On September 28, 2016, the federal Minister of Innovation, Science and Economic Development introduced Bill C-25, An Act to amend the Canada Business Corporations Act, the Canada Cooperatives Act, the Canada Not-for-profit Corporations Act, and the Competition Act. Bill C-25 proposes to introduce a number of important changes to the Canadian corporate governance regime for federally-incorporated businesses and organizations. In relation to the Competition Act, Bill C-25 proposes to broaden the affiliation rules, which could potentially impact a wide range of competition law issues.
The proposed amendments to the affiliation rules in Bill C-25 are substantially the same as those previously included in the proposed Price Transparency Act (Bill C-49) in December 2014. The primary objective of Bill C-49 at the time was to address the perceived problem of unjustified cross-border price gap between identical or similar products in Canada and the United States, which was the focus of significant commentary and criticism from competition law practitioners, economists and academics. The proposed amendments to the affiliation rules were just an incidental part of the bill. Bill C-49 died on the order paper, along with it its proposed amendments to the affiliation rules (which themselves were not controversial). The current Bill C-25 revives substantially the same amendments to the affiliation rules as those included in Bill C-49.
Underlying the affiliation rules is the notion of “control”. Under the current affiliation rules, a corporation is defined to be an affiliate of the person that controls it through ownership of a majority of its voting securities; corporations under common control are affiliates of one another; and two corporations that are affiliated with the same corporation at the same time are deemed to be affiliated with each other. This concept of control currently does not apply in the same comprehensive way to partnerships and sole proprietorships and not at all to trusts. As a result, a majority ownership/control relationship often does not establish an affiliate relationship when partnerships, sole proprietorships or trusts are involved, even though the substantially the same structure involving only corporations would establish an affiliate relationship.
Bill C-25 seeks to close these legislative gaps by: (a) introducing a new definition for “entity”, which includes a corporation, a partnership, sole proprietorship, trust or other unincorporated organization capable of conducting a business; and (b) expanding the concept of “control” for non-corporate entities to track the current approach to corporations. As a result, the new affiliation rules will apply to partnerships, sole proprietorships, trusts and other non-corporate entities in more or less the same way they do to corporations.
The proposed affiliation rules bring a more consistent treatment of corporations and non-corporate entities, which is certainly a welcome result. However, the impact of the proposed affiliation rules will be felt by business groups in different ways. Agreements, transactions and other business dealings amongst only affiliated entities are exempt from the application of the Competition Act’s criminal conspiracy offence and its civil analog, the notifiable transaction regime and restrictions against price maintenance, exclusive dealing and tied selling. Therefore, business groups with non-corporate vehicles such as partnerships or trusts may have greater latitude to make inter-affiliate arrangements under the new affiliation rules. However, in other contexts, the broadened affiliation rules will invite more frequent and extensive application of the Competition Act. For example, the broadened affiliation rule will result in more transactions being subject to mandatory notification under the notifiable transaction regime of the Competition Act, as the notifiablility of a transaction is determined in reference to the assets and revenues of all affiliates and the assets and revenues of non-corporate entities will now be included in that analysis. This will be particularly important to private equity firms and other investors that hold their investment through partnerships.