Under the federal Competition Act (the “Act”) both parties to specified types of transactions that exceed prescribed statutory thresholds are required to file pre-merger notification filings with the federal Competition Bureau (the “Bureau”).
Transactions that are not notifiable (i.e., that fall below the prescribed pre-merger notification thresholds) may also still be subject to review by the federal Competition Tribunal (the “Tribunal”) where they may prevent or lessen competition substantially.
ENFORCEMENT AND RELEVANT LEGISLATION
Parts VIII and IX of the Act govern the substantive review of mergers and pre-merger notification.
The Bureau has the power to make applications to the Tribunal for remedial orders in relation to mergers. Private parties have no jurisdiction to challenge mergers before the Tribunal.
For mergers that exceed the prescribed thresholds under the Act, notification is mandatory. Failure to pre-notify is a criminal offence and parties that fail to notify are subject to fines of up to $50,000.
There is no specific prescribed trigger or deadline for pre-merger notification under the Act. Generally speaking, merging parties have complete discretion regarding when to file pre-notification filings.
A notifiable transaction cannot, however, be completed until either the applicable statutory waiting period has elapsed or clearance has been received (an Advance Ruling Certificate, or “ARC”, or “no action letter”, discussed below).
In addition, regardless of size, any transaction that falls within the broad statutory definition of “merger” under the Act is also potentially subject to substantive review by the Bureau and the Tribunal.
Definition of Merger
Section 91 of the Act defines “merger” broadly as the direct or indirect acquisition of “control” or a “significant interest” in the whole or a part of a business.
As such, control may be acquired through the acquisition of de jure control (the acquisition of more than 50% of the voting shares of a corporation). With respect to partnerships, the Act provides that a partnership is controlled by a person when the person holds an interest in the partnership that entitles them to receive more than 50% of the profits of the partnership or more than 50% of its assets on dissolution.
Control may alternatively be achieved through the acquisition of a “significant interest” in a business. While the Act does not define “significant interest”, the Bureau takes the position in its Merger Enforcement Guidelines (2011) (“MEGs”) that in determining whether an interest is significant, both quantitative and qualitative considerations are relevant. In particular, the Bureau’s position is that a “significant interest” is acquired where an acquirer “obtains the ability to materially influence the economic behavior of the target business”, which may include, but is not limited to, decisions relating to pricing, purchasing, distribution, marketing, investment, financing and the licensing of intellectual property rights.
In this regard, the MEGs contain a list of factors that the Bureau may consider in determining whether a minority shareholding, interest in a combination, agreement or other relationship or interest confers “material influence” over a target.
Test for Notification
For a merger to be notifiable in Canada it must:
1. Involve the acquisition of an “operating business” in Canada;
2. Be one of five specified types of transactions;
3. Exceed the prescribed thresholds under the Act; and
4. Not fall within any exception under the Act.
“Operating Canadian Business”
For a transaction to be notifiable 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.”
The Bureau has issued a number of Interpretation Guidelines in relation to mergers, including its Pre-Merger Notification Interpretation Guideline Number 1: Definition of “operating business”, which sets out its position regarding the meaning of “operating business”.
Types of Notifiable Transactions
The five types of transactions that require pre-merger notification filing, assuming the pre-merger notification thresholds under the Act are met, are:
1. Asset acquisitions;
2. Share acquisitions;
4. Non-corporate combinations; and
5. Acquisitions of interests in non-corporate combinations.
Thresholds for Notification
To be notifiable, a transaction must exceed both the “size of parties” and “size of transaction” thresholds under the Act. These thresholds are cumulative.
Under the size of parties threshold, parties to a transaction, together with their affiliates, must have combined Canadian assets (or gross annual revenues from sales in, from or into Canada) exceeding CDN $400 million.
Under 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 $80 million (a figure adjusted annually).
For share acquisitions, an additional threshold must be met. For the acquisition of public companies, the acquisition must result in the acquirer holding more than 20% of the voting shares of the target (more than 50% if more than 20% is already held). For private companies, the acquisition must result in the acquirer holding more than 35% of the voting shares of the target (more than 50% if more than 35% is already held).
Different thresholds and tests apply for amalgamations and non-corporate combinations.
Pre-merger notification is required for all transactions that exceed the relevant notification thresholds under the Act. In other words, transactions that raise no substantive issues may be notifiable (where they exceed the notification thresholds under the Act) and small transactions that are not notifiable may be reviewed by the Bureau or Tribunal (where they do not exceed the notification thresholds, but may raise substantive issues under section 92 of the Act).
The Act contains a number of exceptions to the pre-merger notification requirements. These include: (i) certain ordinary course acquisitions of real property and goods, (ii) an underwriting exception, (iii) transactions between affiliates, (iv) certain acquisitions of resource properties and (v) where an ARC is received (one form of clearance under the Act).
