Canada: Merger Control
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The merger authorities
Merger control is a matter of federal jurisdiction in Canada. The commissioner of competition is responsible for the administration and enforcement of the federal Competition Act and heads the Competition Bureau. Section 91 of the Act defines a 'merger' as the acquisition of control over a competitor's business in whole or in part, or a significant interest therein, where the latter is described in the Bureau's non-binding Merger Enforcement Guidelines (MEGs) as potentially arising from shareholdings as low as 10 per cent of voting shares, board representation or commercial arrangements. Any merger can be reviewed by the commissioner; however, only certain proposed transactions that exceed defined monetary and equity interest thresholds are subject to pre-merger notification.
Merger control is not initiated by private parties in Canada; rather, this task falls exclusively to the commissioner. However, the commissioner may heed a request by a private party to investigate a merger, and any six residents of Canada can compel her to commence an inquiry. In order to challenge a proposed or completed merger, the commissioner files an application with the Competition Tribunal, an administrative tribunal that may order various remedies enumerated in section 92 of the Act (including the prevention or dissolution of a merger, the divestiture of assets or shares or, with the consent of the merging parties, other remedies), where it finds that a merger substantially prevents or lessens competition, or is likely to do so. Tribunal rulings may subsequently be appealed to the Federal Court of Appeal. The commissioner may initiate this review process for up to one year following the completion of a merger unless an advance ruling certificate (ARC, described below) has been issued in respect of the transaction. In practice, however, most contentious mergers are settled; there is very little merger litigation in Canada.
The Act, along with its regulations, is quite specific in delineating the requirements for pre-merger notification. Generally, where the target involves an 'operating business in Canada,' and certain asset or revenue thresholds are met, parties will be required to alert the commissioner of an imminent merger and then either await the Bureau's approval, or refrain from closing the transaction until the applicable waiting period (discussed below) has expired. Although an international merger involving parties without Canadian assets but which affects competition in Canada could (arguably) be challenged by the commissioner (an interesting jurisdictional question as yet untested in the courts), only a transaction involving the acquisition of an interest in or assets of an 'operating business' in Canada need be notified. An operating business requires a business undertaking in Canada to which persons employed in connection with (but not necessarily by) the undertaking ordinarily report for work. The Bureau interprets this broadly, however, potentially capturing holding companies the books of which are maintained by hired accountants, for example.
If the target has an operating business in Canada, the transaction is notifiable only if it falls into a category described in section 110 of the Act, and then only if each of two financial thresholds and a percentage interest threshold is met. The first 'size of parties' threshold requires that the parties to the transaction together with their affiliates, in aggregate, have assets in Canada or annual gross revenues from sales in, from or into Canada in excess of C$400 million. A secondary 'size of parties' threshold applies to mergers effected by way of corporate amalgamation (ie, 'Delaware mergers'), where each of at least two of the amalgamating corporations together with its affiliates must also have assets in Canada or annual gross revenues from sales in, from or into Canada in excess of C$70 million. The 'size of target' and percentage interest thresholds that correspond to different types of transaction are shown in the table below. Please note that the C$70 million 'size of target' threshold applies for the remainder of 2009, and will be indexed annually to GDP thereafter, unless and until a different amount is prescribed by regulation.
