Canadian COMPETITION LAW

March 21, 2010

The pre-merger notification provisions of the Competition Act (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, Canada’s merger control regime was recently significantly amended (in March, 2009) which has led to the adoption in Canada of a U.S.-style two-track merger control regime.

This note sets out frequently asked questions regarding the scope and application of Canada’s merger control rules.

Is notification mandatory or voluntary?

For mergers that exceed the statutory monetary thresholds under the Act, notification is mandatory and failure to pre-notify is a criminal offence.

Are non-notifiable mergers reviewable?

Yes.  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 to determine whether the merger may prevent or lessen competition substantially in a relevant market (or markets).  Moreover, the Bureau has in the past challenged transactions that were not notifiable.

What is the test for notification?

Generally speaking, for a merger to be notifiable in Canada under Canadian competition law 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 any of the statutory exceptions under the Act.

How is merger defined in the Act?

Section 91 of the Act defines “merger” broadly as the direct or indirect acquisition of control over or a “significant interest” in the whole or a part of a business.  As such, control may be acquired by de jure control (i.e., acquiring more than 50% of the voting shares) or the acquisition of a “significant interest”.

The Bureau has taken the position that the acquisition of a significant interest will occur when a person obtains the ability to materially influence the economic behaviour of a business, including pricing, purchasing, investment or financing decisions, and that, while ownership of less than 10% of the voting interests in a business will not generally constitute ownership of a significant interest, acquisition of 10-50% of the voting interests may be sufficient for materially influence.

What is an 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 taken the position that employees may include both independent contractors and part-time employees.

What types of transactions are notifiable?

The five types of transactions that require pre-merger notification filing, assuming all of the other requirements for pre-merger notification are also met, are: (i) asset acquisitions, (ii) share acquisitions, (iii) amalgamations, (iv) non-corporate combinations and (v) acquisitions of interests in non-corporate combinations (though asset and share acquisitions are the most commonly encountered).

What are the notification thresholds?

To be notifiable, a transaction must exceed both the “size of parties” and “size of transaction” thresholds under the Act.

Under the size of parties threshold, parties to a transaction, together with their affiliates, must have combined Canadian assets (or gross revenues from sales in, from or into Canada) of more than 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 $70 million.

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 (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 (more than 50% if more than 35% is already held).

In addition there are different thresholds and tests for amalgamations and non-corporate combinations.

How are assets and revenues calculated?

Assets and revenues are calculated according to the most recent audited annual financial statements.  The Notifiable Transactions Regulations under the Act set out a detailed regime for the calculation of assets and revenues and can impact asset and revenue calculations where, for example, a transaction is delayed or where material changes are made pre-closing affecting the determination of whether a transaction may be notifiable.

Is purchase price relevant?

No.  Whether or not a proposed transaction is notifiable in Canada does not depend on the purchase price for a transaction, but rather depends on what is being acquired (i.e., whether an operating Canadian business is being acquired), the type of transaction, whether the statutory monetary and share thresholds under the Act are exceeded and whether any exceptions to notification are available under the Act.

Are there exceptions to notification?

Yes.  The Act 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 (as defined in the Act) and where an Advance Ruling Certificate (“ARC”) is received, which is one form of clearance under the Act.

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.

What must be filed?

Whereas previously, parties could choose between filing either a “short form” or “long form” notification (based on the complexity of the deal), Canada now has a single pre-merger notification form.  Having said that, what is filed by merging parties can in many cases depend on the complexity of a proposed transaction and discussions with the Bureau (e.g., whether an ARC application or notification, often together with a competitive effects brief, is filed).

What are the filing fees and who must pay?

Merger notification filings are subject to a CDN $50,000 filing fee and the filing fee is to be paid by the notifying parties.  The fee for an ARC request is CDN $50,000 plus GST and is to be paid by the person making the request.  While parties may determine how filing fees are allocated among the parties, the Bureau has taken the position that notifying parties are jointly and severally liable for payment.

To whom is notification made?

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.

Is Canada a suspensory jurisdiction?

Yes.  Canada is a suspensory jurisdiction.  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 (i.e., an ARC or “no action letter”).

What are the required waiting periods?

As a result of the recent amendments to the Act, Canada now has a new two-stage merger review regime.  Under the new rules, notification triggers an initial 30 calendar day waiting period during which the parties to a transaction are not permitted to complete the transaction (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”, which is the Canadian equivalent to a U.S. second request).

If the Bureau issues a SIR, the waiting period stops until a complete response to the SIR 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.

What is the test to issue a SIR?

The Commissioner of Competition (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 (though they are non-binding and so it remains to see how they will be applied in reality).

How long may the SIR process take?

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.

Where a SIR is not issued, can the Bureau otherwise delay a transaction?

Yes.  In addition to the issuance of a SIR during the initial waiting period, the Bureau also retains the power to seek interim injunctions under section 100 of the Act.

Is the Bureau required to complete its review during the waiting periods?

No.  While merging parties are free to complete a transaction after the expiry of either the initial waiting period (assuming the Bureau has not issued a SIR) or the second waiting period (assuming the Bureau has not taken steps to suspend the transaction, by obtaining a section 100 injunction), the Bureau is not required to have completed its review during these periods and may challenge a transaction for up to one year post-completion (shortened from the previous three years).

