Law in Quebec

A blue-ribbon panel of some 30 experts, hoping to “re-energize” Quebec’s languishing public corporate finance ecosystem, issued a series of “ambitious” recommendations calling for a series of tax breaks and incentives, the simplification of accounting and regulatory requirements for public SMEs, inducements to encourage the hiring of analysts based in Quebec and specialized in the SME public market, and have the Toronto stock exchanges set a target of 20 per cent of listings originating from Quebec. Implementing the recommendations would require the cooperation of a wide range of stakeholders, beginning with the provincial government, followed by regulatory and tax authorities as well as business and Quebec’s accounting professional corporation – all of which will likely prove to be a daunting feat, acknowledged Claude Désy, who co-chaired the panel along with Sylvain Vincent, formerly of EY.

“It won’t be easy,” admitted Désy, a Montreal CPA and tax and securities lawyer with Dunton Rainville. “There has to be a will, and cooperation among stakeholders. I think the Quebec government recognizes that there is a problem but whether they see it as being urgent is something we will see in the future.”

Quebec companies are snubbing the capital markets, relying instead on private equity. Quebec companies account for approximately seven per cent of companies – or 215 Quebec firms — listed on the two main stock exchanges of the TMX Group, even though the province represents about 20 per cent of Canada’s gross domestic product (GDP). And the situation is worsening. Only nine out of 223 companies across Canada that went public in 2014 were Quebec companies, representing a meagre three per cent of total new listings. Last year only 2 of the 22 companies that became publicly traded on the TSX were from Quebec.

“Although an initial public offering (IPO) is not the only financing option for a sufficiently mature company, an active and dynamic IPO market is irrefutably a key feature of a strong entrepreneurial ecosystem and a dynamic financial centre,” noted the report entitled “Public Listing: The Weak Link in Quebec’s Corporate Finance Ecosystem.”

The downward spiral can be in part traced to back to 1999, when the Toronto, Montreal, Vancouver and Alberta stock exchanges agreed to restructure the Canadian capital markets along lines of specialization, with the TSX Group responsible for equity trading and the Montreal exchange focusing on derivatives trading. The disappearance of small brokers in Quebec specializing in public financing for small companies too has hurt as it has become very difficult for small-cap SMEs to capture the attention of institutional investors. As the report points out, those brokers who are still in Quebec usually work for Toronto companies who are more interested in IPOs of more than $100 million.

Hand in hand with the departure of financial analysts to Toronto, particularly on the sell side, is the loss of expertise in areas such as advising and listing, which is a complex process that requires specific expertise. “This expertise is now most often found in Toronto, gradually eating away at Montreal’s status as a major financial centre,” said the report. The situation is so dire that Quebec colleges and universities have all but abandoned offering courses on applied finance. “This kind of expertise is important because SMEs are now less prepared to know when they should go public,” said Michel Leblanc, president and CEO of Board of Trade of Metropolitan Montreal.

Paradoxically, Quebec’s robust private equity industry is not helping matters either. Quebec consistently ranked between first and third among OECD countries in terms of availability of venture capital during the period between 2011 and 2013. The average share of venture capital investments, as a percentage of GDP, totalled 0.24 per cent in Quebec, compared to 0.23 per cent in the United States, 0.21 per cent in Israel, and 0.14 per cent in Canada. All told, about $10 billion is annually invested in equity and quasi-equity in nearly 650 individual rounds of financing, according to a report published by PwC Canada late last year.

But Quebec’s dynamic private equity sector “masks a much less attractive reality,” pointed out the report. Private equity is a short or medium-term investment that is available during an SME’s initial phases of growth and development. But in the later stages of an SME’s growth, venture capitalists usually want to liquidate their position, and either sell their stake or ask entrepreneurs to buy it which in turn exposes promising and healthy Quebec SMEs to takeovers. “One of the challenges we face collectively in Quebec is to have small SMEs become big companies,” said Leblanc. “It could be that many SMEs take too long to list in the stock exchange and don’t become big enough fast enough, and are acquired before they reach the critical size that would allow them to become buyers themselves.” Désy puts it more bluntly: “The problem is that Quebec is becoming a branch economy. We’re losing head offices, and we need to replace them, and most head offices are public companies. That’s my concern.”

The negative perception Quebec entrepreneurs have of the stock exchange too is a barrier. Many bemoan its costs and regulatory requirements such as mandatory disclosure of information, the short-term vision imposed by quarterly financial results, and even the costs and constraints imposed by language requirements.

“There’s a lot to be done but it’s not complicated, other than finding the political will to adopt fiscal measures to encourage public listings,” remarked Nicolas Marcoux, national managing partner, Montreal office and major cities, at PwC Canada. In 2011, PwC, along with law firm Fraser Milner Casgrain (now Dentons) too sounded the alarm over the plunging number of Quebec companies listing on Canadian stock exchanges. “Nothing came out of it – it was a bit disappointing,” said Marcoux.

Enlisting the support of the TMX Group is key to revitalising Quebec’s public SME ecosystem, according to the working group. Its marketing, promotion and support activities “play a critical role” in enhancing the attractiveness and visibility of IPOs. An increased presence of Quebec companies on the stock exchanges is essential, and the working group urges the TMX Group to deploy resources to ensure that Quebec companies make up nearly 20 per cent of listings. The TMX Group appears to be open to the idea. “We continue to work with stakeholders in Quebec to achieve this goal which we subscribe to but it’s not necessarily a short-term objective,” said Mathieu Labrèche, a spokesperson with the TMX Group. “TMX is committed to increasing the number of listings from Quebec, much like all parts of Canada.”

The working group also recommends the reintroduction of a Quebec Stock Saving Plan as a way to generate more capital for Quebec-based small and medium-sized companies. It recommends offering a refundable tax credit to any investor, that would be available for capitalizations under $500 million, and that would not have a minimum holding period or replacement rule. “Investors will see opportunities to invest in a company when they can defer their income taxes or have a rapid return on their incomes,” noted Marcoux. It also recommends amending the Taxation Act so that companies and shareholders can retain tax advantages when a company goes public. The introduction of financial assistance such as a tax credit for share issue expenses for listing on a stock exchange should also be considered, said the report. Moreover, Quebec’s financial watchdog, the Autorité des marchés financiers, should simplify and lighten the regulatory framework applied to SMEs, and in a similar vein accounting requirements for public SMEs should be simplified, added the report.

“Public listings are important to the economy, and it is an indispensable tool to have head offices here in Quebec,” said Marcoux. “Business leaders have in the past raised alarms about the situation, and in the same way that it took years for environmentalists to be heard, I hope that concrete measures will be taken over the next couple of years.”