Significant amendments were recently made to Canada’s federal Competition Act (the “Act”) including the introduction of a new U.S.-style two-stage merger control regime. This update discusses Canada’s new merger control rules and their impact on domestic and cross-border transactions.
Overview of Canadian Merger Control
The pre-merger notification provisions of the Act require both parties to specified types of transactions that exceed the statutory monetary thresholds under the Act to file pre-merger notification filings with the federal Competition Bureau (the “Bureau”).
In addition, regardless of size, any transaction that falls within the statutory definition of “merger” under the Act is potentially subject to substantive review by the Bureau to determine whether it is likely to result in a substantial prevention or lessening of competition in a relevant market (or markets). For mergers that exceed the statutory monetary thresholds, notification is mandatory and failure to notify is a criminal offence.
Pre-merger Notification
For a transaction to be notifiable in Canada it must: (i) involve the acquisition of an “operating business” in Canada, (ii) be one of five specified types of transactions, (iii) exceed the statutory monetary thresholds and (iv) not fall within one of the statutory exceptions in the Act.
Canadian Operating Business
In order for a transaction to be notifiable in Canada, it must involve the acquisition of an “operating business” in Canada, which is defined under the Act as a business undertaking in Canada to which employees employed in connection with the undertaking ordinarily report for work. In this regard, the Bureau has taken the position that employees may include both independent contractors and part time employees.
Types of Transactions
The five types of transactions that require pre-merger notification filing, assuming all of the other requirements are met, are: (i) asset acquisitions, (ii) share acquisitions, (iii) amalgamations, (iv) non-corporate combinations and (v) acquisitions of interests in non-corporate combinations.
Thresholds
In order to be notifiable, a transaction must also exceed the “size of parties” and “size of transaction” thresholds under the Act.
With respect to the size of parties threshold, the parties to a transaction and their affiliates’ Canadian assets, or gross revenues from sales in, from or into Canada, must exceed CDN $400 million. With respect to the size of transaction threshold, 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 exceed CDN $70 million.
For share acquisitions, there is an additional threshold. 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).
Exceptions
The Act also contains a number of exceptions from the pre-merger notification requirements, including certain ordinary course acquisitions of real property and goods, an underwriting exception, transactions between affiliates and where an Advance Ruling Certificate (”ARC”), which is one form of pre-merger clearance under the Act, is obtained.
Who Must Notify
Both parties to a transaction (i.e., both the acquirer and the target) are required to file a pre-merger notification filing. Parties may request that an ARC or alternatively a “no action” letter be issued. Parties will also often file a separate competitive effects 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).
Waiting Periods
Canada is a suspensory jurisdiction, in that parties to a notifiable transaction are prohibited from completing a transaction after filing unless the applicable waiting period has expired or clearance has been received. As a result of recent amendments, Canada now has a U.S. style two-stage merger review process.
Under the new regime, filing triggers an initial 30 calendar day waiting period during which the parties to a transaction are not permitted to complete unless clearance has been received (either by receipt of a no action letter or ARC). During this 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 issues, it now has the power to issue supplementary information requests (the Canadian equivalent to second requests). 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 during which the parties are not permitted to close (again, unless clearance is received).
Under the new regime, there is no limit as to how long the second 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 fully complied with (compared to the lesser standard of substantial completion in the U.S).
In addition, while parties are free to complete a transaction after 30 days of complying with a second request, the Bureau is not required to have completed its review by that time. 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.
The recently amended Act also now gives a court or the Competition Tribunal (“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” (essentially civil fines) of up to CDN $10,000 for each day of non-compliance.
Clearance
Parties may complete a transaction when: (i) an ARC is received, which is the strongest form of clearance under the Act and typically issued in non-complex transactions where there are few or no issues and no overlap, (ii) a “no action letter” is received stating that the Commissioner does not at that time intend to seek a remedial order or (iii) the applicable statutory waiting period has expired.
It is worth noting, however, that the Bureau has the power to continue to review a transaction after the applicable waiting periods have expired if clearance has not been received.
Hostile Transactions
There are special rules under the Act 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), which is intended to prevent targets from stalling a transaction by delaying filing.
Filing
The Bureau’s Merger Notification Unit (“MNU”) is responsible for all pre-merger notifications in Canada. The MNU also gives guidance to parties regarding timing and information requirements for merger notification filings and enforces compliance with the pre-merger notification provisions of the Act.
Substantive Review
Broadly speaking, substantive review of mergers in Canada involves an analysis as to whether a proposed transaction is likely to prevent or lessen competition substantially in one or more relevant markets post-merger (i.e., to assess what the potential anti-competitive effects of a merger may be). Whether a merger is likely to prevent or lessen competition substantially in a relevant market turns largely on whether the merged firm will be likely to exercise a materially greater degree of market power in a relevant market(s) post-merger.
The framework to analyze the potential anti-competitive effects of a transaction includes evaluative criteria in the Act, Tribunal merger decisions and the Bureau’s Merger Enforcement Guidelines (“MEGs”). In assessing potential competition issues associated with a merger, the Bureau considers both unilateral effects (i.e., whether the merged firm alone is likely to be able to exercise market power post-merger) and coordinated effects (i.e., whether a group of firms together are likely to be able to exercise market power post-merger).
This analysis of market power involves, among other things, the review of a number of factors including the estimated market shares of the parties, concentration in the relevant market (or markets), barriers to entry and other “evaluative criteria” including effective remaining competition, foreign competition and countervailing power of customers.
With respect to market shares, the Bureau takes the position in the MEGs that it will generally not challenge a merger on the basis of a concern of a unilateral exercise of market power where the post-merger share is less than 35% and will not generally challenge a merger on the basis of a concern of coordinated effects if: (i) the combined post-merger share of the four largest firms in the relevant market (CR4) is less than 65% or (ii) the post-merger share of the merged entity is less than 10%.
Challenging a Merger
The Bureau has exclusive jurisdiction to challenge mergers under the Act and may challenge a merger either before closing or post-completion.
Where the Bureau takes the position that a proposed merger is likely to prevent or lessen competition substantially, the Commissioner may seek remedial orders from the Tribunal including an order to block the merger (in the case of a proposed merger) or an order for the dissolution of assets of shares (in the case of a completed merger). The Bureau has also sought injunctions in the past to allow more time for substantive review. The Bureau may also challenge a transaction for up to one year after closing, which 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 highly uncommon in Canada with the majority of issues being resolved by way of negotiated settlement (i.e., consent agreements).
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