-month period that would cause the FRE to cross the 10% threshold, the FRE may request a blanket approval from the Superintendent in respect of such transactions.Footnote5

  10. The Superintendent may consider whether the proposed transaction would hinder the effective implementation of corrective measures in the future, and may request information to that effect.

  11. Requests for approval(s) that are addressed in this document are not subject to a service charge.Footnote6

The information requirements and administrative guidance are intended to satisfy typical applications. They have been derived from OSFI’s experience in assessing applications. Applicants who provide all information and material requested can generally expect a more timely assessment of their applications. As appropriate to the circumstances, OSFI may request additional information, take into account other matters, impose terms and conditions, or require undertakings.

Footnotes

Footnote 1

Acquisitions of shares of, or ownership interests in, an entity for which approval of the Minister is required under the ownership regime, or for which approval of the Minister or the Superintendent is required under the substantial investment rules, are exempted from the calculation and application of the 10% threshold: see paragraphs 482(2)(h) and 944(3)(a) of the Bank Act; paragraph 470(2)(d) of the Trust and Loan Companies Act; paragraphs 512(2)(d), 569(3)(b) and 987(3)(a) of the Insurance Companies Act; and paragraph 406(3)(d) of the Cooperative Credit Associations Act.

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Footnote 2

See subsections 482(2) and 944(2) and (3) of the Bank Act, subsection 470(2) of the Trust and Loan Companies Act, subsections 512(2), 569(2) and (3), and 987(2) and (3) of the Insurance Companies Act, and subsections 406(2) and (3) of the Cooperative Credit Associations Act. See also the Exempt Debt Obligation Transactions (Banks and Bank Holding Companies) Regulations under the Bank Act.

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Footnote 3

See paragraphs 490(3)(a) and 550(c) of the Insurance Companies Act.

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Footnote 4

See paragraphs 482(2)(j) and (k) of the Bank Act, paragraphs 470(2)(f) and (g) of the Trust and Loan Companies Act, paragraphs 512(2)(f) and (g) of the Insurance Companies Act, and paragraphs 406(3)(e) and (f) of the Cooperative Credit Associations Act.

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Footnote 5

See subsections 482(1.1) and 944(1.1) of the Bank Act, subsection 470(1.1) of the Trust and Loan Companies Act, subsections 512(1.1), 569(1.1) and 987(1.1) of the Insurance Companies Act, and subsection 406(1.1) of the Cooperative Credit Associations Act.

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Footnote 6

Please see Charges for Services Provided by the Office of the Superintendent of Financial Institutions Regulations 2002.

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