Competition Bureau (the Bureau) has published a draft new Pre-Merger Interpretation Guideline for public consultation (Guideline #15), providing details as to how the Bureau calculates the value of “assets in Canada” and “gross revenues from sales” for purposes of the merger notification thresholds. It will be open for comment from interested parties until June 13, 2012.
The purpose of the guideline is to assist parties and their counsel in interpreting and applying the provisions of theCompetition Act (the Act) relating to notifiable transactions. This guideline sets out the general approach taken by the Bureau and may assist businesses in determining whether the parties-size and transaction-size thresholds under sections 109 and 110 of the Act are exceeded.
As previously covered on this blog, on March 23, 2012 the Bureau announced the publication of two other new Pre-Merger Notification Interpretation Guidelines for public consultation. Those publications were Guideline #12: "Requirement to Submit a New Pre-Merger Notification and/or ARC Request Where a Proposed Transaction is Subsequently Amended" and Guideline #14: "Duplication Arising From Transactions Between Affiliates".
What's in Guideline #15?
Guideline #15 focuses on three key areas of inquiry:
- what is an asset "in" Canada?;
- what are gross revenues from sales “in, from or into” Canada; and
- what revenues are considered to be “generated from those assets”?
The Bureau notes that the audited financial statements are the starting point for analysis, but cautions that "it is incumbent on parties to look beyond these segmented results to ensure that threshold calculations are consistent with the requirements of the Act and the Notifiable Transactions Regulations."
(1) Assets “In” Canada
Unless an exception applies, all assets on the audited financial statements of a Canadian entity (e.g., incorporated in Canada or formed pursuant to a Canadian statute) are assets “in” Canada. For tangible assets, the determination typically turns on where the asset is physically located. For an intangible asset (e.g., intellectual property rights), location is usually determined by the statute conferring the legal rights and privileges associated with the asset. Similarly, the location of a financial asset is usually determined by the statute conferring the legal rights and privileges associated with that asset.
(2) Gross Revenues From Sales “In, From or Into” Canada
Guideline #15 notes that merging parties should consider whether the audited financial statements provide a reasonable approximation of the value of revenues “in”, “from” and/or “into” Canada before relying on them. For example, some financial statements reflect both sales “in” Canada and sales “into” Canada, but exclude sales “from” Canada. [Author’s note: this reflects the European idea of turnover.]. Therefore, the Bureau states, it may be necessary to consult working papers or other records to determine the total value of all three categories of sales. Since only sales “in or from Canada generated by” the assets in Canada are relevant to the “size of target” threshold, whereas sales “in, from or into” Canada generated by assets anywhere in the world are relevant to the “size of parties” threshold, the distinction is important.
Whether gross revenues from sales are considered to be “in, from or into” Canada depends on the location of the seller and/or purchaser. The Guideline states that whether gross revenues are from sales “in, from or into” Canada can often be determined as follows:
- gross revenues from sales “in” Canada: "revenues from sales to a purchaser located in Canada that are booked in the audited financial statements of a Canadian party or Canadian affiliate of a party";
- gross revenues from sales “from” Canada: "revenues from sales to a purchaser not located in Canada that are booked in the audited financial statements of a Canadian party or Canadian affiliate of a party"; and
- gross revenues from sales “into” Canada: "revenues from sales to a purchaser located in Canada that are booked in the audited financial statements of a foreign party or foreign affiliate of a party".
Guideline #15 cautions that where the jurisdiction of incorporation of the seller is not the origin of the sale, the general principles set out above may not apply.
(3) “Generated From Those Assets”
Under Guideline #15, revenues are considered to be generated from assets in Canada if "any of the revenue-generating assets of the target business are located in Canada”. "Revenue-generating assets” is defined to include assets that "contribute in any way and at any stage" to the sale of the asset. This typically consists of things like manufacturing or sales, but omits ancillary functions like human resources.
Guideline #15 notes that merging parties should consider whether the audited financial statements provide a reasonable approximation of the value of revenues "generated from those assets" before relying on them. For example, if the audited financial statements of a party to the proposed transaction have to be adjusted (as a result of certain assets being considered either “in” or “not in” Canada), then similarly, the entries in the financial statements that correspond to gross revenues generated from those assets, may also have to be adjusted.
The draft Guideline #15 provides some hypothetical examples to illustrate the finer points made regarding some of the issues raised. Not all of the interpretations will be without controversy. For example, if a physical revenue-generating asset (such as a cruise ship) is located in Canada at any time during the year, the Bureau will apparently count all of the revenues generated by that asset as having been earned “in” Canada, even if the asset is foreign-registered and was physically located outside of Canada for the majority of the period in question.
The Interpretation Guidelines are not legally binding, but in the absence of court decisions interpreting the Notifiable Transactions Regulations, provide guidance as to the Bureau’s interpretation.