2011 was all about enforcement. Among other things, the Competition Bureau (the "Bureau") issued updated Merger Enforcement Guidelines and updated Merger Review Process Guidelines. It also instituted a challenge in respect of the CCS-Complete Environmental merger and the Air Canada-United Continental joint venture under the merger provisions of the Competition Act (the "Act"), and also challenged the Air Canada-United and Air Canada-Continental alliance agreements under the new civil competitor collaboration provisions of the Act. An abuse of dominance proceeding was initiated against the Toronto Real Estate Board and the Bureau continued its price maintenance proceeding against Visa and MasterCard. Cartel enforcement continued apace and 2011 was also noteworthy for developments in relation to cartel-related class actions. And the Investment Canada Act (the "ICA") continued to make front-page headlines. Our bulletin reports on these and other developments.
Enforcement Policy; etc.
Updated Merger Enforcement Guidelines
In the wake of the issuance in 2010 of updated U.S. Merger Enforcement Guidelines, and after conducting an extensive consultation process, in October 2011 the Canadian Competition Bureau published updated Merger Enforcement Guidelines (hereafter, the "2011 MEGs") that replace the pre-existing guidelines that were published in 2004 (hereafter, the "2004 MEGs"). The Bureau's stated objective in updating the 2004 MEGs was not to do a full rewrite, but to "address certain discrete areas where the  MEGs do not fully reflect current Bureau practice and current economic and legal thinking."
The following are among the most noteworthy changes:
- The 2011 MEGs provide additional guidance as to how the Bureau assesses transactions in which minority interests or interlocking directorates are at issue and when they result in a "merger" for purposes of the substantive merger review jurisdiction under the Competition Act;
- While the 2011 MEGs state that examination of the competitive effects of a merger generally involves defining the relevant markets and assessing the competitive effects of the merger in those markets, the guidelines also state that "Market definition is not necessarily the initial step, or a required step,…" and that the Bureau may instead rely on other methods of assessing the likely competitive effects of a merger including "various economic tools";
- The 2011 MEGs have replaced the two-year time frame for effective entry (to constrain the exercise of market power arising from a merger) with a requirement that entry occur "quickly enough to deter or counteract any material price increase owing to the merger ";
- The 2011 MEGs provide additional and useful guidance on how the Bureau assesses the unilateral and coordinated effects of a merger, on countervailing market power and monopsony issues, and on how the Bureau assesses vertical and conglomerate mergers;
- The 2011 MEGs now incorporate the Bureau's guidance in relation to the efficiencies defense, superseding the 2009 Bureau bulletin on Efficiencies in Merger Review.
Merger Remedies Study Summary
In August 2011, the Bureau issued a bulletin respecting the results of its study of the effectiveness of remedies obtained under the merger provisions of the Act during the period 1995 to 2005. The results of the study will be used to update the Bureau's Information Bulletin on Merger Remedies in Canada, including the consent agreement outline template.
Updated Guidance on Merger Review "No Action" Letters
Effective September 1, 2011, the Bureau changed its practice with respect to no-action letters ("NALs"). Whereas prior to that date, NALs referred to the insufficiency of grounds to challenge a merger, NALs now state only that the Commissioner of Competition ("Commissioner") does not at that time intend to make an application under the merger provisions in respect of the transaction.
New Filing Thresholds
Pre-merger notification under the Act is required where both size-of-parties and size-of-transaction thresholds are exceeded. The size-of-parties threshold is exceeded where the parties, including their respective affiliates, together have assets in Canada or gross revenues from sales in, from or into Canada that exceed $400 million. The size-of-transaction threshold varies with the type of transaction involved (e.g., acquisition of assets, acquisition of shares, amalgamation, etc.), but generally includes a monetary threshold in terms of the gross book value of assets in Canada or the value of annual gross revenues from sales in or from Canada generated from those assets. The size-of-transaction threshold will increase to $77 million (up from $73 million), effective on or about February 11, 2012.
Proposed Merger Register
In October 2011, the Bureau announced that it would establish a merger register, being a list of all closed merger reviews, updated on a monthly basis. The first monthly register report, for the month of February 2012, will be published at the beginning of March 2012.
Updated Merger Review Process Guidelines
In January 2012, the Bureau issued updated Merger Review Process Guidelines that replace its 2009 guidelines and that reflect the considerable experience the Bureau has gained with respect to the two-stage merger review process since its introduction in September 2009. The updated guidelines provide increased guidance on the supplementary information request process, including pre- and post-issuance dialogue and custodians, sample instructions and the use of timing agreements.
