A Comparison of Basic Merger Notification Requirements in Canada, the United States and the European Community

Michael A. Sullivan and Mario Brillant*

A paper prepared for the Annual Conference of the
Canadian Bar Association Competition Law Section

September 20-21, 2001

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*Competition Law Officers, Mergers Notification Unit, Mergers Branch. The views expressed in this paper are those of Michael A. Sullivan and do not necessarily represent the views of the Competition Bureau. We would like to thank Tara-Marie Andronek of the International Affairs Directorate for her assistance in preparing this paper.

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In February 2000, the International Competition Policy Advisory Committee to the Attorney General of the United States and the Assistant Attorney General for Antitrust submitted their final report, commonly referred to the ICPAC Report.¹ One of the mandates of the Committee was to examine and make recommendations with respect to multi jurisdictional merger review, an area of obvious relevance to merger notification. Primarily focussing on the United States, the ICPAC Report nonetheless provides an interesting scorecard for evaluating the merger notification system in Canada.

The purpose of this paper is to describe and compare the basic features of the merger notification systems in Canada, the United States and the European Economic Community, the jurisdictions of most relevance to Canadian competition law enforcers and lawyers.² The ICPAC Report recommendations on merger notification will be used to make observations regarding the Canadian system.

The ICPAC Report Recommendations

The ICPAC report supports the well known benefits of mandatory merger notification requirements, the ability to detect and remedy potentially anticompetitive proposed mergers.³ Merger notification can also reduce costs of litigating completed merger transactions. However, with merger notification laws in place in over 60 countries, transaction costs have increased markedly for international mergers.⁴ In order to rationalize the application of merger review procedures, the ICPAC Report recommends the adoption of several "best practices" which should be contained in merger notification regimes. These include the following recommendations:

Merger Notification in Canada, the United States and the European Economic Community: A Comparison

Each jurisdiction has a mandatory merger notification based on targeting parties to "large transactions" which must notify the agency, supply required information for the review of competition issues and wait for the lapsing of established time periods before they can legally complete the transaction.⁵ Notification in each jurisdiction is based primarily on objective financial criteria as opposed to more subjective market share tests, for example. The merger notification requirements are respectively contained in Part IX of the Competition Act in Canada, Section 7A of the Clayton Act more commonly known as The Hart-Scott-Rodino Act ("HSR") in the United States and Council Regulation (EEC) No. 4064/89 amended by Regulation No. 1310/97 in the European Economic Community.

The Federal Trade Commission's Bureau of Competition has published extensive rules and guidance on HSR to assist merging parties' lawyers in interpreting the statute and regulations. Similarly, the Competition Bureau in 2000 published a Procedures Guide: Notifiable Transactions and Advance Ruling Certificates under the Competition Act and a series of ten interpretation guidelines on specific issues. In the coming year, the Competition Bureau intends to publish additional guidelines for consultation as well as finalize the second draft of the interpretation guideline on the exemption for certain acquisitions of assets in the ordinary course of business. The European Commission's Directorate General for Competition ("DGIV") has published four guidelines with respect to its form CO.⁶ The Form CO is very detailed in its requirements which arguably explains the comparatively low number of guidance statements published by DGIV.⁷

Overall, Canada has made significant progress in the area of providing guidance on merger notification requirements.

A short description and discussion of the basic requirements in each jurisdiction follows:.

I Does the requirement to notify apply to "non-domestic" merger transactions?

Notification in Canada and the United States is only triggered when at least one of the parties has commercial operation in the jurisdiction in conformance with the ICPAC recommendation noted above. The EU appears to have a wider jurisdictional sweep.⁸

II Does the legislation indicate when a notification must be filed with the agency?

