THE CAPITAL POOL COMPANY (CPC) ROUTE
"What is a Capital Pool Company,
A CPC (Capital Pool Company) is a "blind pool" company
without an active business whose initial purpose is to use its
capital to investigate and find a business opportunity to acquire.
To raise this capital, the TSX-VN permits CPCs to list and to
offer their shares to the investing public. Companies proposing
to go public as a CPC and wishing to list their shares on the
TSX-VN must meet the requirements of TSX-VN's CPC program. These
requirements are set out in the TSXVN's Policy
The CPC program permits entrepreneurs to raise
a limited amount of capital quickly and
relatively inexpensively. This capital can only be used to investigate
business opportunities and
to acquire a business that will serve as the basis for a continued
listing on the TSX-VN as a
"non-CPC" public company. Once the CPC's shares have
been issued to the public, investors are
able to trade them through the facilities of the TSX-VN like
the shares of any other public
"What is a Qualifying Transaction?"
A QT (Qualifying Transaction) is typically accomplished by the
CPC buying all of the issued and
outstanding shares of a private company, with an operating business,
from its shareholders.
The result is that the private company becomes, on the completion
of the acquisition, a
wholly-owned subsidiary of the CPC. Because the CPC has no active
business of its own, the
practical result of this acquisition is that the business of
the private company becomes the
business of the CPC.
The QT begins when the CPC has reached an
agreement in principle with the shareholders of
the private company to acquire the private company. While it
is not necessary to do so, the
standard practice is for the parties to sign a "letter
of intent", being a non-binding agreement,
to evidence the proposed terms of the purchase of the private
company by the CPC. This letter
of intent would normally address all of the major terms of the
acquisition and would serve as
an outline for the drafting of the formal agreements that the
parties will ultimately enter into.
While the acquisition is by far the most significant part of
the QT, there are typically other
corporate transactions that the parties will negotiate as well.
The most important of these is
usually a financing to be undertaken by the CPC to raise funds
for the further development of
the private company's business. The shareholders of the private
company will typically not
want to proceed with the acquisition unless a financing is attached
In addition, there may be new stock options
being granted to the principals of the private
company by the CPC, changes to the senior officers and Board
of the CPC to add some of the
principals of the private company, and a name change for the
CPC (to some variation of the
private company's name), among other things. Every situation
will be different and will depend
upon what is needed to get the deal done.
Once the QT has been agreed to, the CPC will
then have to seek TSX-VN approval.
"What are the TSX-VN's requirements
for a QT?"
• The TSX-VN will require the CPC to secure the approval
of its shareholders for the QT.
The QT must be approved by a "majority of the minority"
of the shareholders of the
CPC. This is 50% plus one vote of the votes cast by the CPC's
the related parties of the CPC and related parties of the private
company. In addition,
corporate laws may require shareholder approval by a two-thirds
or 75% majority,
depending in the structure of the transaction.
• The TSX-VN will require the CPC to provide its shareholders
with an Information
Circular. The Information Circular must contain prospectus level
disclosure of the QT,
being the terms of the acquisition, a discussion of the private
company's business and
financial position, and a discussion of what the resulting company
that was formerly
the CPC will look like once the acquisition has completed.
• The QT will have to be sponsored by a Brokerage Firm
that is a member of the
Exchange and a formal sponsorship report will have to be filed
with the TSX-VN by that
• If the CPC is acquiring a private company (rather than
just assets), the financial
statements of the private company will have to be audited. The
audit will have to
cover (up to) the three most recently completed fiscal years
of the private company
and, possibly, an interim period subsequent to the most recent
year-end as well.
• A fair market valuation of the private company being
acquired by the CPC will have to
be prepared by a competent independent party (such as a Chartered
• A proper detailed Business Plan will have to be provided
by the private company.
• Each member of the private company's management team
and Board of Directors, and
each major shareholder of the private company will have to file
a Personal Information
Form, or "PIF", with the TSX-VN.
• The TSX-VN may ask the CPC to file a Filing Statement
(a detailed disclosure document)
in addition to the Information Circular.
The CPC, as constituted after it has completed the acquisition
of the private company, will
have to meet the TSX-VN's minimum listing requirements.
"What is the process for completing a QT?"
The QT cannot be completed until the CPC secures TSX-VN approval.
