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Trends and climate
How would you describe the current merger control climate, including any trends in particular industry sectors?
Canada’s merger control climate has remained largely consistent since wholesale amendments to the Competition Act in 2009 introduced a two-stage merger notification system. The approach to merger review in Canada, which is set out in the Competition Bureau’s 2011 Merger Enforcement Guidelines, remains the approach taken by the bureau in virtually all cases.
Since the enactment of the new regime in 2009, approximately 5% of transactions have gone to a second-stage inquiry, although in 2015-2016 that percentage increased to approximately 8%. Many of those cases have resulted in resolutions – most frequently by way of a consent agreement registered with the Competition Tribunal. In most years, one or two mergers are abandoned by the parties in the face of Competition Bureau expressions of concern.
Since 2009 only three transactions have resulted in formal contested challenges before the Competition Tribunal:
- CCS/Tervita, which went all the way to the Supreme Court; and
- Parkland/Pioneer, which commenced in 2015 and was resolved in 2016; and
- Staples/Office Depot, which was filed the same day as the US challenge was filed, and was discontinued after the parties abandoned the merger once it was enjoined in the United States in early 2016.
CCS/Tervita involved a hazardous waste disposal site. The transaction was well below the notification thresholds, involving less than C$10 million. The Supreme Court allowed the merger on the basis of efficiencies achieved. The court found that the commissioner of competition had failed to quantify the anti-competitive effects and so the pro-competitive efficiencies demonstrated by the merging parties, although modest, outweighed the non-quantified anti-competitive effects.
The Parkland/Pioneer transaction involved the acquisition of gasoline stations in a number of small cities and towns. It resulted in the granting of an interim injunction requiring that the disputed assets be held and operated separately during the period of the challenge. Ultimately, the case was resolved on consent, with divestitures.
Canada’s merger control regime has no particular industry focus. Mergers in all industries are subject to the same general rules. Market circumstances in some industries will suggest that mergers in those industries may be more problematic than in others. Over the last few years Canada has experienced a significant number of large mergers in the retail sector, so a number of cases have focused on retail issues. The Competition Bureau is also generally interested in markets that involve the digital economy, and innovation issues, but there has been no special focus on those markets in merger control actions.
Are there are any proposals to reform or amend the existing merger control regime?
Canada’s merger control regime was significantly amended in 2009 to create a two-stage notification process, similar to the US system.
There are no meaningful amendments proposed with respect to the merger provisions at this time as major amendments occurred in 2009.
Following CCS/Tervita, in which the efficiencies defence was found to be operative, there has been speculation that the merger notification provisions may be amended to allow the Competition Bureau to obtain detailed information on the efficiencies to be pursued by merging parties in cases in which the parties propose to advance an efficiencies defence. There has also been some suggestion from the Competition Bureau that the efficiencies defence itself may be the focus of amendment. However, as yet no such proposals have been advanced.
Legislation, triggers and thresholds
Legislation and authority
What legislation applies to the control of mergers?
Canada’s primary merger control legislation is the Competition Act. In particular, Sections 91 and 92 of the act define mergers and provide that mergers which are likely to give rise to a substantial prevention or lessening of competition may be subject to challenge. Further, Part IX of the act sets out a regime for advance notice to be provided to the Competition Bureau in respect of certain defined merger transactions involving specific minimum values of assets or sales.
What is the relevant authority?
The relevant merger control authority is, in the first instance, the commissioner of competition, who heads the federal Competition Bureau. The commissioner is an independent law enforcement official charged with investigating whether a merger transaction is likely to give rise to a substantial prevention or lessening of competition – and in cases where a transaction is likely to lead to such effects, seeking appropriate remedies to prevent that outcome.
The second key institution is the independent Competition Tribunal. If the commissioner is concerned about a transaction and the parties are unwilling to satisfy the commissioner’s concerns, the commissioner may initiate a proceeding before the Competition Tribunal to prevent the merger or seek divestiture or unwinding in respect of a completed transaction.
The tribunal’s decisions are subject to appeal to the Federal Court of Appeal and from there to the Supreme Court, with leave.
Transactions caught and thresholds
Under what circumstances is a transaction caught by the legislation?
Section 91 of the Competition Act defines a ‘merger’ as being the acquisition or establishment, direct or indirect, by one or more persons, whether by purchase or lease of shares or assets by amalgamation or by combination or otherwise, of control over or a significant interest in the whole or part of the business of a competitor, supplier, customer or other person. Therefore, mergers are broadly defined.
Section 92 of the Competition Act provides that mergers – as defined – which are likely to give rise to a substantial prevention or lessening of competition may be challenged by the commissioner of competition before the Competition Tribunal. There is no de minimis size threshold to possible challenges.