Are timing agreements or other mechanisms available 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, it may be possible to negotiate timing agreements with the Bureau addressing, for example, closing dates and production requirements avoiding the issuance of a SIR.

Are there penalties for failing to file or closing prematurely?

Yes.  The recently amended Act gives the Competition Tribunal (the “Tribunal”) the power, in the case of a proposed transaction, to issue interim injunctions or order the filing of information.  In the case of a completed transaction, the Tribunal may make orders for mergers to be dissolved, 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.

Parties that discover a failure to notify should consult counsel immediately to review options including filing a corrective notification.

When may parties close?

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).

If a transaction is non-complex what is the waiting time to obtain an ARC?

In the case of non-complex transactions, the Bureau’s non-binding service standard period to issue ARCs is fourteen days.

Do the amendments affect the forms of clearance available?

No.  The recent amendments to the Act do not affect parties’ ability to request (or the Bureau’s ability to issue) ARCs under section 102.  The amendments also do not affect the Bureau’s ability to issue “no action letters”.

Are there any special rules for hostile bids?

Yes.  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 then must 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 SIR is issued by the Bureau) begins when the Bureau receives the requested information from the bidder (i.e., regardless of when the target complies).  This mechanism is intended to prevent targets from stalling a transaction by delaying filing.

What is involved in the substantive review of mergers in Canada?

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 (or markets) 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 so-called “evaluative criteria” including effective remaining competition, foreign competition and the countervailing power of customers.

With respect to market shares, the Bureau takes the position in its 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%.

Has substantive merger review changed after the 2009 amendments?

No.  While the amendments to the Act that came into force in March, 2009 significantly changed the process and filing requirements for mergers, the regime for the substantive review of mergers in Canada has not changed.

Who may challenge a merger and what is the process?

The Bureau has exclusive jurisdiction to challenge mergers in Canada and may challenge a merger either pre- 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 and may challenge a transaction for up to one year after closing (which time period 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 in Canada are very uncommon with the majority of issues being resolved by way of negotiated settlement (i.e., through negotiated consent agreements).

What powers does the Bureau have to collect information for a merger review?

The Bureau may exercise its power to issue a SIR to seek further information from merging parties and may also make voluntary information requests or seek section 11 orders to obtain information from third parties.

What are examples of competition law advice prior to a transaction?

Some of the competition law considerations and issues in advance of a transaction include:

Notifiability.  Whether a transaction is notifiable in Canada or other jurisdictions (e.g., the U.S. or EU).  Approximately 100 jurisdictions worldwide now have competition law regimes, with most having also adopted merger control rules that can in some cases mean that a transaction is also notifiable in multiple jurisdictions.

Non-notifiable Transactions.  Where a transaction is not notifiable under the Act, whether there may nevertheless be potential competition law issues (as the Bureau has the power to review mergers that do not meet the thresholds for notification).

Investment Canada Act.  Whether the Investment Canada Act may require that a notification or application for review be filed or other sectoral regulatory requirements (e.g., in relation to transactions in the financial services, telecommunications or transportation industries).

Timing & Multi-juridictional Review.  Timing strategies in relation to required competition filings in Canada and/or other jurisdictions.

Substantive Issues & Strategies.  Potential competition law issues that may arise from the transaction and strategies for minimizing the risk and lessening the likelihood remedies may be sought by the Bureau.

What are some examples of competition law advice during a transaction?

Some of the competition law considerations and potential issues during a transaction include:

Pre-merger Notification Filings.  Where a transaction is notifiable, what to file, engaging in discussions with the Bureau and preparing and coordinating Canadian filings and/or filings in other jurisdictions.

Complex Transactions.  For complex transactions, strategies for clearance, reducing the risk of that a SIR may be issued, dialogue with the Bureau and strategies for meeting the applicable timetable for completion.

Transaction Documents.  Advice in relation to the drafting and negotiation of transaction documents including: (i) representations (e.g., revenues and assets of the parties, which determine whether a transaction is notifiable), (ii) conditions (i.e., relating to competition law clearances) and (iii) covenants (e.g., in relation to information sharing, co-operation to seek clearance, payment of fees and taking steps to effect any remedies).

Pre-merger Conduct Memoranda.   Preparation of pre-merger conduct memoranda (i.e., in relation to due diligence and pre-merger coordination that can raise pre-mature completion or conspiracy issues in some instances).

Communications Strategies.   Assisting with news releases and communications with customers and suppliers (the Bureau commonly contacts customers and suppliers during a merger review).

Negotiation of Remedies.  Analysis and negotiation in relation to any merger remedies that may be required to obtain clearance for a transaction.

What other Bureau guidelines or rules may apply to a merger?

In addition to the Act and Notifiable Transactions Regulations, the Bureau has issued a number of other enforcement guidelines (e.g., the Merger Enforcement Guidelines and merger review process guidelines) and Bulletins (e.g., in relation to the application of the efficiencies defence and merger remedies).  The Bureau has also issued a number of Interpretation Guidelines in relation to the application of the Act in relation to particular types of transactions and situations.

For example, the Bureau has issued Interpretation Guidelines in relation to the definition of “operating business”, multiple step or continuous transactions, ordinary course acquisitions and joint ventures.

The Bureau’s merger-related guidelines, though not binding, can in many cases impact the analysis of both substantive and procedural aspects of a transaction.

For more regulatory law updates follow me on Twitter: @CanadaAttorney

Comments are closed.