CCS Corporation and Complete Environmental Inc.
In January 2011, the Commissioner brought an application challenging the acquisition by CCS Corporation of Complete Environmental Inc. CCS Corporation operates a landfill that accepts hazardous waste produced at oil and gas fields. Complete Environmental Inc. has a permit to operate such a landfill. A noteworthy aspect of the challenge is that the transaction was not notifiable and is being challenged post-closing. Also, departing from usual practice, the Commissioner is seeking dissolution amongst possible remedies.
Competition Bureau Seeks to Block Joint Venture Between Air Canada and United Continental
In June 2011, the Commissioner filed an application with the Competition Tribunal ("Tribunal") to prohibit a proposed joint venture between Air Canada and United Continental. The Commissioner asserted that the joint venture would monopolize 10 Canada/US routes and substantially reduce competition on nine additional routes, leading to increased prices and reduced consumer choice. The Commissioner also asserted that the proposed joint venture would allow the parties to jointly set prices, capacity and schedules and would result in significantly higher prices.
Competition Bureau Clears Canadian Tire's Acquisition of the Forzani Group
This transaction involved the purchase of a national sporting goods retailer by a mass merchandiser with significant sales in sporting equipment. In analyzing the transaction, the Bureau considered various possible product markets (the retail sale of sporting equipment; the retail sale of certain sporting equipment categories such as hockey equipment; and the retail sale of specific sporting equipment products such as hockey skates) and analyzed the potential competitive effects of the transaction from quantitative and qualitative perspectives on the basis of each of the potential markets. Because the Bureau's review did not find significant competitive effects in any of the candidate markets, consistent with the approach articulated in the 2011 MEGs, it determined that it was not necessary to define the relevant product markets.
As a large proportion of the parties' respective retail outlets were located in close proximity to one another, one approach taken by the Bureau to assess the competitive effects of the transaction was to assess whether the nature of competition between the parties was such that, following the transaction, market power could be exercised in local geographic markets. In particular, the Bureau considered the extent to which the parties, prior to the transaction, determined prices or product offerings in response to local competition with one another and with other retailers, and whether Canadian Tire, post-merger, would have the ability to increase prices or reduce product offerings in local markets or across one or more broader geographic areas.
With respect to the possible product markets, the Bureau engaged in a competitive effects analysis to determine whether prices or product offerings varied in local markets rather than on a broader geographic scale. Econometric results indicated that neither party adjusted its prices or product offerings in local markets in response to the presence of the other party. (This finding is to be contrasted with the finding in the US Staples-Office Depot proceeding where the presence of three office superstores in a variety of markets showed lower prices than where there were only two.)
The Bureau also concluded that the presence of competing retailers was likely to constrain the merged entity's ability to exercise market power in each of the candidate product markets across all relevant geographic areas.
Competition Bureau Approves Divestitures in Novartis Acquisition of Alcon
In March 2011, the Bureau announced its approval of the divestiture of certain assets and associated licenses related to the sale in Canada of ophthalmic products belonging to Novartis. The transaction is part of a remedy required to address competition concerns resulting from Novartis's acquisition of control of Alcon in August 2010.
Competition Bureau Clears Merger of XM Canada and Sirius Canada
In February 2011, the Bureau announced that it would not challenge the proposed acquisition of Sirius Canada by Canadian Satellite Radio Holdings ("CSRH"). CSRH is the parent of Canadian Satellite Radio Inc. which provides satellite digital audio radio services in Canada under the trade name XM Canada. Like CSRH, Sirius Canada provides satellite digital audio radio services. The parties' respective US counterparts merged in July 2008; however, the Canadian entities remained independent and continued to operate separately under their respective broadcasting licenses.
Competition Bureau Clears Acquisition of CTV Globemedia Inc. by BCE Inc.