Table 1: Canadian merger notification thresholds ('size of target' and percentage interest)
|Asset purchase||Aggregate value of acquired assets in Canada or annual gross revenues from sales in/from Canada generated by those Canadian assets exceeds C$70 million.|
|Acquisition of voting shares||Aggregate value of target's Canadian assets or annual gross revenues from sales in/from Canada generated by the target's Canadian assets exceeds C$70 million, and the acquirer will as a result possess more than a 20% voting interest in a public corporation, or a 35% interest in a private corporation. (If these percentage interests are already exceeded, a subsequent purchase resulting in more than a 50% voting shareholding will generally again require notification.)|
|Corporate amalgamation||Aggregate value of assets in Canada, or annual gross revenues from sales in/from Canada generated by those Canadian assets, that would be owned by the continuing corporation that would result from the amalgamation or by corporations controlled by the continuing corporation, other than assets that are shares of any of those corporations, exceeds C$70 million.|
|Formation of a non-corporate combination (eg, partnership or joint venture)||Aggregate value of assets in Canada, or annual gross revenues from sales in/from Canada generated by those Canadian assets, that are the subject-matter of the combination, exceeds C$70 million. NB: potential exemption for new unincorporated joint ventures.|
|Purchase of interest in unincorporated business combination||Aggregate value of assets in Canada, or annual gross revenues from sales in/from Canada generated by those Canadian assets, that are the subject matter of the combination, exceeds C$70 million, and the acquirer would hold an aggregate interest in the combination that entitles the person or persons to receive more than 35% of the profits of the combination, or more than 35% of its assets on dissolution. (If this percentage interest is already exceeded, a subsequent purchase resulting in more than a 50% interest will generally again require notification.)|
Note that, with the exception of corporate amalgamations, it is possible for the target of a merger to exceed the thresholds on its own, in which case notification is still necessary even if the acquirer has no presence in and does no business with Canada. Moreover, even when there is an absence of substantive overlap in the parties' businesses, notification is necessary where the above thresholds are met. However, a lack of overlap will be beneficial for the transaction's clearance by the Bureau, as discussed below in the section on substantive review.
Certain types of transaction are exempt from notification, even where the above thresholds are exceeded. Among these are asset securitisations, transactions among affiliates, gifts and inheritances, certain acquisitions of goods in the ordinary course of business, acquisitions of shares for the purpose of underwriting, and certain transactions involving unincorporated joint ventures.
Positive Bureau clearance: advance ruling certificate (ARC) and no-action letter
As discussed below, filing of notification materials and satisfaction of the waiting period legally entitles the parties to close, but provides no comfort that the Bureau will not later challenge the transaction. Indeed, Bureau review may continue after expiry of the waiting period. Many parties to proposed mergers therefore require positive Bureau clearance before proceeding. Such clearance takes the form of an advance ruling certificate (ARC) or a 'no-action' letter.
The commissioner may grant an ARC in response to an application by one or more of the parties (typically, the purchaser). This document states that the commissioner is satisfied that she does not have sufficient grounds to seek an order under section 92 of the Act, and its effect is twofold. First, it exempts the transaction from the notification requirements. Second, as mentioned above, the ARC precludes any post-closing challenge that the commissioner is normally entitled to initiate during the one-year limitation period after closing (provided no materially new or different information comes to light, and the transaction closes within a year of the ARC being issued).
In situations where an ARC may not be forthcoming, the commissioner may (and often does) instead issue a 'no-action letter', wherein she states that she does not intend to challenge the merger. If notification materials have been filed, a no-action letter will terminate the waiting period, although if no notification has been filed then a specific waiver must be issued by the commissioner under section 113 of the Act, exempting the transaction from notification on the basis of the information contained in an ARC request. A no-action letter also does not preclude subsequent challenge by the commissioner, although, in practice, a no-action letter is only issued once a review is complete and thus is often relied upon by the parties.
Given the commissioner's ability to waive notification on the basis of information contained in the ARC request, many notifiable transactions are the subject only of an ARC (or no-action letter) request - statutory notification materials may well not actually be filed, unless the parties desire to trigger the waiting period. (There is no formal time limit for the commissioner's review of an application for an ARC - see 'Substantive review', below). There is no official format for an ARC request - it takes the form of a letter describing the transaction, the parties, any areas of overlap, market shares, other competitors, barriers to entry and other factors affecting the likely competitive impact of the transaction.
