On June 26, the blue-ribbon Competition Policy Review Panel issued its report to the federal Industry Minister on how to raise Canada’s standard of living through greater competition and productivity, calling for urgent action to improve Canada’s competitive position. The report, “Compete to Win,” is wide-ranging and thought-provoking, canvassing issues ranging from education, immigration, taxation, and securities regulation to specific proposals to amend Canada’s competition and foreign investment review laws. Implementation of all, or even many, of the Panel’s sixty-five recommendations would result in fundamental changes to the way business operates in Canada.
The Competition Act
The Panel concluded that “a number of provisions of the Competition Act are either ineffective or obsolete” and noted that “[t]hese deficiencies are particularly evident in respect of the conspiracy and pricing provisions.” While satisfied that the Competition Act’s substantive merger provisions are “modern” and that there is “no compelling need” to change the existing efficiencies defence, the Panel concluded that the Competition Bureau should not limit its assessment of efficiencies to mergers that it determines likely to prevent or lessen competition, but should consider efficiencies from the outset of its assessment of a merger. The Panel also recommended that the Bureau provide more guidance on the criteria the Commissioner of Competition applies in issuing advance ruling certificates in respect of mergers. Notably, the Panel also concluded that the Competition Bureau should focus on its core mandate of enforcing and promoting compliance with the Competition Act and limit its “advocacy” efforts to interventions before federal and provincial boards and tribunals. General competition advocacy (e.g., market studies) should be left to the Panel’s proposed (independent) “Canadian Competitiveness Council,” whose general mandate would be “to examine and report on, advocate for measures to improve, and ensure sustained progress on, Canadian competitiveness.”
The Panel’s principal recommendations for amendments to the Competition Act include:
- replacing the current conspiracy (cartel) provisions with a per se criminal offence for hard core cartels and civil review by the Competition Tribunal for all other agreements that are demonstrated to have or be likely to have significant anti-competitive effects;
- repealing the price discrimination, promotional allowance, and predatory pricing provisions;
Reviewable Practices (other than Mergers)
- repealing the existing criminal price maintenance provision and replacing it with civil review by the Competition Tribunal of price maintenance that is demonstrated to have or be likely to have significant anticompetitive effects, at the behest of either the Competition Bureau or private parties (private access);
- empowering the Competition Tribunal to impose an administrative monetary penalty of up to $5 million for abuse of a dominant position;
- harmonizing merger review procedures with the United States’ Hart-Scott-Rodino (HSR) procedures, with an initial review period of thirty days and a discretion, on the part of the Commissioner of Competition, to initiate a “second stage” review period that would end thirty days after compliance with a “second request” for information by the Commissioner;
- reducing the period within which the Commissioner can challenge a completed merger from three years to one year; and
- reviewing (with a view to increasing) the financial thresholds for merger notification requirements.
The Panel also recommended that the Bureau strive to improve the timeliness of its decisions, advice and rulings, including the issuance of informal “advance rulings,” to ensure that compliance with the Act can be achieved in a timely manner.
The Panel’s recommended introduction of an HSR-like merger review process could – depending on how similar it is to the U.S. process - substantially increase the information demands on merging parties and the time period during which a transaction raising significant competition law issues could not close. It would also diminish the importance of the Federal Court as a gatekeeper in respect of Bureau information demands by replacing the current, judicially-supervised section 11 process with, if it follows the U.S. approach, an onerous second request by the Bureau. Some Canadian stakeholders have expressed surprise at the Panel’s advocacy of a U.S.-style system in these regards.
The Panel’s recommendations for reform in the areas of conspiracy, pricing and abuse of dominance are consistent with the recommendations of the Commissioner (and, in respect of the repeal of the criminal pricing provisions, the private bar) in years past. Of note, the Panel’s recommendations with respect to the pricing provisions and abuse of dominance are at least directionally in line with proposed amendments to the Act contained in Bill C-454, currently before Parliament and discussed in the May 2008 issue of The Competitor.
The Investment Canada Act
While the Panel rejected the OECD’s assessment that Canada has the most restrictive barriers to foreign direct investment among industrialized countries (suggesting instead that Canada’s foreign investment review process is simply more explicit and visible than in most countries), the Panel proposed significant amendments to the Investment Canada Act (the ICA) on the basis that there has been no policy review of the ICA in more than twenty years and to rectify the perception that Canada does not fully welcome foreign investment. Chief among the recommended amendments to the ICA are the following:
- raising the threshold for review of direct foreign acquisitions of Canadian businesses from $295 million in book value of assets of the Canadian target to $1 billion in the “enterprise value” of the business, and extending the higher threshold to investors from all countries (not just those that are members of the World Trade Organization);
- eliminating the very low threshold ($5 million in book value of assets) currently applicable to targets with activities in the so-called “sensitive sectors” of uranium production, financial services and transportation services (but not cultural activities, which would continue to be subject to possible review by Heritage Canada);
- shifting the onus from investors to the Minister by permitting the Minister to reject a transaction on the grounds that it would be “contrary to Canada’s national interest” (currently, investors must show that the transaction is likely to be of “net benefit” to Canada);
- eliminating the requirement to notify Industry Canada of transactions that fall below the review threshold;
- requiring the responsible Ministers (Industry and Heritage Canada) to produce an annual report that would give reasons for the disallowance of any investment, disclose new policies or guidelines, and describe undertakings offered by investors (while respecting confidentiality concerns); and
- increasing the use of guidelines and other advisory communications to clarify the review process and interpretations of the ICA.