In February 2011, the Bureau announced that it did not then intend to challenge the proposed acquisition of CTV Globemedia by BCE Inc., but that it would continue to monitor the parties and regulatory developments to assess whether it should apply to the Tribunal within the one year limitation period following closing. BCE Inc. provides telecommunications services, Internet access and television distribution services. CTV is active in broadcasting and publishing. The Bureau observed the growing trend toward vertical integration in the broadcasting industry. Its focus in that regard has been on the ability of vertically integrated firms to foreclose competing broadcasting distribution undertakings from accessing programming and the exchange of competitively sensitive information of broadcasters and broadcast distribution undertakings. However, the Bureau noted that the issues arose in the context of an industry that is innovating and within a regulatory framework that is evolving. Importantly, the Bureau observed that the Canadian radio-television and telecommunications Commission was separately examining the transaction and had initiated hearings into vertical integration in the broadcasting industry.
ABUSE OF DOMINANCE AND OTHER REVIEWABLE PRACTICES
Toronto Real Estate Board
In May 2011, the Commissioner filed an application for an order from the Competition Tribunal (the "Tribunal") under section 79 of the Act (abuse of dominance) prohibiting the Toronto Real Estate Board ("TREB") from enacting or enforcing rules that prevent or discriminate against TREB members that wish to use TREB's multiple listing service ("MLS") system to offer services over the Internet. The Commissioner alleges that the TREB substantially or completely controls the supply of residential real estate brokerage services in the Greater Toronto Area by reason of its ability to control access to and use of the TREB's MLS system, that TREB rules restricting the ability of brokers to provide customer access to certain MLS data online through, for example, virtual online websites, are discriminatory, preclude innovative brokerage business models and constitute a practice of anti-competitive acts, and that the practice has limited or prevented competition substantially. TREB has responded that, among other things, it is exercising its copyright in the MLS system. The case is currently scheduled to be heard by the Tribunal in September–October of 2012.
Air Canada, United and Continental
In Commissioner of Competition v. Air Canada and United Continental (discussed above) the Commissioner is also seeking a remedy for the first time under the civil competitor collaboration provision of the Act in respect of existing alliance and marketing agreements between Air Canada and United and Air Canada and Continental.
The Visa/MasterCard price maintenance application filed by the Commissioner in December 2010 relating to the terms of supply of credit card network services and reported in our update last year is scheduled to be heard by the Tribunal in April–June of 2012.
Used Car Dealers Association ("UCDA")
On the private action front, UCDA was granted leave to file and has filed an application under section 75 of the Act (refusal to deal) seeking an order requiring the Insurance Bureau of Canada (“IBC”) to supply certain vehicle accident and claims data to UCDA. An interim supply order was issued pursuant to section 104 of the Act (interim orders) on consent of the parties on October 20, 2011, pending a determination on the application. In December, IBC filed an application seeking recission of the interim supply order pursuant to section 106 of the Act (variation of consent agreement or order). The Tribunal has since directed IBC to refile its request for recission under section 104.
Canadian Internet Registration Authority ("CIRA")
Conversely, a request for leave to commence a refusal to deal proceeding against CIRA was denied by the Tribunal as the applicant had failed to submit any evidence that CIRA's refusal to renew its authorization to act as a ".ca" domain name registrar would have an adverse effect on competition in a market.
Finally, the Federal Court of Appeal dismissed Nadeau Poultry's appeal of the Tribunal's 2009 decision denying Nadeau's private application for relief under section 75. The Court upheld the Tribunal's assessment of "ample supply" as requiring that producers have capacity to increase production and would not be obliged to redirect product from one customer to another. The Court also endorsed the Tribunal's determination that anti-competitive effects should be assessed in downstream markets, and emphasized that the Tribunal's findings of fact are not subject to appeal absent prior leave of the Court. Leave to appeal to the Supreme Court of Canada has been denied.
CARTELS AND OTHER CRIMINAL PROHIBITIONS
Cartel, bid-rigging and deceptive marketing matters were an enforcement priority for the Bureau. 2011 saw a number of charges laid and convictions through guilty pleas, including in retail gasoline, infrastructure and telemarketing.
CLASS ACTIONS AND OTHER LITIGATION
There were significant developments in 2011 for claims made by indirect purchasers of allegedly price-fixed products.
The Supreme Court of Canada granted leave to appeal the British Columbia Court of Appeal's decisions in Pro-Sys Consultants Ltd. v. Microsoft Corporation ("Microsoft") and Sun-Rype Products Ltd. v. Archer Daniels Midland Company ("Sun-Rype"). Microsoft and Sun-Rype were two to one majority decisions concluding that indirect purchasers of allegedly price-fixed products have no cause of action recognized in law. These findings suggest a departure from the trend of previous decisions that signalled greater opportunities for indirect plaintiffs to achieve certification.
