Overview
In Canada, under the federal Competition Act (the “Act”), transactions that exceed certain monetary thresholds are required to be notified to the federal Competition Bureau (the “Bureau”). In addition, all mergers regardless of their size (i.e., regardless of whether the statutory thresholds are exceeded) can be reviewed by the Bureau.
Broadly speaking, there are two aspects to merger review in Canada: (i) pre-merger notification and (ii) substantive review for potential competition issues.
I. Pre-merger notification
Parties to transactions that exceed the monetary thresholds set out in the Act are required to make pre-merger notification filings with the Bureau.
In order for a transaction to be notifiable, it must involve the acquisition of an “operating business” in Canada (defined as a business undertaking in Canada to which employees ordinarily report for work) and be one of five specified types of transactions set out in the Act (an asset acquisition, share acquisition, corporate amalgamation, non-corporate combination or an acquisition of an interest in a non-corporate combination).
For share and asset acquisitions, the parties and their affiliates’ Canadian assets (or gross revenues from sales in, from or into Canada) must exceed CDN $400 million (the “size of parties” threshold). In addition, the book value of the target’s assets in Canada (or annual gross revenues from sales in or from Canada generated by those assets) must also exceed CDN $70 million (the “size of transaction” threshold, which is increased annually based on inflation).
There is an additional threshold for share acquisitions. For the acquisition of public companies, the acquisition must result in the acquirer holding more than 20% of the voting shares (more than 50% if more than 20% is already held). For the acquisition of private companies, the acquisition must result in the acquirer holding more than 35% of the voting shares (more than 50% if more than 35% is already held).
The Act also contains a number of exceptions from the obligation to notify, including certain ordinary course acquisitions of real property and goods, an underwriting exception, transactions between affiliates and where an Advance Ruling Certificate (”ARC”) (one form of pre-merger clearance under the Act) is received.
(a) Who Must Notify
Both parties to a transaction (i.e., the acquirer and the target) are required to file a pre-merger notification filing.
Filing choices include an application for an ARC or, alternatively, a filing requesting that a “no action” letter be issued. Parties will also often file a separate submission or brief with a pre-merger notification filing setting out the reasons why the proposed transaction is unlikely to prevent or lessen competition substantially in the relevant market(s).
(b) Closing Before Clearance
Canada is a “suspensory” jurisdiction, which means that parties to a notifiable transaction are not permitted to complete their transaction after filing unless the applicable waiting period has expired or clearance has been received (i.e., an ARC or no action letter).
The recently amended Act now also gives a court or the Competition Tribunal (the “Tribunal”) new powers relating to non-compliance with the statutory waiting periods. These include, for a proposed transaction, the power to issue an interim injunction or compel the filing of information and, for a completed transaction, the power to order that the merger be dissolved, an order for the divestiture of shares or assets or “administrative monetary penalties” of up to CDN $10,000 for each day of non-compliance.
(c) Waiting Periods
Following recent amendments to the Act, Canada now has a U.S. style two-stage merger review process.
After a pre-merger notification is made, there is an initial 30 calendar day waiting period which begins when the Bureau receives the notification filing. During this initial review period, the parties to a transaction are not permitted to close until the waiting period has expired (unless clearance is received).
During the initial 30 day waiting period the Bureau may advise the parties to the transaction that it does not intend to challenge the transaction.
Alternatively, where the Bureau takes the position that there are potential competition issues, it may make a supplementary information request. If the Bureau does so, the waiting period stops until a complete response has been filed upon which a second 30 day waiting period begins in which the parties are not permitted to close (again, unless clearance is received).
There is under the new merger clearance regime no limit on how long the supplementary information request process can take. This is because the burden is on the merging parties to complete the request and, where a second request is made, the “clock” will not start again until the order has been complied with. In addition, while parties are free to complete a transaction after 30 days of fulfilling a second request, the Bureau is not required to have finished its review by then. As such, parties may either opt to wait for the Bureau to complete its review or close and assume the risk that the Bureau may challenge the transaction post-closing.
This new merger clearance process is modeled on that under the U.S. Hart-Scott-Rodino Antitrust Improvements Act and is intended to more closely align Canadian merger review with the U.S. system.
(d) Clearance
Parties may close a transaction when (i) an ARC is received (the strongest form of clearance, typically issued in non-complex transactions where there are no issues or few issues), (ii) a “no action letter” is received (which indicates that the Commissioner does not, at the time it is issued, intend to apply to the Tribunal for remedies) or (iii) the applicable statutory waiting periods have expired.
It is worth noting, however, that the Bureau could continue to review a transaction after the applicable waiting periods have expired.
(e) Hostile Transactions
There are special notification rules for hostile transactions. Under these rules, the initial 30 day review period begins on receipt of a complete filing from the bidder and the Bureau will notify the target that a filing has been received from the bidder (and give the target 10 days to file from the date the target is notified). In addition, the second 30 day waiting period (where a supplementary information request has been issued) begins when the Bureau receives the requested information from the bidder (i.e., regardless of when the target complies). This is meant to prevent the target in a hostile transaction from stalling the transaction by delaying filing.
(f) Challenging a Merger
The Bureau may challenge a merger either before or after closing. The Bureau may seek an injunction to prevent closing or make an application to the Tribunal for a remedial order. Potential remedial orders include an order to block the merger, an order for the dissolution of the merger or for the disposition of assets or shares. The Bureau may also challenge a transaction for up to one year after closing (a period that has recently been shortened from the previous three years).
However, while the Commissioner has the power to make applications to the Tribunal for remedial orders, contested merger proceedings are relatively rare in Canada with the majority of issues being resolved by way of negotiated settlement (i.e., consent agreements providing for the disposition of assets, so-called “behavioural” remedies, etc.).
II. Substantive Review
Broadly speaking, the substantive review of a merger involves an analysis as to whether the proposed merger is likely to prevent or lessen competition substantially in one or more relevant markets (i.e., what the potential anti-competitive effects of a merger may be).
In assessing the potential competition issues associated with a merger, the Bureau will consider both “unilateral effects” (i.e., whether the merged firm alone will be able to exercise market power post-merger) as well as “coordinated effects” (i.e., whether the merger will mean that a group of firms will be more likely to be able to exercise market power post-merger).
The substantive analysis of a merger involves the review of a number of factors including the estimated market shares of the parties, barriers to entry and other so-called “evaluative criteria” (e.g., effective remaining competition).
OUR CANADIAN MERGER CONTROL SERVICES
We practice federal competition law, have provided competition law and compliance advice to clients across Canada and internationally and provide a full range of competition law services in relation to the criminal conspiracy, merger, abuse of dominance, misleading advertising and deceptive marketing provisions of the federal Competition Act. We have provided pre-merger notification and foreign investment advice in relation to numerous domestic and cross-border mergers. Our Canadian merger control and foreign investment services include:
- Advice on the application of the Competition Act to mergers.
- Application of the Investment Canada Act to foreign investment in Canada.
- Preparing pre-merger notification filings and submissions.
- Drafting transaction documents.
- Merger-related compliance guidelines (pre-merger conduct memoranda).
- Coordinating and advice in relation to multi-jurisdictional merger review.
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