In this discussion, we focus on two areas of regulation that can be key to cross-border M&A: competition law (as antitrust is known in Canada) and foreign investment review. While other areas of regulation, such as employment and labour law, often have significant effects on M&A transactions, competition and foreign investment law are two of the main channels through which federal government policy on acquisitions and foreign ownership is directly expressed.
Note that recent developments in Canadian competition and foreign investment law are reported and analyzed by Stikeman Elliott’s blog, The Competitor (www.thecompetitor.ca). The site includes resource materials and links to relevant government websites.
Competition / Antitrust
The basics: the Competition Act, the Commissioner and the Tribunal
In contrast with many other areas of regulation in Canada, competition and foreign investment review are, for virtually all intents and purposes, federal matters only. Competition law – the subject of the first half of this discussion – is governed by the Competition Act, which Parliament passed in 1986. The Act is administered by the office of the Commissioner of Competition, whose responsibilities include the investigation of mergers and anti-competitive business practices. On the application of the Commissioner of Competition (or, in certain circumstances, of private parties), a quasi-judicial body called the Competition Tribunal may conduct hearings on merger review, the regulation of “dominant” firms, refusal to deal, exclusive dealing, tied selling, market restriction or misleading advertising.
Successive Canadian governments have grown increasingly attentive to the anti-competitive effects of mergers and other business practices. In 2009, Parliament enacted the most significant amendments to date to Canada’s competition regime, creating (among other things) the new U.S.-style “two-stage” merger review process. Before we come to that, it will help to review the standards of merger review and the advance notification requirements.
Standards of merger review
Definition of “merger”
Section 91 of the Competition Act defines “merger” very broadly:
… the acquisition or establishment, direct or indirect, by one or more persons, whether by purchase or lease of shares or assets, by amalgamation or by combination or otherwise, of control over or significant interest in the whole or a part of a business of a competitor, supplier, customer or other person.
What constitutes an acquisition of “control” is set out in the Competition Act and includes the acquisition of a majority voting interest in an entity (whether in a corporate or another form). “Significant interest” is not defined, but the Commissioner has issued interpretive guidelines.
It makes no difference whether the merger happens by purchase of shares or lease of assets, by amalgamation or combination, or otherwise. The Commissioner of Competition is entitled to challenge an acquisition before the Tribunal at any time up to one year after its completion, unless an Advance Ruling Certificate (ARC) has been granted (see below). Where the Tribunal determines that competition in a market has been or will be prevented or lessened substantially as the result of a merger or proposed merger, it may exercise its broad discretionary authority to make a remedial order. Such an order can include the outright prohibition of a proposed merger or, in the case of a completed merger, the requirement to divest all or part of the acquired business.
The principal substantive test
For mergers, the principal substantive test under the Competition Act is whether a merger “would or would be likely to prevent or lessen competition substantially” in a relevant market. This is the test that the Commissioner of Competition uses when deciding whether to initiate an application to the Tribunal and it is also the test that the Tribunal uses in its adjudication of an application. In applying the test, the Commissioner of Competition and the Tribunal will consider the extent and effectiveness of foreign competition, whether the business of a party to the merger has failed or is likely to fail, the extent and availability of acceptable substitutes for products supplied by the parties, current barriers to entry into the market, whether the transaction would result in the removal of a vigorous and effective competitor, the extent to which effective competition would remain following the transaction and the nature and extent of change and innovation in the relevant market.
Merger Enforcement Guidelines
The analytical framework that has been adopted by the Commissioner of Competition employs legal and economic criteria similar to those found in U.S.antitrust jurisprudence. In October 2011, the Commissioner of Competition re‑released the Merger Enforcement Guidelines, modelled on similar guidelines adopted by the U.S. Department of Justice, which set out in general terms how the merger review provisions of the Competition Act are to be administered.