ACQUISITION OR INCREASE OF A SIGNIFICANT INTEREST* IN, AND/OR ACQUISITION OF CONTROL** OF, A FEDERALLY REGULATED ENTITY***

Document Properties

  • Type of Publication: Transaction Instructions
  • Revised: May 2013
  • Index A No: 23
  • Category: Non Deemed Approval

*Please see section 8 of the BA, the TLCA and the ICA, and section 9 of the CCAA.

**Please see subsection 3(1) of the BA, the TLCA, the ICA and the CCAA.

***A bank, a federally regulated trust, loan, insurance, bank holding or insurance holding company, or a federally regulated fraternal benefit or cooperative credit society.

Legislative Authorities

Information Requirements

Review by Other Federal Agencies

  1. Where an application is subject to a review under the Competition Act and/or the Investment Canada Act, the applicantFootnote 1 is expected to provide the views of the agencies responsible for administering those statutes, in regards to the proposed transaction.

Incorporation

  1. Where an application has been made for letters patent incorporating a new federally regulated entity (FRE) and a person will acquire a significant interest in, and/or control of, the FRE, the applicant should refer to the OSFI Guide for Incorporating Banks and Federally Regulated Trust and Loan Companies, or Guide for Incorporating Federally Regulated Insurance Companies, as appropriate. These documents identify the information requirements and assessment criteria in respect of an application for the incorporation and the commencement of operations of an FRE, and the procedures to be followed in making that application.

Basic information requirements - Applications for acquiring or increasing a significant interest in, and/or acquiring control of, an FRE

The applicant is generally expected to provide, as applicable:

  1. the name of the applicant;
  2. the name of the jurisdiction and date of incorporation or establishment of the applicant;
  3. the address of the principal place of business and head office of the applicant;
  4. a certified copy of the constating documents and current company by-laws of the applicant;
  5. a summary of the proposed transaction or series of transactions (both referred to as the proposed transaction) that would cause the applicant to acquire or increase a significant interest in, and/or acquire control of, the FRE, including:
    1. the rationale for the transaction,
    2. the amount and type of consideration, including details on how the transaction will be funded,
    3. a description of all agreements that would give effect to the transaction, including the names of parties involved, and
    4. the details of the ownership interests proposed to be acquired by the applicant;
  6. details of any existing business relationship between the applicant and the FRE;
  7. the current organization chart (with percentages owned) of the applicant’s corporate group, including entities in which the applicant beneficially owns 10% or more of the voting rights (indicate by an asterisk whether any of the entities shown on the chart operate in Canada, and provide a summary of these operations);
  8. a revised organization chart showing the effect of the proposed transaction and depicting the amount(s) (with percentages owned) of all ownership interests in the FRE;
  9. details regarding any voting agreement or other similar arrangements that involve persons exercising direct or indirect control over the applicant;
  10. the names of all persons owning more than 10% of any class of shares or ownership interests in the applicant, and the percentage of shares or ownership interests held (to the extent not already shown in the organization chart referred to in paragraph 9 above);
  11. details of any shares or ownership interests of the applicant that are held by a government or a political subdivision, an agent or agency thereof, together with a summary of its involvement in the operation and affairs of the applicant;Footnote 2
  12. a summary of the financial services and other key activities carried on by the applicant and its affiliates (other than the FRE), including a list of jurisdictions in which they operate and the nature and degree of regulatory oversight applicable to the financial services activities;
  13. if the applicant is a foreign-owned financial institution:
    • the name and contact information of an individual from the applicant’s home regulator that is familiar with the applicant’s activities,
    • confirmation that the applicant’s home regulator is aware of the applicant’s intention to acquire or increase a significant interest in, and/or acquire control of, the FRE, details regarding whether the applicant requires regulatory approval from its home regulator to do so, and if so, confirmation that any such approval has been obtained,
    • information on whether, and in what manner, the applicant is subject to comprehensive consolidated supervision and regulation by its home regulator, and
    • a report of the examination in respect of the applicant, issued by its home regulator, if available, or confirmation from the applicant’s home regulator that it reports favourably on the applicant;
  14. if the applicant is another FRE, pro-forma calculations showing the impact of the proposed transaction on the applicant’s balance sheet, income statements and regulatory capital ratios;
  15. a copy of the most recent annual report of the applicant;
  16. the audited consolidated financial statements of the applicant for the last three years (balance sheet, income statement, statement of changes in shareholders’ equity);
  17. details of whether the applicant (and any of its affiliates that are not also applicants) has been the subject of any criminal proceedings or administrative sanctions;
  18. if the applicant is an individual, a completed OSFI Security Information Form (XLS, 165 kB);Footnote 3 and
  19. a certified copy of a resolution of the board of directors of the applicant approving the proposed transaction that would cause the applicant to have or increase a significant interest in, and/or control of, the FRE.