In addition to the ability to challenge mergers of any size if they give rise to a substantial prevention or lessening of competition, the legislation also provides that specific types of transaction that rise above prescribed size thresholds require notification to the Competition Bureau before their implementation. There is no substantive aspect of the test as to whether a transaction is notifiable, so many completely innocuous transactions must be notified. Reciprocally, the fact that a transaction requires no notification does not mean that it cannot or will not be challenged. The commissioner of competition has up to one year post closing to challenge any transaction, whether or not notification needs to be given.
Do thresholds apply to determine when a transaction is caught by the legislation?
While any transaction constituting a merger may be subject to substantive review, only specified transactions are subject to advance notification. The notification rules, found in Part IX of the Competition Act, are reasonably complex and should be consulted in specific cases. Acquisitions of assets or shares, or amalgamations, or combinations or acquisitions of interests in a combination may be notifiable if the relevant size thresholds are exceeded.
While the thresholds operate slightly differently in respect of different types of transaction (eg, acquisition of shares versus amalgamations versus combinations) there is a size-of-parties test that captures the parties on both the size of a transaction and their affiliates, and also a size-of-transaction test that focuses on the firm or assets to be acquired. Although each case needs to be examined on its facts, as a general rule transactions are notifiable when the size of parties exceeds C$400 million in assets in Canada or in sales to, in or from Canada, and when the size of transaction exceeds the annual prescribed amount – C$87 million for 2016 – in assets in Canada or sales in or from Canada.
Is it possible to seek informal guidance from the authority on a possible merger from either a jurisdictional or a substantive perspective?
It is possible to seek guidance from the Competition Bureau as to substantive issues with respect to a proposed transaction and also with respect to whether or not the transaction is notifiable.
Regarding the question of whether a transaction is notifiable, the Merger Notification Unit of the Competition Bureau is experienced in giving advice on the notifiability of transaction structures and can be quite helpful. The typical approach is for counsel to develop an outline of the transaction structure and their position on whether it is notifiable and then to discuss the matter with the Merger Notification Unit. It is often helpful to provide a transaction diagram or an outline of the transaction to the unit in advance of that conversation. These conversations can occur on a client specific basis or on a no-name basis.
Regarding guidance on substantive merger issues, officials at the Competition Bureau will meet with parties to discuss their transaction confidentiality and provide initial feedback. However, typically discussions are only undertaken in cases where counsel is of the view that there is at least a potential issue. In general, without having done a meaningful review and without being in a position to communicate with marketplace participants, Competition Bureau officials will be unable to provide definitive views as to their likely approach to a transaction in those circumstances.
Are foreign-to-foreign mergers caught by the regime? Is a ‘local impact’ test applicable under the legislation?
For the purpose of notification, foreign-to-foreign mergers are caught if there is a Canadian nexus. That nexus requires that the target party must have a business in Canada (being a business undertaking in Canada to which employees employed in connection with the business regularly report to work). The parties to the transaction together with their affiliates must also have either C$400 million in assets in Canada or sales to, from or into Canada. The target must also have the annually prescribed value of assets in Canada or of sales from or to Canada. For 2015 the prescribed amount is C$87 million.
Regarding substantive merger review jurisdiction – as opposed to the notification issue – foreign-to-foreign mergers are caught by the Canadian statute. Even if it takes place entirely elsewhere a merger may give rise to a substantial prevention or lessening of competition within Canada. The commissioner of competition takes the position that the Competition Act gives him or her jurisdiction to challenge mergers where they have an anti-competitive effect in Canada, wherever they are undertaken. However, this effects-based jurisdictional approach has never been tested in a case where the commissioner has sought to challenge a merger with no Canadian elements.
In summary, for notification there must be a meaningful Canadian nexus regarding the transaction. For substantive merger review, the commissioner takes the position that any transaction which is likely to prevent or lessen competition substantially within Canada is subject to potential challenge, but this assertion of jurisdiction has never been tested before the Competition Tribunal or the courts.
What types of joint venture are caught by the legislation?
The Competition Act defines a ‘merger’ as the acquisition or establishment (direct or indirect) by one or more persons, whether by purchase or lease of shares or assets, by amalgamation or by combination or otherwise of control over or a significant interest in the whole or part of the business of a competitor, supplier, customer or other person. Therefore, many sorts of joint venture could fall within the meaning of a merger under the Competition Act. However, there is a specific exemption for joint ventures established in non-corporate form to undertake a specific project or programme of research and development if certain criteria are met.
