Competition Bureau submission to the OECD Competition Committee roundtable on Definition of Transaction for the Purpose of Merger Control Review

June 18, 2013

1. Introduction

  1. Canada’s Competition Bureau (the “Bureau”) is pleased to provide this submission to the OECD Competition Committee’s 18 June 2013 roundtable on “Definition of transaction for the purpose of merger control review”. The Bureau, headed by the Commissioner of Competition (the “Commissioner”),Footnote 1 is an independent law enforcement agency responsible for the administration and enforcement of the Competition Act (the “Act”) Footnote 2 and certain other statutes. In carrying out its mandate, the Bureau strives to ensure that Canadian businesses and consumers have the opportunity to prosper in a competitive and innovative marketplace.

2. Overview of merger notification and review in Canada

  1. Under the Act, the Commissioner has jurisdiction to review and challenge mergers of all sizes and in all sectors of the economy. While the statutory definition of a “merger” is broad, only certain classes of proposed mergers that exceed applicable monetary thresholds are subject to mandatory pre‑merger notification.
  2. For the purposes of the Act’s principal provision enabling the Commissioner to challenge a merger before the Competition Tribunal (the “Tribunal”) Footnote 3 (i.e. section 92), a “merger” is defined as:

    “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.”Footnote 4 [emphasis added]

  3. Generally, the Act defines “control” to be de jure control with respect to corporations,Footnote 5 whereas, the Act does not define a “significant interest”. The Bureau’s interpretation of a “significant interest” is explained in its Merger Enforcement Guidelines (“MEGs”).Footnote 6 The Bureau considers both quantitative and qualitative factors when assessing whether an interest is significant. Qualitatively, a significant interest is held when the person acquiring or establishing the interest obtains the ability to materially influence the economic behaviour of the target business.Footnote 7 The MEGs state that an interlocking directorate would rarely qualify, in and of itself, as the establishment of a significant interest (i.e. a “merger”). Rather, interlocking directorates may be features of transactions that otherwise qualify as mergers, and may be reviewed as appropriate.Footnote 8
  4. While the statutory definition of a merger is broad, only certain classes of transactions that exceed applicable monetary thresholds are subject to mandatory pre‑merger notification under the ActFootnote 9 and cannot be completed until the expiration of the applicable statutory waiting period.Footnote 10 The Commissioner has the ability under the Act to waive the notification requirement and/or terminate the applicable waiting period;Footnote 11 either action can be used as a means of simplifying the notification procedure for transactions that are unlikely to raise potential competition concerns.Footnote 12
  5. The Act includes clear and objective criteria to assist in determining whether a proposed transaction is subject to mandatory pre‑merger notification.Footnote 13 Specifically, notification of a proposed transaction is required where both size‑of‑parties and applicable size‑of‑transaction thresholds are exceeded. The size‑of‑parties threshold requires that the parties to the transaction, together with their affiliates, have combined assets in Canada or annual gross revenues from sales in, from or into Canada in excess of C$400 million.Footnote 14 As discussed further below, there are specific size‑of‑transaction criteria for each of the following classes of transactions: an acquisition of assets; an acquisition of voting shares; an amalgamation; a combination; and the acquisition of an interest in a combination, together with a common dollar value threshold that must be exceeded. For 2013, this dollar value is C$80 million.Footnote 15
  6. In addition, each size‑of‑transaction threshold incorporates the concept of a change in ownership of an “operating business” with a nexus to Canada. “Operating business” is defined in the Act as “a business undertaking in Canada to which employees employed in connection with the undertaking ordinarily report for work.” For example, for the size‑of‑transaction test for an acquisition of shares to be met, the voting shares to be acquired must be of a corporation that carries on an “operating business” or that controls a corporation that carries on an operating business in Canada. For an acquisition of assets, the assets must be of an operating business.Footnote 16
  7. To facilitate the application of the statutory notification criteria and aid parties in determining whether a proposed transaction is notifiable, the Bureau has for many years issued public guidance. In particular, the Bureau has published a number of Pre‑Merger Notification Interpretation Guidelines (some of which are noted in this submission) and a Procedures Guide for Notifiable Transactions and Advance Ruling Certificates under the Competition Act. Often, such guidance documents are drafted after consultations with stakeholders. Indeed, the Bureau is currently in the process of developing three new Interpretation Guidelines, some of which may be ready for publication this year. Moreover, the Bureau’s Merger Notification Unit (which accepts and processes merger filings) provides informal consultations on notification issues on a case‑by‑case basis (as well as formal written opinions, for a fee).

