The Competition Act broadly defines a merger as the acquisition or establishment, whether by purchase or lease of shares or assets, by amalgamation, combination (joint venture) or otherwise, of control over or significant interest in the whole or a part of a business of another.
Under the Act, the Competition Tribunal, upon the application of the Commissioner of Competition of the Competition Bureau, may take action to, among other things, dissolve a merger or prohibit a proposed merger from proceeding if the Tribunal finds that a merger or proposed merger prevents or lessens, or is likely to prevent or lessen, competition substantially. In addition, the Tribunal may, upon the application of the Bureau, in certain circumstances make a temporary order to, among other things, prevent a proposed merger from proceeding for a stated period of time.
The enforcement policy of the Bureau is set out in its 2004 Merger Enforcement Guidelines (46pp.) and 2006 Information Bulletin On Merger Remedies (23pp.).
“Substantially”: In the interpretation of “substantially”, the Act provides that the following factors be considered:
- the extent to which foreign products or foreign competitors provide or are likely to provide effective competition;
- whether the business, or a part of the business, of a party has failed or is likely to fail;
- the extent to which acceptable substitutes for products supplied by the parties are or are likely to be available;
- any barriers to entry into a market, including:
- tariff and non-tariff barriers to international trade;
- interprovincial barriers to trade; and
- regulatory control over entry;
- and any effect of the merger on such barriers;
- the extent to which effective competition remains or would remain in a market;
- any likelihood that the merger will or would result in the removal of a vigorous and effective competitor;
- the nature and extent of change and innovation in a relevant market; and
- any other factor that is relevant to competition in a market that is or would be affected by the merger.
Competition may not be found to be prevented or lessened substantially solely on the basis of evidence of concentration (small number of firms holding substantial market share) or market share. While the Supreme Court of Canada has held in a merger case that by definition some lessening of competition is tolerated as long as it is not substantial, it has also held in a non-merger case that where concentration is high in an industry, any lessening of competition may be substantial.
The Bureau Merger Enforcement Guidelines establish thresholds to distinguish mergers that are unlikely to have anticompetitive consequences from those that require a more detailed analysis. Generally, the Bureau will not challenge a merger on the basis of a concern related to a unilateral exercise of market power when the post-merger market share will be less than 35%. Nor will the Bureau challenge a merger on the basis of a concern related to a coordinated exercise of market power (collusion among remaining competitors) when the postmerger market share of the four largest firms in the market would be less than 65%, or, the postmerger share of the merged entity would be less than 10%. If the proposed merger will exceed these safe harbour market share and industry concentration thresholds, the Bureau will undertake a competitive effects analysis based upon the applicable factors listed above.
An order may not be made against a merger that is likely to bring about efficiency gains that will be greater than, and will offset, the effects of any prevention or lessening of competition provided that the gains in efficiency would not likely be attained if the order were made. In considering whether a merger is likely to bring about efficiency gains, the Act requires taking into account whether such gains will result in a significant increase in the real value of exports or a significant substitution of domestic products for imported products. Gains in efficiency may not be found to result by reason only of a redistribution of income between two or more persons. The Bureau’s approach to the assessment of efficiency gains is set out in its 2009 Information Bulletin On Efficiencies In Merger Review (7pp.).
Parties to proposed mergers exceeding a certain size are required to comply with the pre-notification provisions of the Act and file specified information prior to completion. The filing fee is Cdn. $50,000. and may be paid by one of or split among the parties. Unless waived by the Bureau, a notified merger cannot be proceeded with during the applicable waiting period. In addition to a criminal fine not exceeding $50,000, failure to notify and provide the required information in respect of a completed transaction can result in an administrative monetary penalty not exceeding $10,000 for each day of non-compliance, as well as dissolution of the merger.
The waiting period for a notified merger is 30 days unless, within that period, the Bureau notifies the parties that additional information is required for assessment of the proposed transaction. If a supplementary information request is issued, a transaction cannot be completed until 30 days after the additional information required has been provided to the Bureau. Also, the Bureau may apply for an order to extend the waiting period if more time is required to complete its review of the proposed transaction.
As a practical matter, complex transactions giving rise to significant competition issues cannot be adequately reviewed by the Bureau within the initial 30-day waiting period (depending upon the extent of competitive overlap, the Bureau endeavours to complete its review within 14 days for a proposed transaction that is non-complex and the longer of 45 days and, where a supplementary information request is issued, 30 days after the additional information required has been provided, for a complex transaction). In such cases, the Bureau may be willing to allow the initial waiting period to lapse without issuing a supplementary information request if the parties enter into a timing agreement allowing the Bureau additional time to complete its review prior to closing. The agreement would provide that the Bureau has additional time for review beyond the initial waiting period, the parties will work cooperatively with the Bureau in providing additional information requested and the parties will not close the transaction for an agreed-upon period of time. If there are no issues arising from its review, the Bureau will issue a no-action letter.
Although a proposed transaction may be completed upon expiration of the waiting period (subject to any timing agreement), parties should consider deferring completion if the Bureau has not completed its review and issued a no-action letter as the Bureau may apply to challenge a merger within 1 year of its completion.