Filing and waiting period
Once it is established that a proposed merger requires advance notification (and that formal notification will be made - see 'Positive bureau clearance', above), the process consists of filing the information and materials required in a form prescribed by regulation. A draft regulation amending the Notifiable Transactions Regulations was published on 4 April 2009, and is open to consultation for 60 days. Once in force (likely, the summer of 2009), the amended regulation will prescribe the information that must be filed in all notified transactions (there will no longer be a choice between a short-form or a long-form notification as in the current regime). Pending the coming into force of the amended regulation, the Bureau has announced that parties should continue to use, at their option, either the short-form or the long-form notification materials of the previous regime. Filed under oath or affirmation, a short-form notification contains the parties' general corporate information, an overview of the transaction's structure, a description of its rationale, a summary description of the parties' principal businesses and products, customer and supplier lists, financial information, sales data and similar information for affiliates with significant Canadian assets or sales. Provision is made in the Act for the exclusion of totally irrelevant information (subject to Bureau agreement on this point), as well as information that cannot reasonably be obtained. The draft new regulations require additional information to be filed, including all studies, surveys analyses and reports received or prepared by a senior officer in respect of the likely impact of the transaction on such things as markets, customers, competitors, growth, etc (ie, the so-called '4©' documents for those familiar with US merger review procedures), as well as a copy of the legal document to be used to implement the transaction (or most recent draft thereof).
All parties to a transaction are required to file. Notification can be made at any time prior to the completion of the transaction. Once a filing is made, however, a 30-day statutory waiting period is triggered, within which the parties are prohibited from closing (unless the waiting period is terminated earlier by the issuance of an ARC or a no-action letter). Following the March 2009 enactment of amendments to the Act to create a US-style two-stage merger review process, the commissioner may, within the initial 30-day waiting period, issue a 'second request' for additional information and documents, in which case a new 30-day waiting period will commence following compliance with the second request. The parties are free to close the transaction at their own risk once the waiting period has elapsed, keeping in mind the one-year limitation period for challenge. The commissioner has the option under section 100 of the Act of seeking an injunction from the Tribunal where, upon compliance with the second request, she still requires more time for substantive review, and the commissioner proves that irreversible steps are likely to be taken after closing, which would make it difficult to remedy a presumed substantial lessening or prevention of competition.
Failure to notify or violation of the waiting period is potentially subject to criminal conviction under the Act, and carries a penalty of up to C$50,000 (directors, officers or agents can also be held personally liable). Moreover, the commissioner is entitled to obtain an injunction preventing the transaction from being completed until expiry of the waiting period. Where a transaction subject to notification is implemented prior to expiration, waiver or termination of the waiting period, a court or the Tribunal, on application by the commissioner, may order dissolution of the transaction and payment of a civil 'administrative monetary penalty' of up to C$10,000 for each day of non-compliance with the waiting period.
The Act does not delineate a specific time period in which the Bureau must conclude its review of a merger. That said, the Bureau has issued a Fee and Service Standards Handbook offering non-binding timelines for substantive review: two weeks for 'non-complex' transactions; 10 weeks for 'complex' ones; and five months for 'very complex' mergers. In practice, the vast majority of transactions are deemed non-complex and are cleared within two weeks. When a more extensive investigation is required, the review is often completed in less time than the service standard would indicate. It remains to be seen whether the average time for review of 'complex' and 'very complex' mergers will lengthen, now that waiting periods are no longer finite (until March, 2009, a 'long-form' waiting period was 42 days and could not be extended), but depend upon compliance by the parties with a so-called 'second request' for documents and information (ie, the US procedure), which requests could be quite detailed and extensive.
Most reviews commence with the filing of a request for an ARC or a no-action letter (with or without formal notification). To date, the Bureau's review has been conducted in a largely cooperative manner, with periodic requests for further information from the parties involved. It is usual for the Bureau to canvass the views of competitors, customers and suppliers for their reactions to the proposed merger, though none of them have any power to stop it from happening. The Bureau is required to treat all information submitted (including the notification filings and requests for an ARC or no-action letter) as confidential, and exempt from the federal Access to Information Act. There are, however, a number of statutory exceptions to the confidentiality rules in the Act, including those permitting disclosure for the purposes of enforcing the Act, which the commissioner may rely upon to communicate with competition officials in other jurisdictions, for example. Despite the generally cooperative nature of the process, the commissioner, in addition to her power to issue second requests, holds a subpoena power to obtain the information she requires, a power which under the new regime will likely be used primarily to obtain information from third parties.
Substance of the review
The legal test is whether the merger is likely to substantially prevent or lessen competition in a relevant market. According to the MEGs, this test in turn revolves around whether the merger will create, preserve or enhance market power - the ability to impose a significant and non-transitory price increase (or reduce product offerings or other features of competition) - either unilaterally or in concert with others, as compared to the likely state of affairs in the absence of the merger.