3. Acquisition of shares

  1. For notification purposes, the size‑of‑transaction threshold for an acquisition of voting shares will be met where
    1. the assets in Canada of the target corporation (and its subsidiaries) or gross revenues from sales in or from Canada generated from those assets, exceeds C$80 million, and
    2. the acquisition would result in an acquiring person (and its affiliates) holding voting shares,
      1. in the case of a corporation whose voting shares are publicly traded, in excess of 20% of all of the votes attached to the target corporation’s voting shares, or
      2. in the case of a corporation that does not have any voting shares that are publicly traded, in excess of 35% of all of the votes attached to the target corporation’s voting shares. If an acquiring party already exceeds the aforementioned percentage thresholds of 20% or 35% (i.e. via existing share ownership), as applicable, then the applicable threshold is 50%.
  2. If an acquisition of shares is not notifiable, the Commissioner may nonetheless review (and challenge) the acquisition if it results in a person acquiring a significant interest in the target corporation. In the case of voting shares, the Bureau generally considers that a significant interest in a corporation exists when one or more persons directly or indirectly hold enough voting shares to,
    1. obtain a sufficient level of representation on the board of directors to materially influence that board, or
    2. block special or ordinary resolutions of the corporation.Footnote 17 In the absence of other relationships, ownership of less than 10 percent of the voting interests in a business generally will not be treated as ownership of a significant interest. While inferences about situations that result in a direct or indirect holding of between 10 percent and 50 percent of voting interests are more difficult to draw, a larger voting interest is ordinarily required to materially influence a private company than a widely‑held public company.Footnote 18

4. Acquisition of assets

  1. For notification purposes, the size‑of‑transaction threshold for an acquisition of assets will be exceeded where the value of the assets in Canada to be acquired, or the annual gross revenues from sales in or from Canada generated by those assets, exceeds C$80 million.
  2. If an acquisition of assets is not notifiable, the Commissioner may nonetheless review (and challenge) the acquisition if it results in a person acquiring a significant interest in a business. As discussed in the MEGs, asset transactions (whether notifiable or not) that generally qualify as the acquisition of a significant interest in a business (i.e. a “merger”) include, without limitation, the purchase or lease of an unincorporated division, plant, distribution facilities, retail outlet, brand name or intellectual property rights from a target company.Footnote 19 Further, the acquisition of a subset of the assets of a business that is capable of being used to carry on a separate business is also considered to be the acquisition or establishment of a significant interest in a business.Footnote 20