Additional information requirements - Applications for acquiring control of an FRE

In addition to the Information Requirements outlined in paragraphs 3 to 21 above, where a proposed transaction will result in the applicant controlling the FRE (excluding where there will be no change to the ultimate controlling person), the applicant is also generally expected to provide:

  1. a copy of the most recent report on the applicant issued by a recognized credit rating agency, if available;
  2. details of whether the applicant (and any of its affiliates that are not also applicants) has been denied a request to establish a financial institution or a branch;
  3. if the applicant is a foreign entity, a comparison between the accounting standards used to complete the applicant’s financial statements and the Canadian generally accepted accounting principles;
  4. details in support of the applicant’s capacity to provide continuing financial, managerial and operational support to the FRE, including:
    1. if the applicant is, or controls, a regulated financial institution, confirmation that the institution meets the minimum capital requirements in its home jurisdiction,Footnote 4 and
    2. if the applicant is not a regulated financial institution, a list of its corporate group’s principal competitors, the key financial metrics for the group’s industry (e.g., return on equity, debt to equity) and, for each metric identified, the industry average in each of the past 5 years and the group’s performance against the average;
  5. if the applicant is an individual:
    1. a curriculum vitae, and
    2. information that demonstrates that the applicant has, or has access to, the necessary resources to provide on-going financial support to the FRE;
  6. a detailed description of any proposed changes regarding the FRE’s material outsourcing arrangementsFootnote 5 and any changes that the applicant proposes to make to the FRE, including changes to:
    1. the board of directors and/or senior management of the FRE, including a completed OSFI Security Information Form (XLS, 165 kB)Footnote 6 for each of those individuals,
    2. the policies and procedures of the FRE regarding its approach to risk management, including those pertaining to permissible risk exposures, the delegation of authorities and responsibilities, and the processes for identifying, monitoring and managing risks, and
    3. the business plan of the FRE, and if the proposed changes are material, a revised three-year business plan with relevant assumptions including, for each year, a balance sheet, income statement, and detailed capital position confirming compliance with OSFI’s capital requirements; and
  7. an acknowledgement of the Support PrincipleFootnote 7

Administrative Guidance

Multiple Applicants

  1. Where the acquisition will result in more than one person acquiring or increasing a significant interest in, and/or acquiring control of, an FRE (through a control chain relationship), any one of those persons may submit the application for approval on behalf of all others. That person is expected to:
    1. provide the complete legal name of all persons who will be acquiring or increasing a significant interest in, and/or acquiring control of, the FRE; and
    2. contact OSFI to discuss whether all other Information Requirements outlined in this Transaction Instruction should be provided in respect of each applicant.

Acquisitions of Control

  1. The Minister’s approval is required to acquire control in fact of an FRE. Generally, if a person acquires legal control of an FRE, OSFI assumes that the person also acquires control in fact of the FRE. As a result, where an acquisition of shares of an FRE will cause the person to acquire legal control of the FRE, the approval will generally be in respect of the acquisition of both significant interest and control. Where a person has been granted an approval to acquire a significant interest in a class of shares of an FRE and the person also has legal control of the FRE, the person may subsequently acquire additional shares of the FRE without further approval.Footnote 8

OSFI Security Information Forms

  1. The OSFI Security Information Form(s) must be provided to OSFI in the following two formats: (a) a signed and dated original hard-copy, and (b) an electronic version in Excel format. Once OSFI receives the completed forms, they are then forwarded to the relevant Canadian law enforcement and intelligence agencies to carry out the requisite background and security assessments. Please note that the time required by law enforcement and intelligence agencies to complete these assessments is not within OSFI’s control, and the Superintendent will generally not seek the Minister’s approval until these assessments are completed without issue. As such, applicants are strongly encouraged to remit the completed OSFI Security Information Form(s) at the earliest possible stage in the application.