Application of ICA to Cultural Activities
With respect to acquisitions of Canadian businesses with “cultural” activities, the Panel was critical of numerous aspects of the current review process undertaken by Heritage Canada: the overreach of the current review process to activities and transactions of minimal (if any) cultural significance; a lack of clarity as to the meaning of “cultural” products; and adverse incentives and impacts on the ability to raise capital and enhance competition in cultural sectors. The Panel doubted that a review should be required where the cultural activities are only an ancillary part of the target’s business, and recommended a de minimis exemption based on revenues from the cultural activities of the target business. It stated that Heritage Canada should distinguish between cultural products that involve creation and distribution and those activities that are incidental to commercial activities. Concluding that it did not have sufficient evidence before it to recommend a new review threshold, the Panel recommended that the Minister of Heritage conduct a review of its cultural policies, including foreign investment restrictions, every five years, with the first such review in 2008.
“Hollowing-Out of Corporate Canada”
The Panel acknowledged the debate over the “hollowing out” of corporate Canada and expressed its own concern over foreign takeovers of notable Canadian companies. The Panel concluded that overall the “data indicate that the share of assets in Canada’s non-financial industries under foreign control has not changed noticeably in recent years.” Moreover, while recognizing the loss of a number of leading companies, the Panel also noted a number of “growing Canadian champions” and rejected interfering with “the natural rhythm of creative destruction and renewal.” That said, the Panel was critical of securities regulations, which it says have ham-strung Canadian directors’ ability to defend against hostile takeover bids as compared to their U.S. counterparts, and called on the Ontario Securities Commission to lead reform.
National Security and State-Owned Enterprises
Although the Panel’s revised mandate did not include consideration of a national security test for foreign investment review, the Panel indicated its support for the Minister of Industry’s intention to consider the establishment of a new review requirement for transactions that raise national security concerns and suggested a process similar to that used by the U.S. government, wherein such transactions must be approved by the Committee on Foreign Investment in the United States (CFIUS). Similarly, the Panel also welcomed the Government’s recently issued guidelines on the application of the ICA to state-owned enterprises (see the December 2007 issue of The Competitor for details).
Proposals on sectoral investment restrictions
The Panel reviewed current restrictions on foreign investment in air transport, uranium mining, telecommunications, broadcasting and financial services in order to assess their impact on, among other things, competition. In general, the Panel was supportive of liberalizing foreign investment in these sectors, in some cases with the proviso that market access should be conditional on reciprocal liberalization. The Panel’s principal recommendations in this area were:
- conducting periodic Ministerial reviews (every five years) of the regulatory regime in these sectors with a view to minimizing impediments to competition;
- increasing the limit on foreign ownership of airlines to 49% of voting equity on a reciprocal basis through bilateral negotiations, and completing open-skies negotiations with the European Union “as quickly as possible”;
- liberalizing the non-resident ownership policy for uranium mining, subject to any new national security legislation and certain reciprocal benefits from other countries;
- amending the Telecommunications Act to allow foreign companies to establish a new telecommunications business in Canada or to acquire an existing business having up to a 10% share of the Canadian market—and subsequently liberalizing foreign investment restrictions in the telecommunications and broadcasting industries in a competitively-neutral manner; and
- removing the de facto prohibition on bank, insurance, and cross-pillar mergers of large financial institutions, subject to regulatory safeguards.
Whether and when the Panel’s legislative recommendations will materialize remains to be seen. Some of its key recommendations, including narrowing the focus of foreign investment review and liberalizing foreign investment in telecoms and airline transportation, will no doubt require further public debate before a consensus can be reached. Nevertheless, the Panel recommends a number of policy changes (such as greater transparency in the foreign investment review process) that could be implemented quickly. In addition, support from opposition parties can be expected with respect to many of the recommended amendments to the Competition Act such that these amendments could proceed, on their own or as amendments to Bill C-454 (an opposition private member’s bill, which has passed second reading and is currently before a Parliamentary Committee) notwithstanding the minority status of the current Government. Whatever the Government’s ultimate response to the Panel’s report, it will offer a fertile source of recommendations for Canada’s economic agenda over the coming months.