Who Must Notify
Both parties to a transaction (i.e., acquirer and target) must file pre-merger notification filings where the notification thresholds under the Act are met.
Pre-merger Notification Filings
Before the Act was amended in 2009, parties were able to choose whether to file a “short form” or “long form” notification based on the complexity of a transaction. As a result of the amendments in 2009, Canada now has a single pre-merger notification form.
Section 16 of the Notifiable Transactions Regulations under the Act sets out the information that must be filed which includes: (i) a description of the proposed transaction, (ii) a description of the business objective(s) of the transaction, (iii) copies of the transaction documents, (iv) a list of foreign competition/antitrust authorities notified, (v) party information (including contact information, lists of affiliates with significant Canadian assets or revenues and descriptions of their principal businesses and products), (vi) the parties’ top 20 suppliers and customers for each relevant product and (vii) the geographic regions of sales.
Canada also now has a parallel to the 4c document requirement in the U.S., in that merging parties must also file copies of strategic transaction documents (all “studies, surveys, analyses and reports … prepared or received by an officer or director … for the purpose of evaluating or analyzing the proposed transaction with respect to market shares, competition, competitors, markets, potential for sales growth or expansion into new products or geographic regions”).
It is also common for merging parties to file a competitive brief or submission discussing, among other things, the transaction, the relevant industry, product and geographic markets and effects of the transaction.
Merger notification filings are subject to a CDN $50,000 filing fee to be paid by the notifying parties. The fee for an ARC request is CDN $50,000 and is to be paid by the person making the request. While parties may determine how filing fees are allocated, which is typically subject to negotiation, the Bureau’s position is that notifying parties are jointly and severally liable for payment.
Merger Notification Unit (“MNU”)
The Bureau’s Merger Notification Unit (“MNU”) is responsible for all pre-merger notifications. The MNU also provides guidance to merging parties and enforces compliance with the pre-merger notification provisions of the Act.
Canada is a suspensory jurisdiction. Parties to a notifiable transaction are prohibited from completing the transaction after filing unless either the applicable waiting period has expired or clearance has been received (i.e., an ARC or “no action letter”).
Following amendments to the Act in 2009, Canada now has a two-stage merger review regime. Notification triggers an initial 30 calendar day waiting period, which begins to run from the date on which both parties file their notification forms, during which the parties are not permitted to close (unless clearance has been received).
During the initial 30-day waiting period, the Bureau may advise the parties that it does not intend to challenge the transaction. Alternatively, where the Bureau takes the position that there are potential competition issues, it may issue a Supplementary Information Request (“SIR” – the Canadian equivalent to a U.S. second request).
If the Bureau issues a SIR, the waiting period is suspended until a complete response to the SIR has been filed upon which a second 30-day waiting period begins (during which the parties are again not permitted to close).
Service Standard Periods
In addition to the statutory waiting periods discussed above, the Bureau has established non-statutory service standards for merger reviews. The Bureau’s service standard periods for pre-merger notification filings and ARC applications are as follows: (i) non-complex transactions – up to 14 days from the day on which sufficient information has been received by the Commissioner to assign a complexity designation; (ii) complex transactions – up to 45 days from the day on which sufficient information has been received by the Commissioner to assign a complexity designation, except where a SIR is issued, in which case it is 30 days from the day on which the information requested by the Commissioner has been received from all SIR recipients (coinciding with the statutory 30 day waiting period for a second phase review).
Penalties for Prematurely Closing
The Act sets out a number of remedies where merging parties complete a proposed transaction before the expiry of the applicable waiting period (or receipt of clearance). These include “administrative monetary penalties” (essentially civil fines) of up to CDN $10,000 per day of non-compliance. Divestiture and dissolution orders may also be made.
Parties to a notifiable transaction may close when: (i) an ARC is received, (ii) a “no-action letter” is received or (iii) the applicable statutory waiting period has expired.
The Bureau may, however, continue to review a transaction post-closing and may challenge a transaction for up to one year post-completion (unless an ARC has been received).
SUPPLEMENTARY INFORMATION REQUESTS (“SIRS”)
The Commissioner may issue a SIR requiring parties to a transaction to supply additional information that is “relevant to the Commissioner’s assessment of the proposed transaction”.
While there is no judicial oversight for the issuance of SIRs, the Bureau has issued internal guidelines governing the scope, timing and procedure in relation to SIRs including consultations to narrow their scope.
There is no limit as to how long a SIR request process may take. This is because the burden is on the merging parties to complete the request and, where a SIR is made, the “clock” will not start again until the SIR has been fully complied with.