Ministerial Considerations

  1. OSFI will review an application with a view to ascertaining whether the criteria related to the Ministerial approval have been met.Footnote 9 In this regard, and prior to recommending that the Minister grant an approval, the primary emphasis of OSFI’s review will focus on determining whether the following broad considerations – which are further informed by the Information Requirements set out above – have been satisfied:
    1. the applicant has sufficient resources to provide continuing financial support to the FRE;
    2. the applicant’s business record and experience is appropriate;
    3. the applicant is of good character and integrity and has a good reputation;
    4. any concerns raised by the application relative to Canada’s national security, international relations and international legal obligations are addressed;Footnote 10
    5. the proposed changes to the FRE's business plan are sound and feasible;
    6. the prospective new managers and directors of the FRE have the necessary experience and competence to fulfill their roles;
    7. any integration of the applicant's businesses and operations with those of the FRE is appropriate for the FRE;
    8. any supervisability concerns presented by the proposed ownership structure of the FRE are addressed;
    9. any legislative compliance or public policy issues raised by the application are addressed; and
    10. the applicant’s acquisition or increase of a significant interest in, and/or acquisition of control of, the FRE, will be in the best interests of the financial system in Canada.

Non-WTO Member Applicants

  1. If the applicant is a non-WTO Member foreign bank or foreign institutionFootnote 11, OSFI may request additional information demonstrating that treatment as favourable for FREs exists or will be provided in the jurisdiction in which the applicant principally carries on business, either directly or through a subsidiary.Footnote 12

Part XII of the BA

  1. Where the applicant acquires control or becomes a major ownerFootnote 13 of an FRE, the applicant and its affiliates will, if they are entities referred to in section 508 of the BA, have a financial establishment in Canada (where the group does not already have such an establishment) for purposes of Part XII of the BA.Footnote 14 In such circumstances, the applicant and its affiliates become subject to an operating framework in Canada that is substantively equivalent to the one applicable to Canadian banks in certain areas, such as substantial investments.

Non-Eligible Applicants

  1. The FRE statutes provide that an FRE is generally prohibited from recording in its securities register a transfer or issue of any share of the FRE to:
    1. Her Majesty in right of Canada or of a province or any agent or agency of Her Majesty in either of those rights; or
    2. the government of a foreign country or any political subdivision of a foreign country, or any agent or agency of a foreign government.Footnote 15
  2. An issuance of shares to an eligible agentFootnote 16 (subject to the Minister’s approval), and a transfer or issuance of shares to a foreign institution controlled by a person referred to in (b) of paragraph 7 above, is exempt from the general prohibition described in that paragraph.
  3. The BA also provides that no person may control or be a major shareholderFootnote 17 of a bank or bank holding company if the person, or any of its affiliates:
    1. engages in Canada in any personal property leasing activity in which a bank is not permitted to engage; or
    2. has control, or a substantial investment in any entity that engages in Canada in any personal property leasing activity in which a bank is not permitted to engage.Footnote 18

Supervision and Regulation (Supervisability)