The process for securing
TSX-VN approval and completing the transaction is as follows:
Step 1: Upon the agreement
in principle being reached between the CPC and the shareholders
of the private company (i.e. the letter of intent), the CPC
issues a comprehensive news
release. The requirements for this news release are extensive
and, as such, the CPC must first
provide a draft of the news release to the TSX-VN for its review.
Step 2: Once the news release
has been issued, the CPC's securities will be halted from trading
until the following have occurred:
• The TSX-VN has received confirmation from a member Brokerage
Firm that it has
agreed to act as a sponsor in respect of the QT.
• A PIF has been filed with the TSX-VN for each individual
who will be a director, senior
officer, promoter or other insider of the CPC after completion
of the QT.
• A pre-filing conference (to pre-clear the QT) has been
held with the TSX-VN.
• The TSX-VN and the sponsoring Brokerage Firm have completed
background due diligence.
Step 3: The CPC files with
the TSX-VN the draft Information Circular for the QT and all
necessary supporting documents (the Business Plan, audited financial
statements and the
valuation for the private company being acquired by the CPC).
Normally, the sponsoring
Brokerage Firm will want to sign off on this document before
it is filed with the TSX-VN.
Step 4: The TSX-VN reviews
the CPC's draft Information Circular and the supporting documents
and advises of any deficiencies.
Step 5: The sponsoring Brokerage
Firm files its preliminary sponsorship report with the TSX-VN.
Step 6: After the CPC addresses
the deficiencies raised by the TSX-VN, the CPC's application
presented to the TSX-VN's Listings Committee for consideration.
Step 7: Once the application
has been conditionally accepted by the TSX-VN, the CPC files
"preshareholder meeting" documentation with the TSX-VN
including the proposed final Information
Circular and final sponsor report.
Step 8: Upon satisfactory
review, the CPC mails the Information Circular and the TSX-VN
conditional acceptance of the QT.
Step 9: The CPC's shareholders'
meeting is held to approve the QT.
Step 10: Assuming shareholder
approval is received, the CPC closes the acquisition of the
private company and any other transactions that comprise the
QT (often there is also a
financing to be completed).
Step 11: The CPC files with
the TSX-VN final documentation confirming that all closing
conditions have been satisfied.
Step 12: Provided the final
documentation is satisfactory, the TSX-VN issues a notice evidencing
final acceptance and confirming completion of the QT.
Step 13: The company that
was formerly the CPC commences trading under a new name and
new trade symbol. It is now a "normal" listed company
as opposed to a CPC.
"How long will it take to complete the QT?"
As noted above, the CPC must provide a detailed
Information Circular to its shareholders. The
Information Circular must be approved by the TSX-VN prior to
being mailed to the CPC's
shareholders. It can take 20-30 days to prepare the Information
Circular and obtain the
sponsor's sign off on it before it can be filed with the TSX-VN.
It can then take 30-40 days to
secure TSX-VN's approval for the Information Circular before
it can be mailed to the CPC's
shareholders. Since statutory requirements require about 65
days to elapse from the time the
shareholders meeting is called until it can be held, these steps
alone account for 115-135 days.
You need to add to this the time to negotiate the QT at the
beginning (15 days), the time to
prepare the Business Plan, audit and valuation (30 days) all
of which are needed before the
Information Circular can be prepared, and the time to close
(15 days). With this in mind, the
fastest a QT can be completed from start to finish is 120 to
150 days, with the possibility of it
taking 180 days or more not being unusual.
In order to bring the QT in on the shorter
time frame some of the time periods noted above
have to overlap and be collapsed. To do this, there has to be
exceptional organization and
cooperation by all involved.
"What happens on the completion
of the QT?"
The TSX-VN will not approve a QT unless the resulting company
(meaning the CPC as constituted after the completion of the
acquisition of the private company) meets the TSX-VN's minimum
listing requirements for a non-CPC company (i.e., for an ordinary
operating business company). The former CPC company must at
least satisfy the minimum Tier 2 listing requirements for the
industry sector in which the private company operates as set
out in TSXVN Policy 2.1, except for the public distribution
requirement which must be in compliance with TSX-VN Policy 2.5.
