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New head offices for Quebec

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Much has been said about the exodus of head offices, most often of public companies, to other provinces or countries. We should think about their replacement with new ones.

A public listing is often a prerequisite for a growth-by-acquisition strategy of a high-performing head office. The tools and resources available to a public company are generally essential to such a strategy. Indeed, access to an acquisition currency and new sources of capital, as well as a speedy transaction are critical factors, which are available to listed entities.

A flagging ecosystem

For the past several years, initial public offerings (IPOs) have been few and far between in Quebec and elsewhere. In Canada, there are currently more foreign corporations (8%) listed with the TMX Group than Quebec companies. What’s more, the situation in Quebec is deteriorating. The Working Group on the Shortage of Publicly Traded Quebec Companies (“the working group”) has concluded that Quebec’s public corporate finance ecosystem is lagging in creating new high-performing head offices.

Quebec companies only account for 6% of listings on the two main Canadian stock exchanges, even though the province’s economic weight in Canada is in the range of 20%. While Quebec publicly listed companies are performing well on the stock market, clearly their numbers are not sufficient. The repercussions, in particular for our financial industry, are significant because an active IPO market is a key feature of a dynamic financial hub. Montreal should take note.

In its report entitled “Public Listing: The Weak Link in Quebec’s Corporate Finance Ecosystem,” the working group concludes that a greater number of Quebec businesses should be publicly listed. Indeed, the ingredients for a vibrant SME financing ecosystem are increasingly missing in Quebec.

Action plan

The working group, which I co-chaired with Sylvain Vincent of EY, was comprised of some 35 industry professionals. It issued a set of 20 recommendations intended to spur a more vigorous corporate finance ecosystem in Quebec.

Going public is not really an option for some organizations and can be destabilizing. However, others with high-growth potential manage to take full advantage of this dynamic environment.

The working group first noted that in Quebec, continuing education in finance deals mainly with investments and very little with the sell side of the industry.

There is also a need to enhance the visibility of public financing among our SMEs: targeting of entrepreneurs and their advisors, conferences, graduate degrees, creation of a Quebec institute of applied finance, research on Quebec public issuers, etc.

It should be noted that financial analyses about issuers are a key component for improved performance of publicly listed securities. Studies show that a public SME is less likely to benefit from the attention of analysts beyond its territory. The report proposes that SME analyst activities and financing originating in Quebec should benefit from a system of tax credits similar to that of Montreal international financial centres. The working group also recommended that Quebec institutional investors direct more commission-based activities to brokerage firms located in Quebec. 

Currently, most tax-advantaged funds are required to invest 61% of their assets annually in SMEs actively operating in Quebec. The report suggests raising these funds’ investment standard by a factor of 1.5 in the case of investments in common shares of listed Quebec companies for purposes of reaching their annual objective.

We also know that a key to stock market success is the liquidity of an SME’s security, since it relies in good part on non-institutional investors. The working group has therefore proposed to reinstate a stock-savings-type program (SSP) and recommended that it be promoted as any other incentive measure. The working group noted that demand for securities of the last Quebec Stock Savings Plan funds largely outweighs the offering and that these funds could not meet the demand due to a lack of eligible companies in which to invest the raised funds.

In some cases, taxation is punitive for public SMEs compared to equivalent unlisted SMEs. Since there is no reason to justify such tax discrimination, the working group encourages the governments concerned to review the applicable tax rules.

The working group also pointed out that the regulatory burden and financial reporting requirements for public SMEs have reached a point of saturation. The working group recommends that securities regulators simplify the regulations for SMEs and that professional accounting bodies look into ways to streamline financial reporting, which will likely result in better understanding by investors.

As for stock exchange listing methods, Quebec companies appear to use traditional IPOs more than alternative methods, which are more popular elsewhere in Canada. The working group therefore recommends that measures be taken to better promote these alternative methods, including TSVX capital pool companies and TSX special purpose acquisition corporations.

Currently, a successful flotation often requires significant financing before, during or sometimes after a public listing. The working group therefore suggests that capital be made available through IPO-specific funds. Alternatively, major Quebec investment funds have indicated that such a strategy is now part of their arsenal of support for our SMEs.

In closing, a set of measures is required to complete the value creation chain of our corporations and of future head offices. A major shake-up is necessary so that the government support already provided to our companies produces better returns and Quebec can get back to the business of creating large corporate headquarters.

Claude Désy, M. Fisc., FCPA, FCA
Lawyer
Dunton Rainville

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