IPOs in Canada: Getting Ready to Go Public

Overview 

Optimism is building for a rebound of the initial public offering (IPO) market in Canada. While 2023 was one of the quietest IPO years over the last three decades, more stable equity markets and rising investor confidence signal better things to come in 2024. So what should private companies keep in mind when considering going public?

An IPO is one of the most important decisions a company can make. It is also a significant undertaking, requiring months if not years to bring to fruition, and is often full of surprises, both pleasant and unpleasant. Canadian companies weighing an IPO should therefore consider what preparatory work can be completed in advance, including to ensure readiness to capitalize on favourable market timing.

To increase the chances of a successful IPO, we have, based on our experience guiding a great deal of companies that have gone public, highlighted what we consider to be: (1) critical path items that typically involve the longest lead times, and (2) other strategic and practical considerations that should be integrated into the overall IPO planning process.

For further detail, see our comprehensive guide to IPOs and Going Public in Canada addressing all other aspects of the process for obtaining a public listing in Canada, including (1) principal listing methods, (2) prospectus disclosure, (3) working with underwriters, (4) tax considerations, and (5) post-listing reporting requirements.

Critical Path Items

The following elements of the going public process typically give rise to the longest lead times. To promote a successful listing, these should be given priority by the company from the very start of IPO preparation:

1. Financial Statements and Management’s Discussion & Analysis (MD&A) Generally

Generally, the company will need to provide:

• Three full years of audited annual financial statements.
• Unaudited interims for its most recently completed interim period. 
• The comparative interim period in the immediately preceding year.
• A prescribed form of MD&A for each set of audited and interim financial statements.

These financial statements will normally need to be prepared in accordance with Canadian Generally Accepted Accounting Principles (GAAP) applicable to publicly accountable enterprises, i.e., International Financial Reporting Standards (IFRS).

Preparing an MD&A can prove quite demanding for a management team that has no prior experience with this type of report and involves a level of analysis of information and explanation of results to which they may not be accustomed in running a privately-owned business. Companies should allow sufficient lead time to avoid unexpected (and unfortunate) delays to their IPO.

2. Financial Statements for Recent and Probable Acquisitions

Another very important issue is the preparation of financial statements for recently acquired businesses and probable acquisitions. A key selling point in many IPOs is the growth record and growth prospects of the IPO candidate. As such, many companies going public will have made acquisitions prior to launching their IPO and/or have concrete acquisition proposals planned. IPO candidates must therefore be mindful of the requirements regarding the historical and pro forma financial statements and related MD&As pertaining to acquired businesses and probable acquisitions that are necessary in going public.

In particular, the three full years of audited financial statements requirement in accordance with Canadian GAAP for publicly accountable enterprises will need to include those of businesses acquired less than three years prior to the filing of the IPO prospectus if such acquired businesses can be reasonably regarded as the primary business of the issuer (which will be the case if certain materiality thresholds are met).[1]

Moreover, significant acquisitions completed since the beginning of the company’s most recently completed financial year for which financial statements are included in the IPO prospectus or probable significant acquisitions not yet completed will require the inclusion of historical financial statements of the acquired business in addition to pro forma financial statements of the combined businesses.[2] These financial statements will need to be prepared in accordance with prescribed accounting principles and standards.[3]

Preparing these documents can be surprisingly time consuming and expensive, especially if involving the acquisition of foreign private targets with financial statements that have not been prepared in accordance with the prescribed accounting principles and standards.

3. Internal Controls and Procedures

Another significant IPO workstream that must not be underestimated is the implementation of internal controls and procedures relating to financial reporting and financial disclosure that will be required by securities legislation upon going public. Instituting these controls and procedures within the company will require time and money, as well as training for existing members of the finance function and the onboarding of additional resources.

Save in limited circumstances, these internal controls will also need to cover acquired businesses. For some issuers, this may involve additional work in the IPO process.

Given that the CEO and the CFO will be required to provide annual and quarterly certification regarding internal controls and procedures, they will have a vested interest in ensuring these are properly implemented as part of the IPO process.

