Canadian Competition Bureau actively investigating below-threshold mergers
August 2019 | SPECIAL REPORT: COMPETITION & ANTITRUST
Financier Worldwide Magazine
August 2019 Issue
Once merging parties conclude that their transaction is not reportable to competition authorities, they often assume that competition law considerations have been dispensed with and focus on other deal points. However, just because a transaction falls below the mandatory reporting thresholds does not necessarily mean that it will not be viewed as being anti-competitive or, more importantly, that it is immune to challenge from a competition regulator. Canada’s competition regulator, the Competition Bureau, has the power to review non-reportable mergers. Taking it a step further, the Bureau has recently flexed its muscles with the establishment of a new merger intelligence unit, which has focused a spotlight on non-reportable deals. In fact, in the few short months since the unit’s inception, the Bureau has already brought a challenge against a non-reportable merger that had already closed. The risk of a post-closing challenge understandably strikes fear into the hearts of purchasers. To avoid this nightmare scenario, it is crucial to conduct a substantive competition analysis of all deals with a Canadian component, whether or not they are reportable. In this article, we discuss the Bureau’s historical enforcement of non-reportable mergers and the rising risk to merging parties from these transactions.
Generally speaking, acquisitions are subject to mandatory reporting in Canada if: (i) the target has over C$96m in Canadian revenues or assets, subject to annual adjustment; (ii) the parties to the transaction have over C$400m in Canadian revenues or assets; and (iii) the acquisition is for more than 20 percent of a public company, more than 35 percent of a private entity or more than 50 percent of either, if the purchaser already holds more than 20 percent or 35 percent, respectively. Nevertheless, the Bureau has the power to challenge all mergers, whether or not they meet the mandatory reporting thresholds, within one year of closing. While the Bureau’s merger enforcement actions have traditionally focused on reportable mergers, there are notable examples of Bureau intervention on non-reportable deals. In fact, non-reportable merger cases have been before the Supreme Court of Canada, including the seminal Tervita case, which relates to an acquisition that was only C$6m. There are also examples of negotiated remedies arising from the Bureau’s review of non-reportable transactions. In part, the Bureau’s interest in non-reportable mergers may be due to Canada’s high transaction-size threshold, compared to many other jurisdictions. For example, when taking into consideration relative population size, the C$96m threshold would be equivalent to around C$1bn in the US. So, it is unsurprising that the Bureau would be concerned that below-threshold mergers could have competitive significance.
Until recently, however, the Bureau’s enforcement action involving non-notifiable mergers has typically been reactive and complaint driven. This is likely why enforcement action on non-reportable mergers was not very common and, therefore, parties typically did not report such transactions to the Bureau. Accordingly, if a non-reportable merger presented potential competition concerns, but was not expected to generate complaints, the usual course of action would be to proceed without notifying the Bureau. Indeed, even where there was a risk of complaints, parties would still frequently proceed without notifying the Bureau. However, now that the risk of detection and Bureau review appear to have significantly increased, this approach must be revisited.
Bolstered by additional manpower and resources, which have been funded by the recent increase of the merger filing fee from C$50,000 to around C$75,000, subject to annual adjustment, the Bureau created its merger intelligence unit to focus on detecting, investigating and challenging non-reportable mergers and failures to report deals subject to mandatory reporting. The Bureau’s methods for detecting non-reportable mergers have not been publicly disclosed. Presumably, they involve closely tracking publicly available information, such as press releases and news articles, and, potentially, contact with other regulators. In the short time that the Bureau’s initiative has been underway, the unit has already identified and investigated multiple mergers. The Bureau has also recently obtained a court order to compel information in respect of another non-reportable deal. And the Bureau has even launched a challenge of a non-reportable merger that had already closed, alleging a merger to monopoly. While these developments are in their infancy, there is no doubt that the competition bar has taken note.
These developments are likely to significantly impact the way merging parties approach the analysis of competition risk. The calculus could be changing, such that parties may, in the regular course, choose to voluntarily report or walk away from non-reportable deals that present serious competition issues. This could result in a significant uptick in the reporting of below-threshold mergers. That said, given the lower financial value of such mergers, it may be that parties will not have the appetite to accept a remedy if one were to be required by the Bureau. Merging parties who plan to rely on the prospect that their transaction will not be detected within the one year that the Bureau has to launch a challenge should proceed with caution; this is especially true for publicly announced transactions.
The key takeaway is that conducting a substantive competition analysis for every transaction with a Canadian component is essential. Merging parties may still choose to forego notifying the Bureau and accept the risk of an investigation or a post-closing challenge. However, it is important to do so with open eyes.
Jonathan Bitran is an associate at McCarthy Tétrault LLP. He can be contacted on +1 (416) 601 7693 or by email: email@example.com.
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