Typically, the CPC will issue shares to the shareholders of
the private company (as opposed to paying cash) in order to
acquire all of the issued and outstanding shares (or assets)
of the private company. The TSX-VN will impose an escrow on
some or all of the CPC shares issued to the (then former) shareholders
of the private company. The formula for determining whose shares
will be escrowed (small shareholders are often excluded) and
how long the escrow will be is very complicated and depends
on a number of factors. As a rule of thumb, however, the shareholders
of the private company should assume that if they will be principals
(i.e. directors or senior officers) or major shareholders of
the company resulting from the QT, they will probably have at
least a three-year escrow on the shares that they will receive
from the CPC and as much as a six-year escrow. The shorter period
will only be available if the valuation filed with the TSX-VN
fully supports the price being paid by the CPC to acquire the
private company. The shares will be released in approximately
equal installments every six months over the escrow period.
"Can you show me an example of
The following is an example of what a CPC might look like after
the completion of its QT. The actual structure will depend on
a number of factors the most important of which are:
• The price at which the CPC's shares
are trading at the time the QT is agreed upon and announced.
• The value of the private company being acquired as supported
by the independent valuation opinion that is secured for the
QT. For the purpose of this example, let's assume the following
• The price at which the CPC's shares are trading at the
time of the QT is $0.50 per share (please note that this is
not a representation of the future price of a particular CPC's
shares; simply an example for illustrative purposes).
• The CPC signs a letter of intent to acquire all of the
issued and outstanding shares of a privately owned technology
company, call it No-Name Inc.., which is valued at $4,000,000
(as supported by an independent third party valuation).
• No-Name Inc.. needs, initially, $1,000,000 in financing
to continue building its business.
• No-Name Inc.. is owned 100% by three founding shareholders,
as to 40% each by two of them and 20% by the third. This is
represented by the following shareholdings in No-Name Inc..:
Currently, the issued and outstanding share
capital of the CPC and its fully-diluted share structure (again,
just examples; there will be variations of this) looks like
(1) The CPC's seed shares
are held by the five founding shareholders of the CPC.
(2) These stock options are held by the five
founding shareholders of the CPC and are exercisable at a price
of $0.15 per share for a period of five years.
(3) The initial public offering shares sold
by the Agent to the public. The TSXVN requires that these be
sold to at least 300 members of the public each owning 1,000
(4) A warrant entitling the Agent to purchase
140,000 common shares of the CPC at a price of $0.15 per share
for 18 months. On the acquisition of No-Name Inc., the CPC agrees
to issue to the three shareholders of No-Name Inc.., pro-rata
in accordance with their shareholdings of No-Name Inc., a total
of 8,000,000 shares of the CPC. These shares will be issued
at a price of $0.50 each because that is the current trading
price of the CPC's shares. This means the three shareholders
of No-Name Inc.. will be receiving $4,000,000 worth of the CPC's
shares for their company. On the basis of their current holdings
in No-Name Inc.., they will each receive the following shares
of the CPC:
In order to provide No-Name Inc.. with the
$1,000,000 it needs to build its business, the CPC
and the sponsoring Brokerage Firm have agreed to complete a
private placement of 2,000,000
common shares of the CPC at a price of $0.50 per share. Again,
the $0.50 price is used because
this is the current share price for the CPC. It is agreed that
this private placement will close
concurrent with the closing of the acquisition of No-Name Inc..
Let's assume that the Brokerage
Firm places these 2,000,000 shares with 10 of its clients.
After the completion of the acquisition and
private placement, the issued and outstanding share capital
of the CPC and its fully-diluted share structure will look like
(1) These are the 8,000,000 shares of the CPC
that are issued to the three shareholders of No- Name Inc..
in exchange for all of the issued and outstanding shares of
(2) On the completion of the QT, the parties agree that a new
block of 800,000 stock options will be made available to the
three former principals of No-Name Inc.. and for the new employees
of No-Name Inc..
(3) Sold by the sponsoring Brokerage Firm to ten of its clients
to raise the $1,000,000 that the principals of No-Name Inc..
want to further develop their business. In addition to the foregoing,
the following has occurred:
• No-Name Inc.. has become a wholly-owned subsidiary of
the CPC. Since the business of No-Name Inc.. has become the
business of the CPC, the CPC has changed its name to Tech (Canada)
• The Board of No-Name (Canada) Inc. now consists of all
three of the former shareholders of No-Name Inc.. In addition,
they asked that two of the existing Board members of the CPC
stay on in order to access their significant expertise.
• The President of No-Name Inc. has also become the President
of No-Name (Canada) Inc.
For more information on CPC’s and QT’s,
please contact us.
^Top of Page