4. Board of Directors, Management Team & Compensation

Three other significant workstreams will need to be undertaken in connection with an IPO:

Board of Directors and Governance

A board of directors with the optimal combination of financial and operational expertise, public company experience and Canadian capital market recognition, and taking stock of diversity considerations, must be assembled.

Investors, especially institutional investors that will form the backbone of the IPO’s subscribers, will pay close attention to this component. In particular, issuers will be expected to have a detailed skills matrix identifying the range and degree of competencies possessed by each director.

The Chair of the board will typically be independent or otherwise a lead director will be required to play a counter-balance role. The board will be required to form an audit committee made up of financially literate members who are all independent, and will typically appoint a compensation and nominating/governance committee responsible for overseeing compensation and governance matters made up of independent directors entirely or in majority. A chair will be required to lead these committees.

Companies should allow sufficient time to identify and confirm the availability of suitable candidates for each role (this can be a lengthy process) and onboard them sufficiently ahead of time so they can gain all necessary knowledge about the company and get comfortable in their new role.

Management Team

The passage to being publicly-listed will also typically involve the recruitment of additional resources to the management team, including experienced personnel for the finance and communications functions. These resources should be onboarded sufficiently in advance so they can contribute to the IPO process to their fullest potential. Companies will also need to examine how diversity within management aligns with market expectations and potentially make adjustments to the team or set objectives and adopt policies in that regard.

Compensation

The compensation structure for the management team will need to be reviewed with the assistance of external compensation advisors, as share-based incentive compensation involving stock options, restricted share units and performance share units will typically form part of the compensation components for management of publicly-listed issuers. Additional legal and tax complexities may be involved for companies with management teams spread over several countries which may have specific legal constraints that need to be factored into the design of equity-based compensation schemes.

Compensation levels for board members will also need to be aligned with market comparables and board members will typically be offered the ability to receive all or a portion of their compensation in the form of deferred share units more advantageous from a tax perspective.

Finally, many issuers will also want to take advantage of their new publicly-listed status to incentivize their employees with the implementation of an employee stock purchase plan.

These compensation components require thoughtful consideration, often with the input of the contemplated members of the compensation committee of the board that will need to have been previously identified. Consequently, careful planning will be key here as well.

5. Due Diligence and Virtual Data Room

The company’s directors and underwriters will have liability for any material misstatements or omissions in the listing document unless they can rely on a “due diligence” defence.

• A comprehensive virtual data room must be established and the company must be organized to respond to additional requests from the underwriters promptly. This can be time consuming and senior management will often struggle to balance this process with their normal duties and the other major IPO workstreams (including those discussed above). Starting with a complete and well-organized data room at the outset will mitigate some of the pressure that senior management may feel during the diligence process.
• While the significance is not always apparent to companies, a slow or disorganized process can send negative signals to underwriters and investors. By contrast, a smooth, well-run process can create momentum for a successful listing.

6. Third Party Consents

The company should carefully review its material contracts to determine what consents may be required to go public, including any relevant shareholder or investor rights agreements.

• The company should also review the confidentiality obligations in its material contracts. In many cases, a public company is not able to provide the same assurances regarding confidentiality that a private company can. Often, companies need to seek waivers from major customers and suppliers in advance of the IPO and this can be a delicate process where ample time is helpful.

7. Resource Information Reports 

Companies with mineral projects or oil and gas activities must provide specialized technical disclosure required by securities regulators (NI 43-101 for mining companies and NI 51-101 for oil and gas companies).

• The preparation of this disclosure and associated technical reports is time-consuming and should be commenced as soon as possible.
• External legal counsel can conduct form check reviews of draft technical reports and help identify issues in advance that would be raised by regulators.

Other Strategic and Practical Considerations

Completing a public listing will often result in significant changes to a company’s management and capital structure. In addition to the critical path items identified above, numerous other important check list items should be integrated into the overall going public process, including the following:

1. Engage the Right Advisers

Care must be taken in engaging experienced, practical advisers with strong teamwork skills. The company’s agents, counsel, auditors, technical consultants and other advisers must form a cohesive team to achieve success. This will require not only strong expertise, but also good communication and coordination skills.