Conversely, the Québec Court of Appeal in Option Consommateurs v. Infineon Technologies AG allowed indirect plaintiffs to proceed with their price-fixing claim. The Court expressly disagreed with the British Columbia Court of Appeal's decision in Microsoft and Sun-Rype that indirect plaintiffs have no cause of action recognized in law.
The stage now appears to be set for the Supreme Court of Canada to clarify the scope of indirect purchaser claims in Canada.
MARKETING AND ADVERTISING
In June 2011, the Bureau announced that Bell Canada had, in a consent agreement filed with the Competition Tribunal, agreed to stop making what the Commissioner had concluded were misleading representations about the prices offered for some of Bell Canada's services. A $10 million administrative monetary penalty was part of the settlement. While Bell Canada did not contest the Commissioner's conclusions, it did not accept the Commissioner's allegations.
The Bureau's position was that Bell Canada had charged higher prices than those advertised, despite the fact that disclosure of additional mandatory fees was set forth in disclaimers associated with Bell Canada's advertisements. Disclaimers that, in the view of the Bureau, contradict the general impression conveyed by the overall advertisement, rather than clarify it, are likely to encounter Bureau resistance.
INVESTMENT CANADA ACT
Foreign State Sponsored Investments
2011 was perhaps most notable for China’s change in investment strategy and the Canadian government’s reaction to that change.
China’s state owned enterprises (“SOEs”) and sovereign wealth funds (“SWFs”) have increased their investment activities around the world, principally in the natural resource sector. Canada, a country rich in natural resources, has been and continues to be a focus of a significant portion of this increased investment activity. The Canadian press has reported that Chinese companies, including among them Sinopec Group and CNOOC, have purchased almost $30 billion of Canadian assets in the past five years.
With the increased focus of Chinese SOE/SWFs on Canada’s natural resource sector, the question that was asked following the Canadian government’s blocking of BHP’s bid for Potash was what would Canada’s reaction be to this increase in Chinese investment. To date the answer seems to have been “Welcome to Canada”.
The United States can take partial credit for Canada’s further opening of its door to Chinese investment. Canada is the largest foreign supplier of oil, natural gas, electricity and uranium to the United States and was supporting the construction of a new pipeline that would have had the capacity to move 700,000 barrels of crude produced from the Alberta tar sands to refineries in Texas. However, when President Obama announced that there would be a delay in the decision as to whether to approve that pipeline, Prime Minister Stephen Harper responded that Canada would have to step up efforts to supply energy to Asia.
"This [decision delay] does underscore the necessity of Canada making sure that we are able to access Asian markets for our energy products," Harper told reporters at a recent Asia-Pacific Economic Cooperation leaders' meeting in Hawaii. And since Canada wants to have China as a customer for its natural resources, it should be of no surprise to observers that Canada would have to put out the welcome mat for China as an investor in Canada’s natural resource sector.
This is especially noteworthy given what appears to be a change in the investment strategy by the Chinese SOE/SWFs. Where previously Chinese investors had generally restricted their investments to taking minority positions in Canadian business operations, 2011 saw a number of transactions that resulted in China acquiring control of a number of significant Canadian operating businesses. Chinese National Offshore Oil Corporation acquired Opti Canada for $2.34 billion and Sinopec purchased Daylight Energy for $2.2 billion. Close on the heels of those two transactions, Petro-China, with a final investment $1.9 billion, took over sole ownership of the MacKay River oilsands project having acquired a 60% interest in that project in late 2009. Also, Enbridge’s $5.5-billion Northern Gateway pipeline project which, when completed, will facilitate oil exports to Asia from Alberta is reported to have the backing of foreign business concerns which include China Petroleum & Chemical Corp. among other Asian businesses.
Yet the welcome offered to foreign investors is not unqualified. In a September 2011 interview with Bloomberg Business, Prime Minister Harper is reported to have confirmed that, while Canada welcomes investment by China and other countries, it does so only as long as such acquisitions are "economic in nature and don't have other strategic or political objectives". This comment suggests that, where the review process under the Act applies to a transaction involving a foreign SWF or SOE, the investor will have to demonstrate to the satisfaction of the Canadian government that strategic and/or political objectives do not form all or part of the rationale for the investment
Stelco Suit Settlement
The Canadian government and U.S. Steel have settled their ongoing legal action that would have tested the Canadian government's ability to enforce undertakings given by foreign investors under the ICA.