Canadian and U.S. requirements on this point are almost identical. Merging parties can file as soon as they have a letter of intent or agreement in principle to merge. The EU system is less flexible, and in our experience results in DGIV being notified informally before other agencies with respect to multi-jurisdictional transactions to discuss information required in the Form CO. Consequently, formal notification in the EU often follows Canada and the United States with respect to multi-jurisdictional transactions. The ICPAC Reports recommends that the EU adopt the approach used in Canada and the United States.

III Who is obligated to notify?

Canadian law is flexible with respect to the requirement of who must notify; however, the law is clear that information on all relevant parties to the proposed transaction must be supplied. The latter requirement was clarified in amendments to the Competition Act which came into force in late December 1999. Prior to that only "the person or persons" proposing to acquire assets or voting shares had an obligation to notify.

IV Size of party threshold

On a currency adjusted basis, the United States has the lowest size of parties threshold followed by Canada and the EU. The Competition Bureau estimated this year that approximately 25% of all reported merger activity in Canada is subject to merger notification.⁹ Each jurisdiction has established size of party thresholds at reasonably high levels. The ICPAC Report recommends that jurisdictions index thresholds for inflation or, at least, periodically review and adjust thresholds if they are too low. This issue was studied in 2000 and rejected in Canada with respect to the size of parties threshold.

V Size of transaction threshold

In February 2001, the United States increased the size of transaction threshold from $15 million to $50 million (U.S). The EU transaction threshold is considerably higher than North American thresholds; however, notification may still be required in individual Member States as well as other European countries. The Commissioner has recommended that transaction threshold in Canada be increased to $50 million from $35 million to account for the effects of inflation since 1987.¹⁰ It is anticipated that this will reduce the number of merger notifications in Canada by about 10%.

Based on the ICPAC Report statements, merger notification captures too many mergers with no potential adverse impacts on competition. Given low challenge rates, Canada's move to increase the transaction threshold is consistent with ICPAC Report recommendations.¹¹

VI Exemptions

VI Exemptions Continued

Canada and the United States have taken a codified approach to exemptions from merger notification. The EU has far fewer exempt classes of transactions.

The United States exempts more classes of transactions from merger review than Canada; notably, certain classes of merger transactions reviewable by other Federal agencies¹³ as well as others exempt by regulation. Only asset securitization transactions are exempt in Canada by regulation.¹⁴ Part 802 of the U.S. Code of Federal Regulations set out rules for 27 exemptions from HSR, a number of which are not set out above.

U.S. exemptions suggested for Canada include certain acquisitions of carbon based reserves, residential real estate, investment rental property assets and employee buyouts. The Competition Bureau's long standing response has been that further exemptions will be considered as long as they are not tantamount to industry wide exemptions and that they represent a sufficient number of transactions to merit the attention of legislators.

VII Information requirements

Different information is required to be supplied in each jurisdiction. This has been the subject of considerable commentary on the need to harmonize information requirements.¹⁵ The Canadian short form filing differs from the HSR and EU Form CO in that it requires the provision of comparatively more customer and supplier information where there are overlapping products.  The HSR form requires merging parties to provide product information by North American Industrial Classification System.¹⁶ The EU has the most comprehensive upfront information requirements.

Canada has a unique information filing system, a modest short form, and a more extensive long form where parties elect which form to supply. This feature is praised in the ICPAC Report. The United States and the EU have one form; but, the respective agencies have the ability to formally compel additional information where the agency designs the nature of the request. In our opinion, the Canadian short form filing is seriously deficient in providing the minimum information required to make a preliminary determination of competition issues because it does not require merging parties to file company documents evaluating the proposed transaction. The latter is an important element of the basic filing requirements in the United States and the EU.¹⁷

VIII Additional Information and Second Requests

The Commissioner has the discretion to require the long form within 14 days when it deems that the short form does not provide enough information for the agency's review. This feature, along with the Advance Ruling Certificate feature discussed below in section IX, have lead to frequent pre-filing discussions between the Mergers Branch of the Competition Bureau and merging parties lawyers. At the end of 1999, new short and long form information requirements came into force. The long form requirements have been significantly improved, and it is being requested comparatively more frequently than in the past. DGIV also undertakes extensive pre-filing discussions given the comprehensiveness of the Form CO as well as the availability of an abridged Form for certain joint ventures.

