On January 22, 2008 and for the first time, Canada's Federal Court of Appeal affirmed the test that the Commissioner of Competition must meet to delay the completion of a proposed transaction. This decision has important implications both for purely domestic mergers and for multi-jurisdictional transactions that are subject to merger review in Canada.
The court upheld the March 2007 decision of the Competition Tribunal (the Tribunal) that denied the Commissioner of Competition (the Commissioner) a temporary injunction because the Commissioner had not demonstrated that the ability of the Tribunal to remedy the effect of a proposed merger would be substantially impaired by the completion of the transaction. The court’s decision confirms that the Tribunal will not just “rubber stamp” any request that the Commissioner may make for an injunction under section 100 of the Competition Act (the Act). The decision should, in certain circumstances, give merging parties greater confidence that they will not be prevented from completing their transaction after the expiry of the applicable pre-merger notification waiting period if they wish to do so.
In February 2007, Labatt Brewing Company announced its intention to acquire Lakeport Brewing. The parties submitted long-form pre-merger notifications to the Competition Bureau (the Bureau) and indicated their intention to complete the transaction immediately upon the expiry of the 42-day waiting period prescribed by the Act. Four days before the waiting period expired, the Commissioner sought an injunction under section 100 of the Act to delay the closing by a further 30 days because the Bureau staff had not yet completed its review.
The Tribunal's Decision
There are three requirements that must be met to obtain an injunction under section 100 of the Act, the first two of which would generally be easily satisfied by the Commissioner – namely, that she has commenced an inquiry and that, in her opinion, she requires more time to complete the inquiry. The case therefore turned on the question of whether the third requirement was also satisfied – namely, that if the order were not granted, an action would likely be taken that would substantially impair the Tribunal's ability to remedy the effect of the proposed merger on competition because that action would be difficult to reverse.
The Commissioner argued that allowing the transaction to close would deprive the Tribunal of the ability to block the entire deal and that, therefore, its remedial powers would be substantially impaired. The Tribunal held that the closing of the deal only precluded one type of remedy, but not necessarily the remedy that would be most appropriate in the particular circumstances, such as a partial divestiture. The Tribunal found that the Commissioner must show that "the impairment to the Tribunal's ability to remedy is substantial."
The Court of Appeal's Decision
The Commissioner argued that the Tribunal misinterpreted section 100 by imputing a requirement to conduct the type of competition assessment that was removed from the Act in 1999. After finding the Commissioner's argument to be without merit, the court further found that the Tribunal's application of the test was not erroneous. The court stated:
the Competition Tribunal must consider the effectiveness of the available section 92 remedies in the absence of an interim order, assuming there is a determination that the proposed transaction would, or would be likely to, prevent or lessen competition.
The court concluded that the Tribunal was correct in finding that the:
Commissioner's application for an interim order [was] deficient in that it failed to establish that, without an interim order, the Tribunal's remedial powers under section 92 would be substantially impaired.
Significance of the Decision
This decision has resulted in much speculation about (i) whether the Bureau will revisit the timing standards that it has established for the review of mergers that it designates as “complex” and “very complex”; and (ii) the circumstances in which merging parties may elect to take their chances before the Tribunal rather than wait for possibly several months while the Bureau completes its review of their merger.
Given that the Commissioner has the statutory authority to review a transaction for up to three years post-closing, merging parties typically wait for the Commissioner to issue an advance ruling certificate or “no-action” letter before closing. This is the case even if the Bureau requires several weeks or even months beyond the expiry of the 14 or 42-day statutory waiting period to complete its review. We do not expect that this practice will change in the vast majority of cases, as the costs, uncertainty and other risks associated with “running the clock on the Bureau” typically will outweigh any timing advantage that may be gained by attempting to proceed more quickly towards closing.
However, where it is critically important that the transaction close as quickly as possible (e.g., in competing bid situations), this decision may help merging parties to achieve their timing objectives. Specifically, where there would be little or no irreversible competitive harm associated with closing – for example, where the principal assets to be merged are "bricks and mortar" (such as retail stores or production plants) and where the purchasing party’s access to any of the selling party’s competitively sensitive information would not render a potential divestiture remedy ineffective – the Commissioner may have a difficult time obtaining an interim injunction. In these circumstances, merging parties will now have less reason to be concerned about the possibility that the Commissioner may seek and obtain a temporary injunction if they decide to complete their transaction subsequent to the expiry of the statutory waiting period but before the Commissioner has completed her review of the proposed transaction.
Since the decision does not affect the Commissioner’s ability to seek post-closing remedies, purchasers will still have to weigh the risk of proceeding to closing against:
- the risk of not prevailing in any post-closing challenge that may be brought by the Commissioner;
- the potential legal and other costs that may be associated with such a challenge; and
- the possibility of receiving only a “fire sale” price for any businesses or assets that they may be ordered to divest, if the Commissioner is successful in such a challenge.
Finally, based on recent history, it is possible that the Commissioner will seek legislative changes to the merger review framework. The last time the Commissioner lost a case dealing with interim orders, changes to section 100 were sought and passed. Similarly, when the Commissioner lost a case based on merger-related efficiencies, changes were also sought to the Act. Accordingly, with Canada's competition policy currently under review by a federally-appointed task force, these issues could find their way onto the legislative agenda in the near future.