  1. In all applications involving a proposed change in the ultimate parent of an FRE, the Superintendent will assess OSFI’s ability to supervise, examine and regulate the FRE effectively. This assessment will entail an examination of the proposed corporate structure. Where appropriate, the Superintendent may consider whether the proposed structure would hinder effective implementation of corrective measures in the future.
  2. The Superintendent will generally consider the following factors in assessing the level of risk posed by the proposed corporate structure and its impact on OSFI’s ability to effectively supervise and regulate the FRE:
    1. the activities in which the FRE engages, including any changes that the applicant proposes to make in respect of these activities;
    2. the systemic importance of the FRE, including the absolute size or role of the FRE, relative to the Canadian financial sector;
    3. the predominant nature of the applicant’s group-wide financial activities, including the extent of the financial services activities of the applicant’s group, having regard to:
      1. the complexity of the corporate structure of the group,
      2. the strategic direction of the group or the nature of the planned financial services of the group,
      3. the potential for prudential concerns (e.g., contagion, connected lending among members of the group),
      4. the size of the FRE relative to the group,
      5. the existence and extent of financial services activities carried on by the group in other jurisdictions, and
      6. the branding to be used by the FRE and the extent to which it differs from the branding used in respect of the other activities of the group;
    4. the extent to which the FRE will be an independent and self-sustaining operation with the authority to make decisions independent of the group, having regard to:
      1. the extent to which the FRE’s directors will be independent from the boards of the other entities in the group, and
      2. the extent of the involvement, if any, of the FRE’s management in the business and affairs of the other entities in the group; and
    5. the extent to which affiliates within the corporate group are supervised by Basel Accord signatories, or other regulatory agencies with whom OSFI has concluded a Memorandum of Understanding pertaining to regulatory co-operation and to supervision of these affiliates.
  3. There are various ways that supervisory concerns arising out of corporate structures could be addressed. One possibility would be for applicants to undertake to restructure and consolidate (existing and/or planned) financial services activities in or under the FRE or under a Canadian regulated holding company, where appropriate. Another possibility would be for an applicant to address such concerns through an undertaking to OSFI that restricts certain activities of the corporate group.

No Service Charge

  1. Requests for approval(s) that are addressed in this document are not subject to a service charge.Footnote19

Revisions to this Transaction Instruction

  1. Please note that the May 2013 revisions to this Transaction Instruction reflect OSFI’s expectations and practices as at December 31, 2012. As these expectations and practices continue to evolve, this document will be updated when and as needed.

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

For the purpose of this Transaction Instruction, any reference to applicant generally includes any entity or individual who would acquire or increase a significant interest in, and/or acquire control of, the federally regulated entity.  Please see also paragraph 1 of the Administrative Guidance below.

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Footnote 2

Please see paragraph 7 of the Administrative Guidance below.

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Footnote 3

Please see paragraph 3 of the Administrative Guidance below.

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Footnote 4

Please note that, in certain circumstances, OSFI may request that the applicant provide information that demonstrates that the institution meets the minimum capital requirements in both its home jurisdiction and in Canada.

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Footnote 5

Please see OSFI Guideline B-10 on Outsourcing of Business Activities, Functions and Processes.

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Footnote 6

Please see paragraph 3 of the Administrative Guidance below.

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Footnote 7

The Support Principle that the applicant is expected to acknowledge will be provided by OSFI.

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Footnote 8

Please see paragraphs 383(1)(b) and 891(1)(b) of the BA, 378(1)(b) of the TLCA, 410(1)(b) and  937(1)(b) of the ICA, and 357(1)(b) of the CCAA.

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Footnote 9

Please see subsections 396(1) and 906(1) of the BA, 388(1) of the TLCA, 420(1) and 947(1) of the ICA, and 358.1 of the CCAA.

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Footnote 10

Please see subsections 973.01(1) of the BA, 527.3(1) of the TLCA, 1016.1(1) of the ICA, and 459.3(1) of the CCAA.

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Footnote 11

Please see section 2 of the BA for the definition of “non-WTO Member foreign bank”, and section 2 of the TLCA and the ICA for the definition of “non-WTO member foreign institution”.

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Footnote 12

Please see subsections 396(3) and 906(3) of the BA, 388(2) of the TLCA, and 420(2) and 947(3) of the ICA.

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Footnote 13

Please see subsections 507(9) and (10) of the BA.

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Footnote 14

Please see paragraphs 507(15)(d) and 507(16)(d) of the BA.

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Footnote 18

Please see subsections 401.2(1) and 913(1) of the BA, 396(1) of the TLCA, and 428(1) and 954(1) of the ICA.

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Footnote 16

Please see sections 370(1) and 873 of the BA, 374.1 of the TLCA, and 406.1 and 926 of the ICA.

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Footnote 17

A person is a major shareholder of a bank where the person directly or indirectly owns more than 20% of the voting shares, or 30% of the non-voting shares, of the bank.

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Footnote 18

Please see sections 378.1, 378.2, 885 and 886 of the BA.

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Footnote 19

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

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