Regarding notification, only specific types of transaction are notifiable:
- acquisitions of assets;
- acquisitions of shares;
- formations of combinations; and
- acquisitions of interests in combinations.
The combination provision is the most relevant for the purposes of the joint venture question. The test is inherently complex, but turns principally on whether there will be a contribution of assets and if the combination will carry on business not through a corporate form. Further, there are exemptions from notification with respect to combinations if the range of activities of the combination is restricted, there are provisions for an orderly termination of the combination and no change of control of any party to the combination. The provisions are reasonably complex and require analysis on a case-by-case basis.
If a joint venture falls within the combination provision (and does not fall within the exemption) or if it triggers notification as a result of the acquisition of shares or assets, it is reviewed on the same basis as other mergers – there are no special substantive rules for joint ventures.
Process and timing
Is the notification process voluntary or mandatory?
If the type of transaction requires advance notification and if the size of parties and size of transaction thresholds are exceeded, then notification is mandatory. Failure to notify is a criminal offence. However, inadvertent failure to notify has not, at least thus far, been the subject of significant enforcement action. By way of example, a firm which recently failed to notify two mergers agreed to an alternate case resolution by adopting a compliance policy, without additional penalty.
What timing requirements apply when filing a notification?
There is no time limit within which notification must be filed. However, if the transaction is notifiable, it cannot close until the relevant materials have been filed and 30 days have elapsed without receipt of a supplementary information request – unless the commissioner of competition waives the remaining period.
If a supplementary information request is issued by the commissioner within the initial 30 days after filing, the time periods before which closing cannot occur are extended to 30 days after the parties complete their response.
What form should the notification take? What content is required?
Notifications may take two broad forms. One is a request for an advance ruling certificate or a no action letter. Pursuant to Sections 102 to 103 of the Competition Act, an advance ruling certificate, if issued by the commissioner of competition, confirms that the commissioner may not subsequently challenge the transaction based on the information which was provided to him or her in respect of the request for the advance ruling certificate. By contrast, a no action letter is a statement by the commissioner of competition that as presently advised, he or she does not intend to challenge the transaction. It is generally provided by the commissioner in conjunction with a waiver of the formal notification requirements.
Requests for an advance ruling certificate and no action letter are typically made in the form of a letter to the Competition Bureau outlining the transaction and the reasons why it is not likely to give rise to a substantial lessening or prevention of competition. These letters vary considerably in complexity. In transactions where there is virtually no overlap between the parties, the letter can be extremely short. In other cases where the transaction is complex and there is significant overlap, such requests can be extensive, detailed and involve considerable factual and economic evidence – typically similar to white paper submissions in the United States.
When an advance ruling certificate or no-action letter is requested without the filing of a formal notification, the Competition Bureau strives to respond promptly, but there is no formal time limit and the parties may not close the transaction until the bureau issues the advance ruling certificate or provides a no-action letter and waives the formal filing requirement.
The other notification approach is to file formal notification. This requires a considerable amount of detailed information, including:
- an overview of the transaction structure;
- an executed or draft copy of the legal documents used to implement the proposed transaction;
- a description of the transaction’s business objectives;
- a list of the foreign antitrust authorities that have been notified;
- a summary description of the principal business carried out by each party and their principal product categories, including contact information for the top 20 customers and suppliers for each product category;
- basic financial information;
- an indication of the geographic scope of sales of each of the party’s principal businesses; and
- all studies, surveys, analyses and reports prepared or received by an officer or director for the purpose of evaluating or analysing the proposed transaction – similar to the Section 4(c) documents under the US Hart-Scott-Rodino process.
Filing of this information, under oath or affirmation, starts a 30-day clock after which, if no supplementary information request is issued, the transaction may close. In transactions where timing is important, it is common to file formal notification to start the clock running. Where formal notification is filed, the parties almost always file a request for an advance ruling certificate or no action letter.
Is there a pre-notification process before formal notification, and if so, what does this involve?
There is no pre-notification process before formal notification (ie, there is no legal or practical requirement to contact the Competition Bureau before filing a notification). However, the Competition Bureau is open to pre-filing discussions to prepare to review the file expeditiously and provide initial guidance where it can regarding areas of potential concern. That said, it is not necessary or expected that there be any pre-filing discussion, as is the case in some jurisdictions. Where timing is important, it is often advisable to provide advance information to the Competition Bureau, so that it may move expeditiously to review transactions once a formal filing occurs.
Can a merger be implemented before clearance is obtained?
Parties may not complete a merger prior to the expiry of the waiting periods, unless the commissioner of competition waives the running of any remaining time period.
Guidance from authorities
What guidance is available from the authorities?
