Merger activity continues unabated in Canada, where about 300 mergers were notified to the Competition Bureau in the past year. The magnitude and number of transactions also continues to increase, as does the frequency of clearances sought from multiple antitrust agencies around the world.
Against this backdrop of intensified merger activity, the Bureau continues to review and refine core aspects of its merger clearance process. The federal government has also recently appointed a Competition Policy Review Panel to review Canada’s competition and foreign investment laws in response to criticism of increased foreign acquisitions of Canadian companies.
The emergence of regimes in countries that previously did not concern themselves with merger review, the prospect of changes to Canada’s merger clearance regime, as well as potentially significant changes to the rules governing foreign acquisitions of Canadian businesses, mean that merging parties currently face an increasingly complex and shifting regulatory landscape. Counsel seeking to successfully clear and complete transactions in Canada will need to keep abreast of these changes and the drivers behind these changes.
Competition Policy Review Panel
The most significant competition law development this year was the federal government’s appointment in July of a Competition Policy Review Panel to review key aspects of Canada’s competition and foreign investment laws in a changing global economy and to ensure that they encourage “even greater foreign investment” and more Canadian jobs.
The five-member Review Panel’s “core mandate” is to review the Competition Act (the “Act”) and the Investment Canada Act (the “ICA”). The Review Panel is also charged with examining Canada’s sectoral restrictions on foreign direct investment (e.g., the airline, financial services and broadcasting sectors). The Review Panel, whose appointment was announced the same day Alcan Inc. announced the largest takeover offer in Canadian history (a USD $38.1 billion acquisition by Rio Tinto plc), is to report back to the Minister of Industry in June, 2008 with concrete recommendations that could form the basis for changes to the Act and the ICA. Over-arching objectives of the Review Panel include advising on whether Canada’s investment framework should be updated to address national security concerns and issues relating to acquisitions by large foreign stateowned enterprises with non-commercial objectives (with the possibility of adding a national security review clause to the existing foreign investment rules).
Given the significant level of recent debate, notably by the New Democratic Party and Liberals, over foreign takeovers of established “flagship” Canadian companies (e.g., Alcan, Inco and Hudson’s Bay Company) the Review Panel is stepping into topical and controversial territory. Among other things, the review likely will include the Act’s merger clearance rules, as well as existing ICA rules governing foreign investment in Canada (which currently requires parties to apply for review of acquisitions of control of Canadian businesses that exceed certain monetary thresholds, with approval turning on whether the investment is of “net benefit” to Canada).
Competition Act Injunctions
One of the most significant recent Canadian merger cases this past year involved the Bureau’s attempt to block Labatt Brewing Company’s acquisition of Lakeport Brewing Income Fund using the Act’s interim injunction provisions.
When the Bureau advised the parties that it would not complete its review within the statutory 42-day waiting period, Labatt proposed to close with a “hold-separate” arrangement to delay integration of the Lakeport business post-closing, allowing the Bureau to complete its review. The Bureau declined and sought a Tribunal order to block the transaction, which the Tribunal dismissed, finding that the Commissioner had failed to meet the test for an injunction while confirming its ability to impose post-closing remedies.
The Labatt/Lakeport case, which is currently under appeal, is the first time the Tribunal considered these amended injunction provisions under the Act. The case is significant in that it may make it more difficult for the Commissioner to block mergers in Canada. Moreover, merging parties may be less willing to negotiate hold separate arrangements pending completion of the Bureau’s review. It is interesting to note that while orthodox thinking has been that imposing an effective post-merger remedy may be more difficult once parties have combined their assets (i.e., when the “eggs are scrambled”), this may no longer be as significant a deterrent as once thought. The critical point made by the Tribunal in Labatt/Lakeport is that the Act both permits post-merger remedies and that the Tribunal can impose them. The final implications of this important decision on merger remedies remain to be seen.
Bureau Merger Review Initiatives
Apart from the federal government–mandated review of competition policy, the Bureau also continues to review core aspects of its merger clearance policy. The Bureau’s key initiatives include:
- Ex-Post Merger Review. The Bureau is conducting expost merger reviews of several significant, but unchallenged, completed transactions to determine whether a substantial lessening of competition has resulted in the relevant markets affected and whether its conclusions in reviewing the mergers were appropriate.