The Bureau’s general approach to administering the review process is set out in its 2009 Merger Review Process Guidelines (23pp.).
Pre-notification is required where:
- the parties to the proposed transaction, together with their affiliates, have assets in Canada or annual gross revenues from sales in, from or into Canada exceeding $400 million;
- the transaction involves the acquisition of a business that has a business undertaking in Canada to which employees ordinarily report or controls a company that carries on such a business; and
- the thresholds for the following transaction vehicles would be exceeded:
- in a share acquisition, the aggregate value of the assets in Canada, or the annual gross revenues from sales in or from Canada generated from such assets, of the target company, or by companies controlled by that company, exceeds $70 million, and, the purchaser, together with its affiliates:
- in respect to a public company target, will acquire shares carrying more than 20% or (having more than 20% prior to the acquisition) 50% of the votes attached to outstanding shares;
- in respect to a private company target, will acquire shares carrying more than 35% or (having more than 35% prior to the acquisition) 50% of the votes attached to outstanding shares
- in an asset acquisition, the aggregate value of the assets in Canada to be acquired, or the annual gross revenues from sales in or from Canada generated from such assets, exceeds $70 million
- in an amalgamation transaction, the aggregate value of the assets in Canada, or the annual gross revenues from sales in or from Canada generated from such assets, that would be owned by the continuing company, or by companies controlled by the continuing company, exceeds $70 million, and, each of at least two of the amalgamating companies, together with its affiliates, has assets in Canada, or has annual gross revenues from sales in, from or into Canada, that exceeds $70 million in aggregate value
- in a combination transaction (i.e., other than through a company), the aggregate value of the assets in Canada that are the subject-matter of the combination, or the annual gross revenues from sales in or from Canada generated from such assets, exceeds $70 million
- in an acquisition of an interest in a combination transaction, the aggregate value of assets in Canada that are the subject-matter of the combination, or the annual gross revenues from sales in or from Canada generated from such assets, exceeds $70 million, and, as a result of the proposed acquisition, the purchaser, together with its affiliates, would be entitled to receive more than 35% or (having more than 35% prior to the acquisition) 50% of the profits of the combination or its assets on dissolution
The determination of the relevant asset and annual gross revenue values is generally to be made by reference to the most recent audited financial statements of the parties.
Information to be supplied to the Bureau in notifying a proposed merger includes:
- a description of the proposed transaction and the business objectives intended to be achieved
- draft or executed legal documents to implement the proposed transaction
- a list of foreign competition or antitrust authorities notified of the proposed transaction and date of notification
- a detailed description of the parties and their affiliates including a summary description of their principal businesses (with geographic regions of sales) and categories of products, together with the annual volume or value of purchases from their 20 most important suppliers and sales to their 20 most important customers for each principal product category (including contact information)
- most recent annual reports and financial statements
- all studies, surveys, analyses and reports that were prepared or received by an officer or director for the purpose of evaluating or analysing the proposed transaction and, if not otherwise set out in a document, the names and titles of the individuals who prepared the document and the date prepared
Although not required by the Act, a description and analysis of the competitive impact of the transaction should be provided by the parties as it will expedite the review process and assist the Bureau in understanding the parties' view of the competitive effects of the proposed transaction.
A proposed transaction that, because of its size, is not subject to the pre-notification requirements may still be reviewed and/or challenged by the Bureau prior to or within 1 year following completion of the transaction. If the transaction is subject to Investment Canada review, Investment Canada will refer the transaction to the Bureau for consideration and comment. Also, the Act provides that the Bureau shall commence an inquiry into a transaction when there is reason to believe that competition may be substantially lessened (for example, as the result of a complaint by a customer or competitor) or upon receipt of a written complaint from any six persons resident in Canada. Consequently, parties to non-notifiable transactions involving significant competitive overlap may decide to voluntarily advise the Bureau of the transaction and participate in any review requested by the Bureau prior to closing in order to avoid post-transaction uncertainty and costs.
Information supplied pursuant to the pre-notification requirements, or provided voluntarily pursuant to the Act, is exempt from the provisions of the Access to Information Act. The Act prohibits the Bureau from disclosing the fact that the parties have pre-notified and from divulging information obtained from the parties pursuant to the pre-notification provisions or provided voluntarily pursuant to the Act. As a matter of policy, the Bureau will respect the wishes of the parties where a merger is not yet public. The fact that the parties have communicated with the Bureau about a proposed transaction will not be disclosed.
Advance Ruling Certificate
A proposed merger is exempt from the pre-notification requirements if the Bureau has issued an advance ruling certificate. The Bureau may issue a certificate upon being satisfied (usually on the basis of a letter with supporting documents attached) by a party or parties to a proposed transaction that there would not be sufficient grounds on which to apply to the Tribunal as the proposed merger is not likely to prevent or lessen competition substantially.
In addition, the Act provides that where the Bureau issues a certificate, the Bureau may not, if the transaction to which the certificate relates is substantially completed within one year after the certificate is issued, subsequently apply to the Tribunal to challenge the merger as described above (within 1 year following completion of the transaction) solely on the basis of information that is the same or substantially the same as the information on the basis of which the advance ruling certificate was issued.