2. Agree on Company Valuation Range

Prior to starting a listing process, the company should assess and agree on its expected valuation range with its advisors and key stakeholders.

3. Complete Tax Planning

Canadian and international tax considerations will need to be assessed early in the listing process and in making corporate structure decisions.

4. Consider Reorganization Issues

Companies should determine if a corporate reorganization is required prior to a public listing. This is often necessary to align the company’s capital structure with what is traditionally expected of a Canadian public company.

5. Determine Desirability of Dual Class Share Structure

In some cases, the founders may want to reserve control of the company post-listing via a dual class share structure where investors are offered single voting shares and founders retain multiple voting shares. This is a complicated issue that should be discussed in advance, particularly since dual class structures may be unpopular among proxy advisory firms and certain advisors.

Terms can be structured in a manner that is more or less favorable to investors, by reducing or increasing the number of votes on the multiple voting shares and by restraining or widening the sunset provisions on the dual class share structure. The ability to use a dual class structure or have terms that are more favorable to the founders will often be tied to the level of demand for IPOs in general and the particular IPO at hand.

6. Determine Stock Exchange & Underwriters’ Escrow Requirements

Certain shareholders, senior officers and directors of the company may be subject to escrow requirements. These are often imposed by the listing exchange and restrict the sale of securities for specific timeframes following the closing of the listing.

• Underwriters also typically require a post-closing lock-up period for major shareholders and management.
• Various shareholders and their independent counsel may want to review and comment on lock-up documents, adding to the time necessary to implement the lock-up.

7. Evaluate Post-Closing Public Company Readiness

Being ready to be a public company requires a significant time investment by management. Private companies may need to enhance their capabilities related to financial reporting and regulatory compliance. This often requires the creation of processes and systems to ensure satisfactory risk management.

8. Conduct Business as Usual

The listing process will be an intensive and time-consuming one for the commercial team. Ideally, with proper planning and experienced advisors, it should be sufficiently separate from the ongoing operations of the company so as to be minimally disruptive to those operations up to the point of completion.

Executive Summary

As market conditions improve, companies considering going public in Canada should anticipate the significant front-end work necessary to conduct a successful IPO and begin their associated planning, including the critical path items and other strategic and practical matters highlighted above.

For further detail, see our comprehensive guide to IPOs and Going Public in Canada addressing all other aspects of the process for obtaining a public listing in Canada, including (1) principal listing methods in Canada, (2) prospectus preparation and disclosure, (3) working with underwriters, (4) tax considerations, and (5) post-listing reporting requirements.

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[1] Depending on the jurisdiction in which the issuer is based, the principal securities regulator may take a more stringent approach in determining if a business acquired forms part of the primary business of the issuer and exclude only immaterial acquisitions. In addition, for acquisitions where less than 9 months of operations have been reflected in the historical audited financial statements of the issuer, pro forma financial statements of the combined businesses will also need to be prepared.

[2] Significant acquisitions are those meeting certain materiality thresholds calculated in accordance with somewhat complex methodologies set forth in the securities regulations that usually involve a fair bit of head scratching from financial and legal advisors alike. Generally, historical financial statements will include the last two completed financial years (with the most recently completed financial year being audited) and the most recently interim period completed prior to the acquisition.

[3] Prescribed accounting principles generally include Canadian GAAP applicable to publicly accountable enterprises (i.e. IFRS), Canadian GAAP applicable to private companies, IFRS, U.S. GAAP or accounting principles meeting the disclosure requirements for foreign private issuers under U.S. securities legislation, and which may require reconciliation statements depending on circumstances. Prescribed auditing standards generally include Canadian GAAS, U.S. PCAOB GAAS, U.S. AICPA GAAS (for non SEC issuers) or ISA (for foreign issuers if certain conditions are met).