5. Joint ventures

  1. Pursuant to the Act, the formation of an unincorporated combination is exempt from the substantive merger review provisions (section 92) if it is undertaken for a specific project or program of research and development, and certain criteria are met.Footnote 21 Such criteria include the following:
    1. the project/program would not likely take place or would not reasonably be likely to take place in the absence of the combination because of the risks involved in relation to the project/program and the business to which it relates;
    2. no change of control over any party to the combination would result;
    3. all persons who formed the combination are party to a written agreement that,
      1. imposes an obligation on at least one of the parties to contribute assets to the combination,
      2. governs the continuing relationship between the parties,
      3. restricts the range of activities that may be carried on by the combination, and
      4. provides that the agreement terminates on completion of the project/program; and
    4. the combination is not likely to prevent or lessen competition except to the extent reasonably required to undertake and complete the project/program.
  2. The formation of a combination may be notifiable under the Act if the size‑of‑parties and applicable size‑of‑transaction thresholds are exceeded. The size‑of‑transaction threshold for a combination of at least two persons that propose to carry on business other than through a corporation, will be met where:
    1. at least one of the persons contributes assets from an operating business; and
    2. the aggregate value of the assets in Canada or the gross revenues from sales in or from Canada generated from those assets exceeds C$80 million. The Act also has a size‑of‑transaction test for the acquisition of an interest in a combination.Footnote 22
  3. Pursuant to section 112 of the Act, an unincorporated combination is exempt from notification requirements if certain criteria are met,Footnote 23 including the following:
    1. all persons who propose to form the combination have a written agreement or intend to have a written agreement that,
      1. imposes an obligation on at least one of the parties to contribute assets to the combination,
      2. governs the continuing relationship between the parties,
      3. restricts the range of activities that may be carried on by the combination, and
      4. provides for the orderly termination of the agreement; and
    2. no change of control over any party to the combination would result from the combination. This exemption typically only applies to the formation of a combination, and does not apply to the acquisition of an interest in a combination by a new party. Footnote 24
  4. It is possible that parties to a proposed combination may structure their combination, or argue that the combination is structured, such that no assets are being contributed to the joint venture and, as a result, these combinations fall outside the scope of the Act’s notification provisions. The Bureau is aware of instances where transactions that raise potential competition concerns have been exempt from notification under section 112 of the Act.

6. Amalgamations

  1. For notification purposes, an amalgamation will be notifiable where:
    1. the assets or annual gross revenues from sales in or from Canada of the continuing corporation (and subsidiaries) exceed C$80 million; and
    2. each of at least two of the amalgamating corporations, together with its affiliates, have assets in Canada, or annual gross revenues from sales in, from or into Canada, that exceed C$80 million.Footnote 25

7. Exemptions

  1. No industry sector is specifically exempt from the substantive provisions respecting merger control contained in the Act. However, the Tribunal may be prohibited from making an order with respect to a merger involving banks, trust companies or insurance companies under the substantive merger control provision of the Act (section 92) if the Minister of Finance certifies the names of the parties and that the merger is in the public interest.Footnote 26 The Tribunal may be similarly prohibited where a merger has been approved under the Canada Transportation Act,Footnote 27 and the Minister of Transportation has certified the names of the parties.Footnote 28
  2. There are no special notification thresholds or exemptions from pre‑merger notification requirements for any specific industry sector. However, certain general exemptions from the pre‑merger notification requirements of the Act, include the following:
    1. a transaction where all of the parties are affiliates of each other;
    2. a transaction that the Minister of Finance has certified under the Act to be in the public interest;
    3. a transaction that has received an advance ruling certificate under section 102 of the Act; and
    4. a transaction in respect of which the Commissioner has waived the obligation to notify.Footnote 29

In addition, certain specific exemptions in respect of acquisitions of voting shares, assets or interests, are specified in the Act, including the following:

  1. acquisitions of real property or goods in the ordinary course of business, provided the person(s) making the acquisition would not hold all or substantially all of the assets of a business or an operating segment of a business;Footnote 30
  2. certain acquisitions solely for the purpose of underwriting;
  3. certain acquisitions that result from a gift, intestate succession or testamentary disposition;
  4. certain creditor transactions made in the ordinary course of business;Footnote 31 and
  5. certain acquisitions of a Canadian resource property (whether as an acquisition of an asset or of voting shares of a corporation that does not have any significant assets other than the resource property), provided the acquiring person incurs expenses to carry out exploration or development activities with respect to the property.Footnote 32 In addition, certain acquisitions that are to be undertaken to give effect to an asset securitization transaction are exempt from pre‑merger notification requirements.Footnote 33

8. Objective criteria and “gaming the system”

  1. The Act includes criminal and civil sanctions for completing a notifiable transaction without submitting a notification or completing a notifiable transaction prior to the expiry of the applicable waiting period.Footnote 34 These possible sanctions appear to be effective in ensuring compliance, as in the Bureau’s experience, the failure to notify is rare and in most instances inadvertent.
  2. The Bureau is not aware of frequent instances of parties restructuring transactions to avoid pre‑merger notification under the Act.Footnote 35 However, as noted above, it is possible that parties have not submitted a notification based on the exemption from notification for joint ventures (section 112 of the Act).

