Canadian COMPETITION LAW

January 24, 2013

Steve Szentesi
Kevin Wright (Davis LLP)
(with contributions by Jonathan Gilhen – Davis LLP)

Extract from a chapter to be published in CLEBC’s
Annual Review of Law & Practice – 2013

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2012 was a busy year for Canadian competition and foreign investment law, with significant developments in all major areas including misleading advertising, mergers, abuse of dominance, criminal matters (including cartels, bid-rigging and deceptive marketing) and private actions.  The following is an overview of some of the key merger and Investment Canada Act developments (with summaries of other significant developments in 2012 to come over the next few days).

MERGERS & INVESTMENT CANADA ACT

CCS

On May 29, 2012, the Competition Tribunal (the “Tribunal”) concluded that the acquisition by CCS Corporation (subsequently renamed Tervita Corporation) of the shares of Complete Environmental Inc. substantially prevented competition and ordered CCS to divest the shares or assets of Complete’s wholly-owned subsidiary Babkirk Land Services Inc. (“Babkirk”).  The divestiture order was stayed pending Tervita’s appeal to the Federal Court of Appeal, which was heard on December 10 and 11, 2012.

CCS is the owner of the only two operating secure landfills in North-Eastern British Columbia (“NEBC”) permitted to accept solid hazardous waste.  These landfills primarily service oil and gas industry operators seeking to dispose of materials generated through drilling activities.   Babkirk had secured regulatory approvals for development of a secure hazardous waste landfill in NEBC.

On January 7, 2011, CCS acquired the shares of Complete from five individuals for just over $6 million.  The acquisition fell well below the financial thresholds for mandatory pre-closing notification to the Competition Bureau (the “Bureau”).  On January 24, 2011, the Commissioner of Competition (the “Commissioner”) filed an application with the Tribunal seeking a remedy under the merger provisions of the Act.  Although Babkirk had not yet constructed a landfill, the Commissioner contended that the acquisition was a merger that prevented, or was likely to prevent, competition substantially by eliminating the only likely imminent competitor for secure landfill services in NEBC.  The vendors were also named as respondents since the Commissioner sought an order to dissolve the acquisition.  Normally the Bureau’s preferred merger remedy is divestiture by the purchaser.

Following a hearing in late 2011, the Tribunal concluded that the acquisition was a “merger” that “… was more likely than not to maintain the ability of CCS to exercise materially greater market power” and which was “likely to prevent competition substantially.”  The Tribunal rejected CCS’s defence that the merger was likely to achieve efficiencies that outweighed any anti-competitive effects.  However, the Tribunal held that the Commissioner’s proposed dissolution remedy would be overbroad, intrusive and less effective and ordered divestiture instead.

The Commissioner is normally selective in bringing contested merger cases, with the CCS case being only the 6th contested merger decided by the Tribunal since 1986.  The case reinforces that the Commissioner may pursue any merger, including one that is localized or is relatively small in terms of deal size, for up to one year after closing.  The case provided an opportunity for the Tribunal to articulate its approach to an alleged prevention (as opposed to a lessening) of competition and for the application of the efficiencies defence under section 96 of the Act.

The decision illustrates that in a prevent case, an order can issue even where the parties did not expect to compete but for the merger.  Here, the Tribunal found that although the vendors had intended to operate the Babkirk site as a bioremediation facility primarily, eventually they would have abandoned that plan and they (or new owners) would have competed with CCS directly by landfilling.  The Tribunal also ruled that the concept of “merger” is broad and includes the acquisition of non-operational assets obtained in the development of a business.

Investment Canada Act

In January 2013, Industry Canada announced that the threshold under the Investment Canada Act for required advance review of most direct foreign acquisitions (involving investors or purchasers from WTO-member states) of control of Canadian businesses increased from $330 million to $344 million.

New SOE Guidelines

On December 7, 2012, the Minister of Industry announced that the $15.1 billion acquisition of Nexen Inc. by China National Offshore Oil Co. (“CNOOC”) and the $6 billion acquisition of Progress Energy Resources Corp. (“Progress”) by Malaysia’s Petronas had been approved under the Investment Canada Act.  The approvals of these takeover bids come after the Canadian government’s rejection in 2010 of the proposed acquisition by BHP Billiton PLC of PotashCorp, which had left some observers with the impression that Canada was growing increasingly hostile to foreign investment.

Concurrently with announcing the approval of the Nexen/CNOOC and Progress/Petronas transactions, the Canadian government announced revisions to Canada’s foreign investment guidelines, which are intended to clarify the review process for investments by foreign state-owned enterprises (“SOEs”).

Under the Investment Canada Act, certain large foreign investments to acquire control of a Canadian business that exceed specified financial thresholds are subject to a review by the Minister to determine whether the transaction is likely to be of “net benefit to Canada” based on six, largely economic, factors (“net benefit to Canada” test)  In addition to the review factors enumerated in the Investment Canada Act, the new SOE Guidelines outline key considerations in determining whether a proposed investment by an SOE will be of net benefit to Canada.  While the “net benefit to Canada” test will still apply, the government will look at such factors as the governance and commercial orientation of the acquirer, the degree of foreign state control or influence over the acquirer, the extent to which the acquirer conforms to Canadian standards of corporate governance (such as transparency and disclosure), adherence to free market principles, and the likelihood that the new enterprise will operate on a commercial basis.