All three jurisdictions have extensive investigative powers. In Canada, the Competition Bureau relies on the power to apply to the courts to subpoena documents, oral testimony and written returns in a relatively small number of matters which raise serious competition issues. Recently the Competition Bureau has assigned a senior competition law officer to vet all court applications for subpoenas to ensure relevancy and consistency. However, most additional information continues to be provided voluntarily in the form of submissions and informal information requests.

In the United States, second requests for information are issued with respect to approximately 2% of filings.¹⁸ The ICPAC Report has extensive commentary on almost every aspect of the HSR second request process. Quite recently the FTC and Antitrust Division of the U.S. Department of Justice have responded to the recommendations in the ICPAC Report by establishing procedures to improve the HSR second request process.¹⁹ Additionally, both agencies in the United States have the power to issue civil investigative demands to depose witnesses, obtain documents and written returns of information without resort to court approval.

The investigative tools available to DGIV, agency issued second requests and civil investigative demands, essentially are analogous to the powers available to antitrust enforcers in the United States.

IX Abridged Notification

One of the most notable and useful feature of the Canadian merger notification system is the availability of Advance Ruling Certificates for proposed transactions. The equivalent is not available in the United States or the EU. An Advance Ruling Certificates, if issued and the transaction is completed within one year, has two characteristics. One, it prohibits the Commissioner from challenging the transaction solely on the basis of the information that is the same or substantially the same as the information used to issue the certificate; and two, it waives the obligation to notify under section 114.²⁰

Advance Ruling Certificate requests generally contain a short description of the parties, the proposed transaction, product and geographic markets and a brief competitive analysis if there is any horizontal or vertical overlap between the parties.²¹ Generally, less information is required in the request that the requirements set out in the short form information requirements. Certificates are issued when there is little or no overlap between the parties, when market shares are well below the thresholds set out in the Merger Enforcement Guidelines²², when a transaction would result in a small increase in market concentration or for other classes of transactions such as mergers which result in going from control in fact to control in law.

Interestingly the ICPAC Report does not recommend the adoption of Advance Ruling Certificates. Rather it encourages U.S. antitrust enforcers to adopt a variant of a long standing Canadian practice of accepting more voluntary information to narrow and clarify issues and otherwise avoid the issuance of HSR second requests.

A notification in short form can be made in the EU in cases where a joint venture has de minimis or no, actual or foreseen activities in two or more member states. Such cases occur where joint control is acquired by two or more undertakings, and where: (i) the turnover of the joint venture and/or the turnover of the contributed activities is less than ECU 100 million; and (ii) the total value of assets transferred to the joint venture is less than ECU 100 million. More information is required in the EU short form filing than its Canadian counterpart. The information to be supplied is similar to the HSR form with the additional requirement to supply information on the merging parties' five largest customers and suppliers as well as submissions on geographic markets and market shares.

X Waiting periods

Merging parties may not complete the proposed transaction in Canada and the United States until the expiration of the respective waiting period. In Canada, the exceptions to this is when an Advance Ruling Certificate is issued or if the parties are advised that the Commissioner does not intend to challenge the proposed transaction. In the United States, merging parties must apply and receive permission, called "early termination", in order to complete a proposed transaction before the end of the 30 day waiting period. In the EU, the transaction cannot be completed until DGIV renders a positive substantive decision.