- Merger Remedies Study. The Bureau is also conducting a review of past merger remedies, similar to those conducted by the U.S. Federal Trade Commission and European Commission. The objective of the Bureau’s study is to determine whether past remedies were effective in addressing competition concerns, with an emphasis on evaluating behavioural and quasi-structural remedies (while the Bureau prefers divestitures, merging parties may prefer in many cases to negotiate behavioural or quasi-behavioural remedies not requiring the outright sale of assets).
- Technical Backgrounders. Finally, the Bureau continues to issue technical backgrounders of its analysis and rationales for conclusions in completed mergers, which are intended to give merging parties increased guidance with respect to the Bureau’s merger review policies. The Bureau’s technical backgrounders, which mirror the methodology of its revised Merger Enforcement Guidelines (focusing on key factors including post-merger concentration, barriers to entry, countervailing power and remaining competition), have added some degree of insight into the Bureau’s analytical approach to merger review. For example, in one recent case (Maytag/Whirlpool ), the Bureau decided not to challenge the transaction despite a significant post-merger share based on effective remaining competition and buyer countervailing power. Ten backgrounders have been issued to date including in the steel (Mittal/Arcelor), consumer healthcare (Johnson & Johnson/Pfizer) and motion picture (Cineplex/Famous Players) industries.
Outline Consent Agreement
Late last year, the Bureau issued its Information Bulletin on Merger Remedies in Canada (“Remedies Bulletin”) (see Mergers and Acquisitions Brief, Spring 2007, “Competition Bureau Issues Final Merger Remedies Bulletin”), setting out the Bureau’s narrower approach to the design and implementation of merger remedies. The Bureau has now issued its Outline Consent Agreement (“Outline Agreement”) to accompany its Remedies Bulletin, which, according the Bureau, is intended as a “generic model” upon which merger remedies will be negotiated and which will evolve as its merger remedies policy develops.
The structure of the Outline Agreement closely mirrors the Remedies Bulletin, containing terms relating to initial and trustee sale periods, the sale price for divestiture assets (with no minimum sale price during the second trustee sale phase), buyer approval criteria and the more controversial “crown jewel” assets (secondary core assets the Bureau may seek to be divested where an initial sale is unsuccessful). The Outline Agreement is also generally consistent with the increasingly formalized approach of other antitrust agencies, such as the European Commission, whose Model Text for Divestiture Commitments is the Commission’s model for divestiture commitments.
Notably, the Bureau’s Outline Agreement, like the Remedies Bulletin itself, provides no meaningful guidance as to when crown jewel assets will be required as part of a divestiture package and reflects the Bureau’s continued preference for structural (i.e., divestiture) rather than behavioural remedies. Also notable are the extensive “hold separate” provisions in the Outline Agreement (providing for the independent operation of a business before divestiture) and provisions intended to prevent the exchange of competitively sensitive information between the merged entity and divestiture business before sale, which are reminiscent of the European Commission’s “ring-fencing” commitments.
While the Bureau continues to prefer structural remedies, the Outline Agreement does include terms relating to behavioural and quasi-behavioural remedies (e.g., to modify the merged firm’s conduct post merger or to license key intellectual property). Accordingly, there remains latitude for merging parties to negotiate behavioural remedies in some cases. Perhaps of greater concern, however, is the extent to which merging parties and their counsel will be able to deviate from the Bureau’s increasingly formalized approach to remedies (the Outline Agreement being merely a starting point for negotiating remedies with the Bureau) or from the increasing obligations being sought by the Bureau as part of its standardized merger remedies policy.
The past year has been an exceptionally active one for mergers and has also been marked by significant activity within the Bureau, which continues to review and revise key elements of its merger clearance policy. At the same time, the federal government’s Review Panel is engaged in a wide-ranging review of Canada’s competition and foreign investment laws. The ultimate impacts of the Bureau’s current policy initiatives, as well as the government’s review of fundamental aspects of competition law in Canada, remain to be seen. What is clear, however, is that merging parties and their counsel currently face a dynamic and politically charged regulatory landscape in seeking successful review and clearance of their transactions in Canada.