In the new SOE Guidelines, the definition of an SOE has been expanded to include not only entities owned by a foreign state, but also entities that are directly or indirectly owned, controlled, or influenced by a foreign government, potentially creating uncertainty as to when the new SOE policy regime applies.

The Minister will monitor SOE transactions throughout the Canadian economy, with a specific focus on three factors: (a) the degree of control or influence a state-owned enterprise would likely exert on the Canadian business that is being acquired; (b) the degree of control or influence a state-owned enterprise would likely exert on the industry in which the Canadian business operates; and (c) the extent to which a foreign state is likely to exercise control or influence over the state-owned enterprise acquiring the Canadian business.

The new SOE Guidelines will also target investments in the Canadian oil sands.  In the future, acquisitions by foreign SOEs of Canadian oil sands companies will only be found to be of net benefit to Canada on an “exceptional basis”.  This approach marks a departure from the former SOE Guidelines, which did not identify specific industries or assets that are considered more sensitive than others.

Finally, the previously announced amendments (that had yet to be implemented) to the Investment Canada Act to increase progressively the financial thresholds for a review of investments by WTO non-SOE foreign investors from $330 million (in 2012) to $1 billion in enterprise value will not apply to proposed takeovers by SOEs, which will remain at $330 million, adjusted annually, based on the book value of assets (not enterprise value).

Monthly Merger Reports

In an effort to increase transparency in its merger review process, in February 2012 the Bureau announced that it would begin publishing on its website a monthly list of completed merger reviews (“Merger List”).  The Merger List will list all mergers for which a pre-merger notification was made under section 114 of the Act, a request was made for an advance ruling certificate under section 102, or both, and will also set out the names of the parties to the merger, the industry sector involved and the result of the review by the Bureau, being: (i) “ARC”, signifying issuance of an advance ruling certificate; (ii) “NAL”, signifying the issuance of a “no action letter”, which is a letter from the Commissioner confirming that he does not, at that time, intend to make an application under section 92 of the Act in respect of the merger (or proposed merger); (iii) “CA”, signifying the registration of a consent agreement with the Tribunal; and (iv) “JD”, signifying a judicial decision in respect of the merger (or proposed merger).

Prior to the Bureau’s official announcement, some stakeholders raised concerns with the publication of the Merger List, primarily on the basis that information provided by parties to the Bureau pursuant to the Act is subject to statutory confidentiality obligations under section 29, which does not have an express exception to permit such publication.  Notwithstanding the concerns raised by stakeholders, the Bureau commenced publication of the Merger List in February 2012.

Merger Review Process Guidelines

In March 2009, significant amendments to the Act came into effect, one of which was to create a two-stage merger review process.  Under the two-stage merger review framework, an initial notification is supplied to the Commissioner by the parties to the merger with pre-determined information requirements, and subsequently the Commissioner may require the parties to supply additional information relevant to the Commissioner’s assessment of the merger, known as a “supplementary information request” or “SIR”.  Shortly after the amendments came into force, the Bureau published its Merger Review Process Guidelines, which set out its approach to administering the new two-stage merger review process.

With the benefit of over two years experience managing the new merger review process, in January 2012, the Bureau published revised Merger Review Process Guidelines reflecting the Bureau’s current practices.  The revised Merger Review Process Guidelines provide information and important guidance on a variety of issues, such as:

The nature and timing of communications between the parties to the transaction and the Bureau.  In particular, the revised guidelines re-confirm dialogue prior to issuance of a SIR is not intended as a forum to debate the merits of the case or relevance of information but rather an opportunity for the parties to understand the SIR and provide meaningful input as to how data is kept, alternative sources or forms of information and any other factors that might impair the ability of the party to comply with the SIR.

Timing issues in hostile transactions, clarifying that the relevant waiting periods commence based on the date information is supplied by the bidder such that a hostile target cannot delay the start of the waiting periods.  The Bureau will typically issue a SIR in combination with a timing agreement and/or orders pursuant to section 11 of the Act to ensure receipt of a response from the target.

The requirement to refresh information in response to a SIR.  A party must produce “refreshed” information (i) if more than 90 days have passed between the date of issuance of the SIR and the date of certification of a complete response, and/or (ii) for certain categories of documents (e.g., transaction documents and efficiencies-related records), as the Bureau requires responsive records to be current to within 30 days of a party’s certification of a complete response.  However, a party that has engaged in rolling production may not be required to produce refreshed records if the Bureau has indicated in writing that it has received sufficient information with respect to a particular SIR specification.

Size of Transaction Threshold

Subject to certain exemptions and qualifications, the acquisition of interests in an operating business through the acquisition of assets, shares or interests in a combination or by amalgamation must be notified to the Bureau in advance if prescribed “size of parties” (section 109) and “size of transaction” (section 110) thresholds are both exceeded.

The size of threshold test asks if the book value (as determined in accordance with the Notifiable Transactions Regulations) of the target’s assets in Canada or its gross revenues from sales in or from Canada exceed a prescribed amount, which is indexed and reviewed each year.  On January 8, 2013, the Bureau announced that this threshold increased from $77 million to $80 million.

The size of parties threshold remains at an aggregate $400 million calculated based on assets in Canada or gross revenues from sales in, from or into Canada of the parties and their respective affiliates.

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