Defining the boundaries of the relevant geographic and product market in any given merger situation is therefore crucial. The Bureau employs a 'hypothetical monopolist test' to accomplish this task. When a potential market is considered, the test posits whether a monopoly supplier could raise prices (in the aforementioned significant and lasting fashion), without losing such a volume of sales as to make the endeavour unprofitable. If customers are readily able to turn to substitutes or simply go elsewhere for their needs, this means that the market boundaries must be set more broadly. The smallest market identified in which a hypothetical monopolist would be able to sustain such a price increase is the correct market for analysis of the merger.
In determining whether competition would be substantially lessened or prevented, the Bureau will consider a number of factors described in the MEGs, although these are only loose guidelines, and none is determinative on its own. Market share concentration is an important starting point from the standpoints of both unilateral and coordinated effects. The MEGs suggest that a merger resulting in less than a 35 per cent market share for the merged entity, or less than a 65 per cent market share held by the four largest firms, is not likely to be challenged.
That said, the Act notes under subsection 92(2) that market share cannot be the only factor considered in determining whether competition will be substantially lessened or prevented. Section 93 of the Act requires consideration of all other relevant factors affecting the merger's likely competitive impact, including: remaining post-merger competition; the possible elimination of particularly vigorous or effective competitors; substitutes for the merging parties' products; the degree of foreign competition; the possibility of one of the parties failing in the absence of the merger; barriers to entry; the extent of innovation in the market; and any other relevant factor.
Section 96 of the Act also allows for an 'efficiency defence' to an otherwise anticompetitive merger. The provision states that the Tribunal shall not make an order if the gains in efficiency brought about by the proposed merger are greater than and would offset the effects of any loss in competition, and an order would prevent these gains from being made. The MEGs recommend that parties expecting to rely on this provision attempt to demonstrate the efficiency gains early in the notification process. In addition, the Tribunal has held that the effects of the loss in competition must be measured taking all of the Act's objects into account, and not necessarily only the dead-weight economic loss.
Where the Bureau takes issue with certain aspects of a proposed or completed merger, it will attempt to negotiate a remedial course of action with the parties concerned. Such consensual remedies will typically be registered with the Tribunal as consent agreements, which are enforceable as Tribunal orders upon registration. Note that a third party may apply to the Tribunal to revise or rescind a consent agreement within 60 days of its registration. In order to do this successfully, however, the applicant must show that it is directly affected by the agreement, and that the terms of the agreement could not have been the subject of a Tribunal order.
Where the parties contest the need for a remedy, the Tribunal can, upon application by the commissioner under section 92 of the Act, order remedies so as to correct aspects of an otherwise problematic merger. When the commissioner files an application for a remedial order, an adversarial process is initiated with many of the features of a court proceeding, including a hearing. Where the Tribunal finds that competition has been substantially prevented or lessened due to a completed merger, it may order a party or any other person: to dissolve the merger in such manner as the Tribunal directs; to dispose of assets or shares designated by the Tribunal in such manner as the Tribunal directs; or to take any other action, with the consent of the commissioner and the person against whom the order is directed.
When the order is made prospectively against a proposed merger, the Tribunal may order a party or any other person: not to proceed with the merger in whole or in part; prohibiting the person against whom the order is directed, should the merger or part thereof be completed, from doing any act or thing the prohibition of which the Tribunal determines to be necessary to ensure that the merger or part thereof does not prevent or lessen competition substantially; or ordering the person to take any other action, with the consent of the commissioner and the person against whom the order is directed.
In September 2006, the Bureau issued an information bulletin on the subject of merger remedies, clarifying how it will proceed when remedies are sought. It discusses the critical points that the Bureau will consider when remedies are contemplated, and, among other things, outlines desired timelines for the divestiture of shares or assets, prescribes the potential use of 'crown jewels' (to make divestiture packages more enticing to prospective buyers), and proclaims a preference for the sale of pre-existing businesses, as well as up-front buyers. The bulletin also discusses the Bureau's practices when coordinating with foreign competition authorities in respect of multi-jurisdictional transactions.