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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 transactiona (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$92 million for 2018 – 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 2017 the prescribed amount is C$92 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.
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