The vast majority of merger filings in Canada are Advance Ruling Certificate requests, short form filings or the two methods in combination. The 14 calendar day short form waiting period in Canada is substantially shorter than the 30 day period in place in the United States or the EU.²³ Often Canada is among the last jurisdictions to be notified. While in theory the Competition Bureau could have a waiting period up to 56 days ²⁴ plus the time needed to prepare filings, very few transactions are "bumped" to a long form filing.²⁵ A serious issue faced by Canadian enforcers is that notification waiting periods almost always expire before the completion of the substantive review of problematic transactions. Unless the merging parties voluntarily delay the closing of the transaction, the Commissioner must apply for an injunction or negotiate a voluntary hold-separate arrangement.²⁶

The United States and the EU have two-stage systems. An initial 30 day period followed by a second stage for problematic transactions. An HSR second request enjoins the proposed transaction for up to a further 30 days following substantial completion of the request.²⁷ A second stage merger investigation can take up to a further four months. Likewise the proposed transaction cannot be completed during the review period. Contrary to the United States and EU systems as well as the ICPAC Report Recommendations, Canada does not have a "two stage" merger review process or an initial 30 day review period.²⁸

A unique feature of the Canadian system is the existence of service standard time periods which are maximal periods within which the Competition Bureau will render a substantive decision on a merger transaction.²⁹ The service standard periods are based on the initial assessment of the complexity of the competition issues presented by the merger, and the "clock" starts once the matter is public and the Bureau receives sufficient information on product and geographic markets, barriers to entry and other competitively important information.³⁰ Only the 14 day service standard review period for "non-complex" mergers corresponds with one of the waiting periods set out in Part IX of the Competition Act. The ten week and five month service standard review periods for "complex"and "very complex" mergers go well beyond the statutory waiting periods. Delays in starting the service standard time period, based on the provision of voluntary or compulsory information is a sometimes source of complaint from merging parties' lawyers. The "clock" stops once a substantive decision has been communicated to the merging parties. Overall, the Competition Bureau has a good record in meeting its service standard commitments.³¹

Canada has attempted to increase the certainty associated with length of its review periods through its service standards policies and generally speed up the merger review process. Following the adoption of filings fee and service standards, the Compliance Directorate of the Competition Bureau undertook a study of the Canadian, American, UK and Australian merger review processes which was published in 2001.³² One of the major recommendations of the Benchmarking Report was to devote more resources and responsibilities to merger notification at the Competition Bureau. In November 2000, the Mergers Notification Unit was established with the mandate to undertake traditional notification activities, establish the complexity of all incoming transactions, review non-complex transactions and undertake policy and communications work. In step with the ICPAC Report recommendations, a considerable aspect of the Merger Notification Unit's work involves getting files off to a good start by discussing and, hopefully narrowing issues at the outset of the review for each transaction.

XI Filing fees

In February 2001, the United States substantially increased its filing fees as the increase in the size of transaction threshold was anticipated by Congress to result in a dramatic reduction in the number of merger filings. The change also involving moving away from a flat fee to a three tiered system based on the value of the transaction. In the United States, merger filing fees completely fund both the Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice.

Canadian fees have remained constant since their introduction in November 1997, and only fund the direct costs of merger review. ³³ Recently, the Competition Bureau has indicated that it may be assessing the need to increase filing fees in Canada to offset the effects of an increase in the size of transaction threshold. However, no specifics have emerged as yet.

The EU, unlike many member States and other European countries, has no filing fees. Overall, it is likely that the filing fees will be an ongoing issue for the foreseeable future as agency budgets increasingly rely on fee revenue.³⁴

Concluding Remarks

Within the thrust of the ICPAC Report's recommendations to reduce costs associated with the merger review process, the Canadian system is relatively less onerous than the merger notification systems in the United States and the EU. The Canadian system is particularly good at clearing non-problematic mergers in a relatively short period of time subject to modest information requirements.

There are, however, areas in Canadian merger notification system which in the view of informed observers should be examined. Notification is required for too many competitively insignificant mergers. To a certain degree this is inevitable with a system based on transaction and financial, as opposed to market impact, criteria. The proposed increase in the size of transaction threshold will address this issue. It would also be helpful to consider whether more classes of exempt transactions would be beneficial.