Guidance is generally available from the Competition Bureau regarding the operation of the notice and waiting periods. However, as the rules in this regard are relatively straightforward, guidance in this respect is seldom required.
What fees are payable to the authority for filing a notification?
If a transaction is notifiable, a fee of C$50,000 is payable with respect to notifications. That fee is payable for a formal notification or for a request for an advance ruling certification or for both in respect of the same transaction (ie, one C$50,000 fee for both).
Publicity and confidentiality
What provisions apply regarding publicity and confidentiality?
Section 9(3) of the Competition Act provides that “all inquiries [under the Competition Act] shall be conducted in private”. Section 29 of the act provides that the commissioner of competition and his or her officials may not communicate information received in respect of a matter under investigation, except with the Canadian law enforcement agency or for the purposes of administration or enforcement of the act.
The Competition Bureau is of the view that the latter exemption allows it a wide ambit to communicate otherwise confidential information. The bureau’s position and standard approach is that once a filing has been made, it can and will make whatever contacts with marketplace participants that it deems necessary and appropriate to assess the implications of a transaction. Further, the bureau is of the view that this provision allows it to exchange any information in its possession with foreign antitrust authorities, insofar as that exchange may assist it in its own investigation of a merger transaction. Thus, while many foreign agencies require a waiver from the parties to share information with the Competition Bureau, the Canadian bureau takes the position that no waiver is required to share information with foreign antitrust authorities.
In 2013 the bureau commenced publication of a regular merger registry. A month after it completes a review of a transaction, the transaction will be publicly listed on the register. The register lists transactions which were reviewed in the previous month, by way of names of parties and industry in which they operate. Typically this does not cause problems regarding confidentiality, but on some rare occasions when a merger is not publicly known there can be issues. As a result, parties need to understand the bureau’s approach for maintaining confidentiality in respect of transactions and work with it to minimise any negative impact.
Are there any penalties for failing to notify a merger?
There are penalties regarding failing to provide notification of a merger. Under the Competition Act there is a criminal fine of C$50,000 for failure to provide advance notice of a merger where it is required, as well as the possibility of a civil penalty of up to C$10,000 per day. However, in almost 30 years of the merger notification provisions being in force there have been no prosecutions for failure to notify. Recently a firm which had failed on two occasions to file a mandatory notification agreed to resolve the commissioner of competition’s concerns by agreeing to adopt a competition law compliance policy.
Procedure and test
Procedure and timetable
What procedures are followed by the authority? What is the timetable for the merger investigation?
Once a formal notification or a request for an advance ruling certificate or no action letter is filed with the Competition Bureau, a team of officers will be assigned to review the transaction. They will review the materials received from the parties to the transaction, together with any submissions volunteered by interested third parties. They will also typically contact marketplace participants – most particularly customers and suppliers – to seek their views. The bureau will frequently contact foreign antitrust authorities, particularly when the merger is being reviewed elsewhere.
When a formal filing is made, the bureau has 30 days from the time of the filing to decide whether a supplementary information request will be issued. In more than 90% of cases none is issued. Once the 30-day period has expired, the parties are free to proceed with the transaction, unless the bureau obtains an injunction to prevent the transaction from closing or obtains an undertaking from the parties not to close.
What obligations are imposed on the parties during the process?
Once the parties have completed a merger notification filing there are no formal obligations on them unless a supplementary information request is issued. However, during the initial 30-day period, the Competition Bureau will frequently ask the parties for additional information to assist in its review of the transaction. The parties generally work expeditiously to provide additional information to assist the bureau with its review, in an effort to minimise the risk that a supplementary information request will be issued.
If a supplementary information request is issued, then the parties are obliged to respond before the Competition Bureau moves forward in its review of the transaction. Frequently requests can be quite complex and onerous. They typically require a great deal of information and a considerable volume of documents to be provided. Further, unless the request is complied with within 90 days there is usually an obligation to refresh the answers.
What role can third parties play in the process?
Third parties with an interest in a particular merger are free to make submissions to the Competition Bureau at any time. The bureau will typically be pleased to receive these submissions and use any information provided in its assessment of the transaction. However, third parties do not have any formal role in the bureau’s investigation and have no specific entitlement to any bureau information in relation to its review of a transaction.
What is the substantive test applied by the authority?
The substantive test applied is whether the transaction is likely to give rise to a substantial prevention or lessening of competition. The substance of the test is explored in considerable detail in the Competition Bureau’s Merger Enforcement Guidelines. The assessment is a reasonably standard assessment of competitive effects, including:
- likely interdependent or unilateral effects on competition;
- the availability of acceptable substitute products;
- the effectiveness of remaining competition;
- foreign competition;
- whether the merger will remove a vigorous competitor from the market;
- whether the target entity has failed or is about to fail;
- barriers to entry;
- the nature and extent of change and innovation in the market; and
- any other relevant factors – which will often include the possible existence of countervailing buyer power.
