Mergers and acquisitions activity continues unabated in Canada, where parties submitted notifications for approximately three hundred transactions to the Competition Bureau (the "Bureau") in the past year. The number and value of these transactions also continue to increase, as does the frequency of clearances sought from multiple antitrust enforcement agencies around the world.
Against this backdrop of intensified mergers and acquisitions activity, the Bureau continues to review and refine core aspects of its merger clearance process. The federal government has also recently established a Competition Policy Review Panel to review Canada's competition and foreign investment laws in response to criticism of increased foreign acquisitions of Canadian businesses.
The emergence of merger clearance regimes in countries that previously did not conduct merger reviews, the prospect of changes to Canada's merger clearance process, as well as potentially significant changes to the rules governing foreign acquisitions of Canadian businesses, mean that merging parties currently face an increasingly complex and shifting regulatory landscape. This article highlights some of these recent developments.
Competition Policy Review Panel
The most significant competition law development so far in 2007 was the federal government's establishment in July 2007 of a Competition Policy Review Panel with a mandate to review key aspects of Canada's competition and foreign investment laws in light of a changing global economy and to ensure that they encourage "even greater foreign investment" and more Canadian jobs.
The five-member Review Panel's "core mandate" is to review the Competition Act (Canada) (the "Competition Act") and the Investment Canada Act ("Investment Act"). The Review Panel, whose appointment was announced the same day Alcan Inc. disclosed that Rio Tinto plc had made a takeover offer for its shares,1 is to report to the Minister of Industry in June 2008 with concrete recommendations that could form the basis for changes to the Competition Act and the Investment Act. Given the recent debate over foreign takeovers of established "flagship" Canadian companies (e.g., Alcan Inc., Inco Limited and the Hudson's Bay Company), the Review Panel is stepping into topical and controversial territory.
The Review Panel is also charged with examining Canada's sectoral ownership restrictions on direct foreign investment (e.g. airlines, financial services and broadcasting). Over-arching objectives of the Review Panel include advising on whether Canada's investment framework should be updated to address national security concerns and issues relating to acquisitions by large foreign state-owned enterprises with non-commercial objectives. The review likely will include the Competition Act's merger clearance rules, as well as existing Investment Act rules governing foreign investment in Canada, which currently require parties to apply for review of acquisitions of control of Canadian businesses that exceed certain monetary thresholds.
Developments in Competition Act Injunctions – Labatt/Lakeport
One of the most significant Canadian merger cases in 2007 to date involved the Bureau's attempt to block Labatt Brewing Company's acquisition of Lakeport Brewing Income Fund using the Competition Act's interim injunction provisions.
When the Bureau advised the parties that it would not complete its review within the statutory 42-day waiting period, Labatt proposed to close with a "hold-separate" arrangement that would delay integration of Lakeport's business to allow the Bureau to complete its review. The Bureau declined and sought an order from the Competition Tribunal to block the transaction on an interim basis. The Tribunal dismissed this application finding that the Commissioner had failed to meet the test for an interim injunction under the Competition Act. The critical point made by the Tribunal in Labatt/Lakeport was that because the Competition Act both permits post-merger remedies and allows the Tribunal to impose them, there was no reason why these remedies could not be imposed post-closing.
The Labatt/Lakeport case, currently under appeal, was the first time the Tribunal had considered the Competition Act's amended interim injunction provisions. The case is significant in that it may be more difficult for the Commissioner to block mergers in Canada. Moreover, merging parties may be less inclined to negotiate hold separate arrangements pending completion of the Bureau's review. It is interesting to note that while orthodox thinking has been that imposing an effective post-merger remedy may be more difficult once parties have combined their assets (i.e., when the "eggs are scrambled"), this may no longer be as significant a deterrent as once thought. The final implications of this important decision on merger remedies remain to be seen.
Bureau Merger Review Initiatives
Apart from the federal government-mandated review of competition policy, the Bureau also continues to review core aspects of its merger clearance policy. The Bureau's key initiatives include:
- Ex-Post Merger Review. The Bureau is conducting ex-post merger reviews of several significant, but unchallenged, completed transactions to determine whether a substantial lessening of competition has resulted in the relevant markets affected and whether its conclusions in reviewing the mergers were appropriate.
- Merger Remedies Study. The Bureau is also conducting a review of past merger remedies, similar to those conducted by the U.S. Federal Trade Commission and European Commission. The objective of the Bureau's study is to determine whether past remedies were effective in addressing competition concerns, with an emphasis on evaluating behavioural and quasi-structural remedies.2
- Technical Backgrounders. Finally, the Bureau continues to issue technical backgrounders of its analysis and rationales for conclusions in completed mergers. These are intended to give merging parties increased guidance and insight with respect to the Bureau's merger review policies.3 Ten backgrounders have been issued including in the steel (Mittal/Arcelor), consumer healthcare (Johnson & Johnson/Pfizer) and motion picture (Cineplex/
Famous Players) industries. These backgrounders are in practice giving merging parties and their counsel some level of enhanced insight into the Bureau's analytical approach to merger review and clearance.
Outline Consent Agreement
Late in 2006, the Bureau issued its Information Bulletin on Merger Remedies in Canada (the "Remedies Bulletin") setting out the Bureau's narrower approach to the design and implementation of merger remedies. The Bureau has now issued its Outline Consent Agreement (the "Outline Agreement") to accompany its Remedies Bulletin which, according to the Bureau, is intended as a "generic model" upon which merger remedies will be negotiated and is expected to evolve as its merger remedies policy develops.
The structure of the Outline Agreement closely follows the Remedies Bulletin and contains terms relating to initial and trustee sale periods, the sale price for divestiture assets, buyer approval criteria and the more controversial "crown jewel" assets (secondary key assets the Bureau may seek to be sold where an initial divestiture of assets is unsuccessful). The necessity of requiring crown jewel assets as part of a divestiture package has been the subject of significant debate, the principal argument being that requiring such additional assets to be sold may go well beyond providing an effective post-merger remedy in some cases. The Outline Agreement is also generally consistent with the increasingly formalized approach of other antitrust agencies, such as the European Commission.
Notably, the model terms of the Bureau's Outline Agreement provide no meaningful guidance as to when crown jewel assets will be required as part of a divestiture package and reflects the Bureau's continued preference for structural (i.e. divestiture) rather than behavioural remedies. Also notable, are the extensive "hold separate" provisions and provisions intended to prevent the exchange of competitively sensitive information between the merged entity and divestiture business before sale, reminiscent of the European Commission's "ring-fencing" commitments.
While the Bureau continues to prefer structural remedies, the Outline Agreement does include terms relating to behavioural and quasi-behavioural remedies (e.g. to modify the merged firm's conduct post merger or to license key intellectual property). Accordingly, there remains latitude for merging parties to negotiate behavioural remedies in some cases. Perhaps of greater concern, however, is the extent to which merging parties and their counsel will be able to deviate from the Bureau's increasingly formalized approach to remedies and negotiate tailored remedies to address competition concerns in individual transactions (the Outline Agreement being merely a starting point for negotiating remedies with the Bureau) or depart from the increasing obligations being sought by the Bureau as part of its evolving merger remedies policy.
The past year has been an exceptionally active one for mergers and acquisitions and Bureau activity, which continues to review and revise key elements of its merger clearance policy. At the same time, the federal government's Review Panel is engaged in a wide-ranging review of Canada's competition and foreign investment laws. While the ultimate impacts of these current initiatives remain to be seen, what is clear is that merging parties and their counsel currently face a dynamic and increasingly politically charged regulatory landscape in seeking clearance for their transactions in Canada.