Although the Act requires the Bureau to consider a request for a certificate as expeditiously as possible, there is no provision for a finite waiting period. Accordingly, parties should consider filing a formal notification with the request for a certificate in order to trigger the 30-day waiting period, described above.
Process For Significant Competitive Effect Transactions
The Bureau can take up to five months or more to review a proposed transaction that it believes may have significant adverse competitive effects in the marketplace. Timing will be dependent, in part, upon how quickly the parties respond to a very detailed request for additional information from the Bureau. As the Bureau will not finalize its review before completion of its marketplace contact due diligence, timing will also be affected by how soon the parties allow the Bureau to commence marketplace contacts (as a matter of policy, the Bureau will not provide positive written guidance to parties until there is an actual transaction on the table which allows the Bureau to undertake marketplace contacts with customers, suppliers, competitors and others).
In assessing whether a merger is likely to prevent or lessen competition substantially, the Bureau attempts to determine the likely impact of the merger on each competitive dimension in relation to which a firm competes, such as price, level of service, quality, product choice and innovation. Such an assessment requires an in-depth understanding of the business and competitive dynamics of the particular industry and can require considerable detail relating to both the markets and the parties. For example, will the combined market share be less than the sum of the parties' pre-merger shares as a result of lost customers, or will it be greater because of certain advantages of the merged firm? Will parts of certain product lines be dropped? If so, does this create efficiencies in production and/or reduce choice for customers?
The first step in the assessment process is the identification of the relevant product and geographic markets. In economic terms, an attempt is made to determine the degree of cross-elasticity of demand and supply between products and suppliers; i.e., the extent to which a significant price increase of the products of the parties would cause buyers to switch to a substitute product or cause entry of other producers. The Bureau will often seek the advice of independent economic experts on these and other matters considered in its evaluation.
Once the relevant markets are defined, the Bureau's staff evaluate their structural and behavioural characteristics. An important structural consideration is the market share of the various market participants and how the shares have changed over time. This measurement is usually made on the basis of the firms' sales or productive capacity. Another important structural consideration is the extent to which barriers to entry affect the ability of potential competitors to enter the market in response to increases in the price levels of the products of the remaining firms. The other factors, listed above, are then evaluated.
Factors which are not specifically mentioned but which can be important include countervailing market power held by buyers, a prior history of anticompetitive conduct in the industry and the extent to which products in the market are homogeneous.
At the end of the analysis, all of the quantitative and qualitative factors are considered to determine whether the merger is likely to prevent or lessen competition substantially. If the answer is affirmative, consideration is then given to whether any real efficiency gains will be derived from the merger, and if so, whether they are likely to be greater than and will offset the effects of any prevention or lessening of competition. It is important to note that if certain of the gains claimed can be reasonably expected to be attained by the parties in a less restrictive fashion than by the merger, then they will not be eligible for consideration. Common operating scale and scope efficiencies that are recognized in horizontal mergers are derived from production economies of scale, technological complementarities, specialization in product lines, the elimination of excess capacity or duplication, and reduction in service, transportation and other distribution costs.
In view of the foregoing and the potential impact that the Bureau's decision may have on a transaction, it is beneficial to discuss the proposed merger with the Bureau at an early stage before the transaction is made public or as soon as possible thereafter. These discussions will often provide parties with an indication of the Bureau's likely concerns and provide an early opportunity to discuss timely compliance with a voluntary information request which may minimize the need for, or the scope of, a subsequent formal supplementary information request. Also, if the transaction involves the acquisition of a publicly traded company and raises significant competition law issues, the parties should give early consideration to a fix-it-first divestiture package to minimize the Bureau’s review time and the likelihood that delay may attract alternative buyers.
Once the Bureau has been advised of the proposed transaction, the next point of contact is usually a meeting with the staff of the Mergers Branch of the Bureau. A useful vehicle for advancing discussion is the preparation and delivery of a brief memorandum which outlines the details of the transaction including the reasons for the merger, the product lines of the merging companies, the relevant geographic markets, market share data and a description of the remaining competitors, their products, location and price competitiveness. Other relevant considerations should also be addressed such as the extent of regulation or other barriers to entry, the potential for efficiencies and the countervailing market power of customers or suppliers.
During the review process, the parties will be contacted regularly by the Bureau for additional information and clarification. The Bureau's staff will usually be seeking, simultaneously, input from customers, suppliers and competitors. Where applicable, information may also be sought from unions and provincial governments (if the proposed transaction will give rise to politically sensitive issues, an agenda should be developed to deal with political concerns). In addition, the Bureau often retains one or more industry experts to provide technical understanding of the industry and an opinion on the dynamics of industry behaviour.
In the event the Bureau concludes that the proposed merger is likely to prevent or lessen competition substantially, the parties must decide whether to abandon the transaction, litigate the Bureau's decision (proceeding with the transaction notwithstanding the adverse decision will likely precipitate the Bureau challenging the merger by filing an application before the Tribunal) or consider whether there are ways to restructure the merger in a manner that will resolve the Bureau's concerns (such as selling part of the business to a competitively preferable purchaser).