The Canadian merger notification system does not serve the antitrust community as well as those in the United States and in the EU. This could be fixed by a more fulsome short form requiring the provision of HSR 4c type documents with a 30 day waiting period.³⁵ Secondly, Canada should adopt a two stage merger review system where completion of the proposed transaction is prohibited for a further period, say 30 days following compliance with an additional information requirement. Here there are a number of interesting possibilities for debate such as using a long form filing, agency issued second requests or court orders as well as set time limits for merging parties to respond to demands for information and for the Competition Bureau to take a decision to challenge.

Over a longer time frame, there is a good case for more harmonization of merger notification internationally. Much of the future debate on merger review will focus on the difficult questions relating to standards to achieve this objective.

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Footnotes

¹  International Competition Policy Advisory Committee to the Attorney General and Assistant Attorney General for Antitrust. Final Report, 2000

²  The Canadian and United States Pre-merger Notification- A Comparison by Michelle Lally, Partner Osler Hoskin Harcourt, September 30, 1999, a paper prepared for the 1999 CBA Competition Law Conference contains a very detailed description of the Canadian and U.S. systems.

³  Also see Reflections on 20 Years of Merger Enforcement under the Hart-Scott-Rodino Act by William Baer, former Director of the Bureau of Competition, Federal Trade Commission, before The Conference Board, Washington, D.C., October 29, 1996 and before The 35th Annual Corporate Counsel Institute, Northwestern University School of Law, Corporate Law Center, San Francisco, CA, October 31, 1996

⁴  See The Internationalization of Antitrust: The Need for a Global Competition Forum by J. William Rowley, QC a paper prepared for the Canadian Competition Policy: Preparing for the Future Conference sponsored by the Competition Bureau, the Richard Ivey School of Business, University of Western Ontario and Industry Canada, June 19 and 20, 2001 

⁵  See pages 4 and 15 of Chapter 3 of the ICPAC Report.

⁶  The guidelines are on the calculation of turnover for insurance undertakings as well as joint undertakings and the application of the two-thirds rule. All pertain to establishing notification thresholds.

⁷  Guidance material can be found on each agency's website, www.competitionbureau.gc.ca, www.ftc.gov and www.europa.eu.

⁸  This statement is drawn from comments by John Davies and Maya Barr, lawyers with Freshfields Deringer, on the European Court of First Instance's 1998 judgement in the Gencor/Lonrho case published in Getting the Deal Through - Mergers and Acquisitions in 30 Jurisdictions Worldwide 2000. Published by Law Business Research Ltd.

⁹  Mergers and Acquisition in Canada published by Crosbie & Co. Inc. reported that there were 1,297 merger transaction publically reported in Canada during the 2000 calendar year. The Competition Bureau received 361 notifications in 2000.

¹⁰  Part IX of the Competition Act came into force in July 1987, about one year after the Act itself came into force. Contrary to the ICPAC recommendation; however, thresholds will not be automatically adjusted for inflation.

¹¹  In recent years, an average of eight to ten mergers a year have been challenged, abandoned or restructured out of the 350 to 400 mergers reviewed by the Competition Bureau each year. See Annual Report of the Commissioner of Competition for the year ending March 31, 2000, available at www.competitionbureau.gc.ca.

¹²  The exemptions listed for the United States are set out in the statute. Additional exemptions are set out by regulation.

¹³  Readers should be cautioned on this point. A considerable portion of Chapter 3 of the ICPAC Report is devoted to multiple review of mergers by antitrust and sectoral regulators in the United States.

¹⁴  Asset securitization transactions are competitively benign financing transaction where the obligation to notify was only triggered by the lender securing title to assets in the event of a debt default. This exemption came into force on December 27, 1999.