The litigation arose out of allegations by the Industry Minister that U.S. Steel had failed to honour certain undertakings it had made in connection with its approval under the ICA for its 2007 acquisition of Stelco, a Canadian steel producer. Had it lost the case, U.S. Steel could have faced penalties of up to $10,000 for each day it was found to be in violation of the ICA although intervenors in the suit had argued that additional remedies should be ordered such as a forced divestiture.
On December 12, 2011, the Minister of Industry announced that the parties had settled their dispute. Among the terms of settlement disclosed by the Minister, U.S. Steel agreed to:
- continue to produce steel in Canada until 2015;
- operate both the Stelco Lake Erie and Hamilton plants until 2015; and
- make at least $50 million in capital investments by December 2015 to maintain the Canadian facilities, over and above its original undertaking to invest $200 million by October 31, 2012.
While the Canadian government has pointed out that its case against U.S. Steel demonstrates that foreign investors must take the commitments that they make to Canada as part of the ICA approval process seriously, foreign investors should ensure that any commitments given to obtain ICA approval are appropriately conditioned to excuse performance if events beyond their control prevent them from honouring their undertakings. U.S. Steel maintained throughout the litigation process that its failure to fulfill its undertakings had arisen from unexpected events beyond its control and, as such, it should be excused from performance. The Industry Minister did not agree with this position.
Reforming the Investment Canada Act
Following Canada's blocking of BHP's bid for Potash, then Industry Minister Tony Clement announced that he would be reviewing the ICA with respect to making changes that would, among other things, increase the transparency of the decision making process. Mr. Clement's successor, current Industry Minister Christian Paradis, is reported to have confirmed that Canada is open to changing its law governing foreign takeovers to provide more "certainty" to companies considering purchases of Canadian firms.
In late 2011, the C.D. Howe Institute issued a report, "Reforming the Investment Canada Act: Walk More Softly, Carry a Bigger Stick", which recommended that Ottawa should transform the ICA to create a broader, more transparent foreign investment review regime to encourage investment inflows while protecting Canadian national interests. In addition to increasing decision-making transparency, the Report argued that Canada should scrap the "net benefit test" that now restricts inbound foreign investment in an effort to reverse Canada's declining share of global foreign direct investment. The Report recommends using a national interest test which would reverse the onus by requiring the Canadian government to show why a foreign investment that it wanted to disallow is not in the national interest.
2012 may see the Conservatives introduce changes to the ICA but how far these changes will go remains to be seen.
Increase to Review Threshold
The monetary threshold below which direct investments in Canadian businesses by non-Canadians who qualify as WTO investors generally do not require Ministerial approval under the ICA is $330 million for 2011.
Canadian Uranium Industry
2011 saw global miner Rio Tinto complete its acquisition of Canadian uranium junior Hathor Exploration. Hathor, prior to the acquisition, only carried on exploration activities near western Canada's Athabasca Basin which supplies about a fifth of the world's uranium.
Prior to 2009, the uranium mining sector had been considered a sensitive investment sector under the ICA and, as such, investments by qualified WTO investors did not get the benefit of the higher review threshold ($312 million in 2011). 2009 amendments to the Act removed uranium from the ICA's list of sensitive industry sectors. As such, the acquisition of Hathor Exploration which had an asset value below $312 million was not subject to the approval requirements under the statute.
Under current Canadian mining policies, foreign companies are generally barred from owning more than 49 percent of an operating uranium mine. While Hathor does not have an operating mine, presumably Rio Tinto's interest in that company relates ultimately to bringing its Roughrider uranium project into production which will bring Hathor's mining operations within the ambit of Canada's uranium policies.
Because of this, it appears that Rio Tinto will have to either look for a Canadian partner or wait for a change in Canada's mining policy. With respect to the latter option, the federal government's Competition Policy Review Panel which was mandated to review Canada's competition and foreign investment policies recommended in its June 2008 report that the foreign ownership laws in the uranium mining sector be liberalized. Subsequently, the Conservative government said in its throne speech in March 2010 that it wanted to "ensure that unnecessary regulation does not inhibit the growth of Canada's uranium mining industry by unduly restricting foreign investment". Most recently, a Saskatchewan MP introduced a bill in Parliament that would, if passed, allow foreign companies to purchase and own Canadian uranium mines. Based on the foregoing, it may be that Rio Tinto will not have long to wait for a change in policy.