9. Changes in the merger regime

  1. There were significant amendments to the merger provisions of the Act in March 2009, including the creation of a two‑stage merger review process. Although there was only a minor change to the types of transactions subject to notification,Footnote 36 the size‑of‑transaction monetary threshold was increased in March 2009, from C$50 million to C$70 million (except for amalgamations which remained at C$70 million), and an annual review and indexing mechanism was introduced. The size of transaction threshold for 2013 is C$80 million. The increased monetary thresholds have reduced the number of transactions that otherwise would have been notifiable.
  2. There have been no recent statutory amendments with respect to the definition of a “merger”; however, the guidance in the MEGs pertaining to the definition of a merger has evolved over time including in the most recent version of the MEGs (published in October 2011).
  3. While the Commissioner has the ability to review effectively any merger, the March 2009 amendments reduced the amount of time the Commissioner has to challenge a transaction after it has been substantially completed, from three years to one year.Footnote 37 Given the relatively short one year period, parties to a non‑notifiable transaction may be more likely to engage in strategic behaviour to avoid detection than was previously experienced.
  4. The main challenges with respect to non‑notifiable mergers now are timely detection, given this one year limitation period, and the ability to obtain an effective remedy where the transaction has already closed.Footnote 38 As a result of a number of non‑notifiable transactions that raised potential competition concerns following the 2009 amendments,Footnote 39 policies and practices have been implemented to assist in detecting non‑notifiable mergers that may raise substantive competition concerns. Non‑notifiable transactions that the Bureau may want to review are detected mainly through complaints from market stakeholders (e.g. customers, suppliers, competitors, etc.) or market monitoring using media sources and mergers and acquisitions databases. In addition, as part of the Bureau’s continued commitment to transparency, in March 2012, the Mergers Branch introduced a publicly accessible Merger Register. The Merger Register is a monthly report of concluded merger reviews that indicates the names of the parties to the transaction, the industry sector involved, and the outcome of the Bureau’s review.
  5. In addition to these efforts, the Commissioner has engaged in litigation in respect of two non‑notifiable transactions in the past three years; namely, the acquisition of Babkirk Land Services (“BLS”) by CCS Corporation (“CCS”) and a proposed joint venture between Air Canada and United Continental Holdings, Inc.Footnote 40
  6. In CCS, the Commissioner applied for an order before the Tribunal in respect of CCS’s acquisition of the shares of Complete Environmental Inc. (“CEI”) and ownership of its wholly‑owned subsidiary BLS. The Commissioner was successful in obtaining an order from the Tribunal requiring CCS to divest the shares or assets of BLS.Footnote 41 The Tribunal’s order was upheld by the Federal Court of Appeal.Footnote 42 The Commissioner received notice on April 11, 2013, that an application for leave to appeal to the Supreme Court of Canada has been filed. One issue raised in CCS involved a consideration of the definition of “merger” for the purposes of section 92 of the Act. The respondents argued that CEI was not, at the relevant time, a “business” for the purposes of the definition of “merger” in the Act, arguing that it was not actively accepting and treating hazardous waste, and was not otherwise operational in relation to the supply of secure landfill services.Footnote 43 The Tribunal rejected the argument that the transaction was not a merger for the purposes of the Act, finding that CEI was actively engaged in the development of the Babkirk Site as a hazardous waste treatment facility that included a secure landfill.Footnote 44 This case is also important, in that it confirmed for stakeholders that the Bureau is prepared to challenge a closed non‑notifiable transaction.

10. Conclusion

  1. In summary, Canada’s regime for merger notification and review is characterized by, among other things, the following core attributes:
    1. clear and objective criteria for mandatory pre‑merger notification coupled with ongoing and substantive guidance from the Bureau regarding the application of those criteriaFootnote 45
    2. a simplified procedure for transactions that are notifiable but are unlikely to raise potential competition concerns (i.e. the Commissioner may waive the notification and/or waiting period under the Act); and
    3. the ability of the Commissioner to challenge non‑notifiable transactions, subject to a one‑year limitation period following substantial completion of the transaction.
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