Timing Agreements and Other Mechanisms to Avoid SIRs
There may be cases when the Bureau’s review is not completed during the initial 30-day waiting period. In such cases, a timing agreement with the Bureau is a potential alternative to the issuance of a SIR (precluding the merging parties from completing the proposed transaction for a specified period).
See for example, Competition Bureau, Bulletin, Fees and Service Standards Handbook for Mergers and Merger-Related Matters:
“[f]or less complex mergers, or complex mergers where the Bureau requires additional information to determine the necessity or scope of a SIR, such additional information will generally be sought on a voluntary basis. Alternatively, the parties and the Bureau may have an understanding (as may be embodied in a timing agreement) that: (1) the Bureau is continuing its review beyond the expiry of any applicable statutory waiting period; (2) the parties will work cooperatively with the Bureau to address additional information requests from the Bureau; and (3) the parties will not close the transaction for an agreed-upon period of time to allow the Bureau to complete its review.”
Two forms of clearance are available under the Act: (i) ARCs and (ii) “no action letters.”
Advance Ruling Certificates (“ARCs”)
Merging parties may request an ARC from the Commissioner of Competition (the “Commissioner”) under section 102 of the Act.
Where an ARC is issued, and the transaction is substantially completed within one year of its issuance, the Bureau cannot apply to the Tribunal for remedial orders solely on the basis of information that is the same (or substantially the same) as the information on which the ARC was based.
ARC applications typically take the form of letter submissions to the Bureau setting out the facts relating to the proposed transaction, relevant product and geographic markets and submissions as to why a proposed transaction is unlikely to raise any significant substantive issues under the Act. An ARC application does not, however, start the relevant statutory waiting period. As such, merging parties may file a pre-merger notification filing together with an ARC application to start the statutory waiting period.
An ARC is the strongest form of merger clearance possible under the Act and, as such, only typically applied for (and issued) in the absence of any likely significant competitive effects.
No Action Letters
Under subsection 123(2) of the Act, the Bureau may issue a letter stating that “… the Commissioner does not, at this time, intend to make an application under section 92 in respect of the proposed transaction.” The Bureau revised its standard language for no action letters in 2011.
In addition, where information has been supplied in an ARC request, and the information is substantially similar to that required for notification, the Commissioner may also waive the notification requirement (and applicable waiting period).
There are special rules under the Act for hostile transactions.
In a hostile bid, the initial 30-day waiting period begins on receipt of a complete filing from the bidder. The Bureau must then notify the target that a filing has been received from the bidder and give the target 10 days to file a notification from the date the target is notified.
In addition, where a SIR is issued, the second 30-day waiting period begins after the Commissioner has received the information requested from the bidder and the bidder has certified that its response is correct and complete in all material respects.
The Bureau has also recently issued several Hostile Transactions Interpretation Guidelines (see links below).
SUBSTANTIVE MERGER 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 the potential anti-competitive effects of a merger).
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 (or markets) post-merger.
The framework to analyze the potential anti-competitive effects of a transaction includes evaluative criteria set out in section 93 of the Act, Tribunal merger decisions and the Bureau’s MEGs, which were revised and updated by the Bureau in 2011 (see link below).
In assessing potential competition issues arising from a merger, the Bureau considers both unilateral effects (i.e., whether the merged firm alone will likely be able to exercise market power post-merger) and coordinated effects (i.e., whether a group of firms together will likely be able to exercise market power post-merger).
Generally speaking, this analysis involves, among other things, the review of the estimated market shares of the parties, concentration in the relevant market(s), barriers to entry and other so-called “evaluative criteria” (including effective remaining competition, foreign competition and the countervailing power of customers).
The Bureau has exclusive jurisdiction to challenge mergers in Canada and may challenge a merger either pre- or post-completion (with some limitations).
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 divestiture of assets of shares or dissolution altogether (in the case of a completed merger). In this regard, the Tribunal’s power to order dissolution of a completed merger was recently confirmed.
The Bureau has also sought injunctions in the past to allow more time for substantive review and may challenge a transaction for up to one year post-closing (except where an ARC has been issued).
Where the Commissioner does commence proceedings before the Tribunal, however, private parties may seek leave from the Tribunal to intervene. For example, in one recent case, WestJet was granted leave to intervene in the Bureau’s challenge of the Air Canada / United merger.
BUREAU’S POWER TO COLLECT INFORMATION
The Bureau may exercise its power to issue a SIR (see above) to seek further information from merging parties, make voluntary requests for more information or seek compulsory production orders under section 11 of the Act to obtain information from third parties.
The Bureau also commonly makes market contacts (i.e., to the customers, competitors and suppliers of merging parties) as part of its routine merger review process.
LINKS AND RESOURCES
Monthly Merger Reviews
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