¹⁵  See J. William Rowley, QC and A. Neil Campbell, Multi-jurisdictional Merger Review - Is it time for a Common Form Filing Treaty? Policy Directions for Global Merger Review: A Special Report by the Global Fourm for Competition and Trade Policy (1999). Also see R. Whish and D. Wood, Mergers in the Real World - A Study of Merger Control Procedures (Paris: OECD,1994).

¹⁶  North American Industrial Classification System codes replaced Standard Industrial Codes in the HSR form as of July 2001.

¹⁷  Regulation 17(e)(xv) of the Notifiable Transactions Regulations which is part of the long form filing requires such information; however, the long form is filed or invoked in respect of approximately 2% of filings.

¹⁸  See Appendix A of the Annual Report to Congress for Fiscal year 2000 Pursuant to Subsection 7A of the Clayton Act Hart Scot Rodino Antitrust Improvement Act, submitted by the Federal Trade Commission Bureau of Competition and Department of Justice Antitrust Division.

¹⁹  Report to Congress Regarding Merger Review submitted by the Federal Trade Commission, June 19, 2001.

²⁰  See sections 102 and 103 as well as subsections 113(b) and 113(c). Subsection 113 (c) came into force December 27, 1999. It extends the exemption to notify further even when the ARC request is denied if substantially similar information was supplied in the ARC request. Previously, denying an ARC resulted in the parties having to supply a short form, if one was not supplied with the ARC request, and shortening the waiting period.

²¹  For more information see Procedures Guide for Notifiable Transactions and Advance Ruling Certificates available in the Competition Bureau's website www.competitionbureau.gc.ca.

²²  Merger Enforcement Guidelines of the Commissioner of Competition 1991, available at www.competitionbureau.gc.ca

²³  From July 1986 to December 27, 1999 the waiting period for a short form filing in Canada was seven calendar days.

²⁴  Paragraph 123(1)(c) of Part IX of the Competition Act provides that the waiting period in respect of the long form in respect of share transaction taken up through the facilities of a stock exchange in Canada is 21 days. However, this technique is not commonly used in Canada as most shares are taken up through a depository.

²⁵  Only two transactions in 2001 to date.

²⁶  The interim order provisions are contained in section 100 of the Competition Act. The Competition Tribunal may issue an interim order enjoining the completion of a proposed merger from ten to 60 days on Application by the Commissioner i) certifying an inquiry under subsection 10(b), ii) more time is required to complete the inquiry, iii) that in the absence of an order actions by the merging parties are likely to be taken that would impair the effectiveness of a final order that would be difficult to reverse. This section came into force in December 1999. Previously, the section contained a competition test. The Commissioner's application in the only fully contested injunction proceeding, DIR v. Superior Propane Inc et. al. CT 98-02, was unsuccessful. No applications under the amended section 100 of the Competition Act have been filed with the Competition Tribunal to date.

²⁷  20 days in the case of a cash tender acquisition of voting securities.

²⁸  Calvin S. Goldman and Mark Katz advocate such a change in their paper Canadian Competition Policy: Where do we go from Here? prepared for the Canadian Competition Policy : Preparing for the Future Conference sponsored by the Competition Bureau, the Richard Ivey School of Business, University of Western Ontario and Industry Canada, June 19 and 20, 2001.

²⁹  See the Competition Bureau's Fee and Service Standards Handbook Pursuant to the Competition Act, Ottawa May 1, 1998, release 2 available at www.competitionbureau.gc.ca.

³⁰  Ibid

³¹  See the Competition Bureau's Merger Review Performance Report 2001, Ottawa, June 28, 2001 available at www.competitionbureau.gc.ca.

³²  Merger Review Benchmarking Report, Competition Bureau, June 28, 2001 available at www.competitionbureau.gc.ca.

³³  Supra note 16.

³⁴  Canadian Lawyers Crusade for Merger Relief by Eric Reguly The Globe and Mail Report on Business, published June 9, 2001.

³⁵  The long form filing requirement at paragraph 17(e)(xii) is comparable to section 4c of the HSR form.