As discussed in our previous blog post, on November 17, 2022, the Honourable François-Philippe Champagne, Minister of Innovation, Science and Industry, launched the much anticipated public consultation on the second stage of potential amendments to the Competition Act (the “Act”).
As part of this consultation process, the Department of Innovation, Science and Economic Development (“ISED”) issued a discussion paper, titled The Future of Competition Policy in Canada (the “Discussion Paper”), which considers numerous issues and potential areas of reform, including in the mergers, unilateral conduct, competitor collaboration, deceptive marketing and administration/enforcement context. The Discussion Paper does not include any particular recommendations or proposed amendments to the Act. Rather, it simply sets the stage, invites feedback from interested stakeholders on the issues and discusses a number of potential areas of reform. Feedback can be provided on or before February 27, 2023.
To help businesses better understand the issues and potential areas of reform included in the Discussion Paper, we are releasing a series of blog posts discussing these issues and potential areas of reform on a topic-by-topic basis. This is the first blog post in the series, which is focussed on potential reforms to merger review in Canada.
According to the Discussion Paper, “[c]oncerns have been raised with respect to the reach of the Act’s remedial framework, given the potentially harmful effects of concentration”, including in connection with the acquisition of start-ups and potential innovators in the digital economy. For example, the Discussion Paper points out that “[n]on-notifiable, yet ultimately important acquisitions may evade detection, while even known mergers may cause competitive harm that is too difficult to forecast with precision at the time of acquisition, yet too late to remedy once it becomes apparent”. In light of these and other concerns, the Federal Government is considering several possible reforms and would welcome input on each of the merger-related topics listed below, as well as input on reforms to the merger review process more generally.
- The revision of pre-merger notification rules to better capture mergers of interest. Transactions that exceed certain financial thresholds are subject to mandatory pre-merger notification in Canada. However, the Discussion Paper notes that pre-emptive acquisitions of innovative or disruptive firms will often fall below these thresholds, making it more difficult for the Competition Bureau (the “Bureau”) to detect and review such transactions during the existing one-year limitation period. The Discussion Paper also notes that the existing “methods of calculation [for the pre-merger notification thresholds] can lead to some unprincipled results, such that a foreign merger that affects a great deal of commerce into Canada may fail to surpass the size of transaction threshold, while a sale to a completely new entrant can be notifiable due to the acquired company alone”. Pointing to these issues, the Discussion Paper states that “it is clearly time to re-examine notification criteria, even beyond the above-noted concerns with respect to nascent firms”.
- Extension of the limitation period for non-notifiable mergers (e.g. extending the limitation period to three years), or tying it to voluntary notification. Section 97 of the Act prevents the Commissioner of Competition (the “Commissioner”) from challenging a merger more than one year after it has been substantially completed. However, the Discussion Paper notes that harmful competitive effects may not become apparent within the first year after completion – something it suggests is “an increasingly likely scenario in the dynamic markets that typify the digital economy”. While some commentators have suggested that this concern can be addressed under the abuse of dominance provisions, the Discussion Paper notes that “this approach cannot remedy consequences of concentration, such as higher prices, that are not themselves an abuse”. The issue here is whether the merger limitation period should be readjusted, whether absolutely or conditionally, at least for non-notifiable mergers.
- Easing of the conditions for interim relief when the Bureau is challenging a merger and seeking an injunction. The Act includes provisions allowing the Bureau to apply for interim injunctions preventing merging parties from closing a transaction following the expiry of the statutory waiting period. However, the Discussion Paper notes that “the increased complexity of mergers has made it challenging or impossible to review all of the … information, prepare court filings, obtain a hearing date, and complete the hearing all within the 30 [day waiting period], with the result that parties can still close – and potentially harm the market irreversibly – before the opportunity for interim relief even arises”. In light of these challenges, the Discussion Paper states that “[i]t is worth investigating whether a more practical mechanism could be put in place for short-term interim relief, from the time that the Commissioner declares an intent to seek an injunction pending a challenge, to the time the injunction is decided”. In effect, the Discussion Paper is raising the possibility of making it easier for the Commissioner to obtain interim relief in certain circumstances.
- Changes to the efficiencies defence (e.g., restricting its application to circumstances where consumers or suppliers would not be harmed by the merger). Section 96 of the Act, commonly known as the efficiencies defence, provides that the Competition Tribunal (the “Tribunal”) cannot make a remedial order where it finds that the efficiencies likely to arise from a merger are greater than, and will offset, the anti-competitive effects of the merger. The Discussion Paper notes that the efficiencies defence is “arguably unique” to Canada; that the effect of this defence is to allow mergers to proceed even where they lead to significant harm to consumers in the form of higher prices and/or reduced choices; and that critics have noted the potential for this defence to lead to adverse impacts on consumers without necessarily generating any of the intended benefits for Canadian firms in global markets. In this regard, the Discussion Paper states that the Canadian government will be examining possible reform of the efficiencies defence, with possible ways forward running the gamut from reforming aspects of the defence to its abolishment. At least some changes to the efficiencies defence are likely inevitable.
- Revisiting the standard for a merger remedy (e.g. to better protect against prospective competitive harm, or to better account for effects on labour markets).
- The Tribunal is able to order remedies where it finds that a merger prevents or lessens, or is likely to prevent or lessen, competition substantially. The Discussion Paper raises issues with this standard and suggests that Canada needs a forward-looking framework that looks beyond current market conditions and allows for an examination of how transactions may affect the future welfare of market participants. In particular, the Discussion Paper highlights challenges to applying the merger provisions’ competitive effects test to acquisitions in fast-moving digital markets. While the Discussion Paper does not recommend a particular framework or standard, it does refer to proposals that have been suggested in other jurisdictions, including the United Kingdom (i.e., a “balance of harms” approach, where both the likelihood and magnitude of the potential impacts of a merger are weighed together in considering whether to block or allow a merger, rather than having a separate threshold which must be met for each) and the United States (“an appreciable risk of materially lessening competition”). The Discussion Paper also notes other reform suggestions which have been raised in other jurisdictions, including “presumptions for already-dominant firms”, “special tests for digital platforms” or “reversing the burden of proof for certain types of mergers”. Changes along these lines would fundamentally re-shape the merger review process in Canada.
- Separately, the Discussion Paper notes that it is worth considering whether amendments to the Act could give labour a more central role in competition analyses. This could include, for example, modifying the Act’s purpose clause; the addition of a consideration in the competitive effects test in section 93 of the Act that would expressly consider monopsony power and labour effects; or modification of the efficiencies defence to address employment-based efficiencies more directly.
Timing of Submissions
As noted above, interested stakeholders have been invited to provide submissions on or before February 27, 2023. This can be done using the online consultation form on ISED’s website.