The Competition Act requires that the Competition Tribunal not make a decision on the basis of market shares or concentration ratios alone.
The act also contains an efficiencies defence, which provides that if the merger is likely to bring about gains in efficiency that will be greater than and offset the effects of prevention or lessening of competition, then the merger is to be allowed, even if it is likely to lead to a substantial prevention or lessening of competition. This provision was introduced into the act in recognition that, particularly in respect of smaller economies, efficiencies may be important to overall economic health. While the vast majority of transactions reviewed do not depend on an efficiencies defence, in two contested cases before the courts – one in the early 2000s (Superior Propane) and one decided in 2015 (CCS/Tervita) – the efficiency defence allowed a merger which had been found to give rise to substantial prevention or lessening of competition to proceed.
Does the legislation allow carve-out agreements in order to avoid delaying the global closing?
The statute does not provide for carve outs to allow closing of international transactions. However, the Competition Bureau has occasionally allowed transactions to close with hold separate undertakings regarding assets which may give rise to a potential anti-competitive effect.
Test for joint ventures
Is a special substantive test applied for joint ventures?
There is no special substantive test for joint ventures. If the transaction constitutes a merger within the broad definition of that term, the test is whether it is likely to give rise to a substantial prevention or lessening of competition.
What are the potential outcomes of the merger investigation? Please include reference to potential remedies, conditions and undertakings.
Merger reviews can give rise to a number of outcomes. The most common is that the transaction is cleared. This may be by way of an advance ruling certificate, which insulates a transaction from a possible subsequent challenge from the commissioner of competition on the basis of the facts that were provided at the time that the advanced ruling certificate was requested. Transactions may also be cleared by way of the provision of a no-action letter indicating that the commissioner of competition has no present intention to challenge the transaction. Transactions may also be cleared on the basis of the expiry of the waiting period, with no action being taken by the commissioner to prevent closing.
In cases in which the commissioner has concerns about a transaction, the parties may give undertakings to the commissioner with respect to either future behaviour of the merged entity or with respect to divestiture, in order to address the concerns.
More commonly, when a remedy is required, transactions may be cleared on the basis that the parties enter into a consent agreement, which is registered with the Competition Tribunal and has the force of a court order. The consent agreement will provide for whatever remedies the commissioner of competition deems appropriate, including ongoing behavioural remedies, divestitures, quasi-structural remedies and combinations of the above.
If the parties do not agree on a remedy, the commissioner may file an application with the tribunal to challenge the transaction. If the transaction has not yet closed, the challenge will be to enjoin closing or at least enjoin closing with respect to the relevant assets which the commissioner alleges give rise to a risk of a likelihood of substantial prevention or lessening of competition. If the transaction has already closed, the application will seek the dissolution of the merger or disposition of assets or shares. The order may, on consent, require other action.
Right of appeal
Is there a right of appeal?
If the commissioner of competition declines to clear a merger the transaction can still proceed, unless the commissioner challenges the merger before the Competition Tribunal (ie, once the relevant waiting periods expire, the parties are free to close the transaction at the risk that the commissioner may subsequently challenge it). If the commissioner challenges the transaction, he or she must do so by filing an application with the tribunal. The issue is then disputed before the tribunal with evidence called by both the commissioner and the merging parties. The tribunal then makes a ruling. The tribunal’s rulings can be appealed to the Federal Court of Appeal without leave on questions of law or mixed fact and law and with leave on questions of fact. Federal Court of Appeal decisions are subject to appeal to the Supreme Court, with leave of that court.
Do third parties have a right of appeal?
Third parties have no right of appeal with respect to the decision of the commissioner of competition to challenge or not challenge a merger. However, once a proceeding before the Competition Tribunal has begun, third parties may seek intervener status in those proceedings. That status may be granted by the tribunal if it concludes that the third parties can bring a relevant and meaningful perspective to the proceedings and that allowing their intervention would not otherwise be prejudicial or problematic with respect to those proceedings.
What is the time limit for any appeal?
Once the commissioner of competition has a formal notification before him or her there are specific timelines within which he or she must file an application with the Competition Tribunal. If such an application is not filed then the parties are free to close the transaction. Once the matter is before the Competition Tribunal it will set its own timelines for a hearing. In merger cases, initial hearings typically occur within one year of an application being filed. A Competition Tribunal decision may be appealed to the Federal Court of Appeal, typically within 30 days of its issuance.