Competition Bureau’s proposal to increase the filing fee for merger reviews

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Aussi offert en français sous le titre Proposition du Bureau de la concurrence en vue d’augmenter les frais de dépôt pour les examens des fusions

Summary

The Competition Bureau (Bureau) is an independent law enforcement agency within the Department of Innovation, Science and Economic Development (ISED) that protects and promotes competition in Canada. The Bureau’s mandate includes reviewing mergers in Canada to ensure that they will not substantially lessen or prevent competition.

A fee for merger reviews was first introduced in 1997, and increased in 2003, to ensure that the Bureau has adequate resources to conduct activities relating to its mergers mandate. The fee is fixed by the Minister of Industry (now Minister of ISED), who has authority to establish fees under the Department of Industry Act (DIA). As of 2003, the Bureau requires that merging parties pay a filing fee of $50,000 for merger reviews.

Given that there has been no increase in fees since 2003, when compound inflation alone is considered, the merger filing fee would be $65,500. In addition, rising operating and salary costs have made the Bureau’s efforts to deliver merger reviews within the limits of current funding unsustainable. Revenues from the filing fee constitute the largest source of cost recovery revenue for the Bureau. However, over the last two years, an increase in the number of merger transactions requiring more complex work has resulted in a revenue shortfall for the Bureau’s merger activities. Related contributing factors include the increasing volumes of documents requiring sophisticated analysis and increased need for quantification arising from the Supreme Court of Canada decision in Tervita. Although the number of merger filings received by the Bureau dropped significantly after the size-of-transaction threshold increased in 2009, the revenue shortfall from the significant decrease in filings has not been accompanied by a workload decrease, as there has not been a corresponding decrease in the number of complex cases.

In alignment with the Government of Canada’s initiative to modernize service fees, following an in-depth review of its costs, the Bureau will be submitting a proposal to the Minister of ISED to increase the merger filing fee from $50,000 to $72,000. This increase will ensure that the Bureau can continue to effectively review mergers and manage its merger program. Revenues generated by a merger filing fee of $72,000, would be used to cover 100% of the merger related costs incurred by the Bureau. The increased revenue will help the Bureau improve its service to clients. Changes the Bureau will implement include more frequent hiring of economic, industry and legal experts, and continuing to improve document management and review processes.

This document provides an overview of key factors relating to the fee proposal. It presents the legislative and policy framework under which the Bureau reviews mergers and imposes a fee for merger filings, the rationale for the fee increase, and a costing and impact analysis of the proposed fee.

Introduction

About the Competition Bureau

As an independent law enforcement agency, the Bureau ensures that Canadian businesses and consumers can prosper in an innovative and competitive marketplace. The Bureau is responsible for the administration and enforcement of the Competition Act, the Consumer Packaging and Labelling Act (except as it relates to food), the Textile Labelling Act and the Precious Metals Marking Act.

The Bureau conducts a variety of activities relating to the enforcement and promotion of competition in Canada, such as investigating anti‑competitive activities, advocating the benefits of competition, promoting compliance with the Competition Act and reviewing proposed merger transactions. The Bureau charges fees for some of these activities, such as for CA Numbers for textile dealers, merger reviews and written opinions.

The Bureau’s Mergers Directorate undertakes activities relating directly and indirectly to merger enforcement. The Directorate’s direct enforcement activities include reviewing notifiable and non‑notifiableFootnote 1 mergers in all sectors of the economy. The other work it undertakes in support of its enforcement mandate includes but is not limited to developing technical guidance publications, establishing memoranda of understanding (MOUs) with other government agencies, and undertaking various projects aimed at improving the timeliness and effectiveness of merger reviews.

Legislative and policy framework

The Competition Act prohibits mergers that prevent or lessen, or are likely to prevent or lessen competition substantially. Under subsection 114(1) of the Act, merging parties to a transaction that exceeds certain monetary thresholds are required to notify the Commissioner of Competition about a proposed transaction (pre‑merger notification), and/or request an Advance Ruling Certificate (ARC). Since November 1997, the Bureau has required the payment of fees for notification filings and ARC requests. At that time, a $25,000 fee was fixed by the Minister of Industry pursuant to sections 18 and 20 of the DIA. Less than six years later, in April 2003, the fee was increased to $50, 000 and has remained unchanged since that time. Under the DIA, the Minister is required to consult stakeholders before establishing and or revising service fees. The Bureau will be holding online consultations for 30 days with stakeholders to hear their views on this important proposal.

The Bureau is also subject to the Service Fees Act (SFA). Implemented in June 2017, the SFA replaced the User Fees Act (UFA), which was repealed as part of the Government’s initiative to modernize business fees. The SFA introduced a number of changes aimed at enhancing government accountability and stewardship of taxpayer dollars. These changes include performance standards and annual reporting for all fees and an annual adjustment of fees based on the Consumer Price Index (CPI). The requirement to adjust fees annually based on the CPI will come into force on April 1, 2018. The SFA also requires departments and agencies to establish a mechanism for remitting fees when service standards are not met. The Treasury Board and ISED are currently developing guidelines on fee remmissions.

The Bureau also consulted Government of Canada guidance documents during the development of the fee proposal. The Treasury Board’s Guidelines on Costing was used to calculate the full costs, including both indirect and direct costs, and resource allocations associated with the merger filing fee. The Guide to Establishing the Level of a Cost‑Based User Fee or Regulatory Charge will be used to determine the pricing of the fee.

Background

Why is the Competition Bureau proposing an increase in the merger filing fee?

The Bureau first introduced a fee and service standards for pre‑merger notifications (PMNs) and ARC requests in November 1997. The $25,000 fee was implemented to offset the resource demands placed on the Bureau as a result of increasing mergers activities.

Although the total number of mergers reviewed by the Bureau has been relatively constant since fiscal year 2008‑09, there has been an increase in the number of resource‑intensive complex cases reviewed in recent years. For example, the number of concluded complex cases reviewed rose from 48 in 2013‑14 to 65 in 2015‑16. Maintaining the filing fee at $50,000 for the last 14 years, despite these changes, has led the merger program to incur revenue deficits over the last few years. Recent judicial decisions have contributed significantly to the deficits and changes. In particular, the Supreme Court of Canada’s decision in Tervita established a requirement for more complex quantification of anti‑competitive effects, which has increased the time and cost of merger reviews. A trend toward more complex, strategic mergers requiring greater analysis is a change that is occurring at both the domestic and global levelsFootnote 2. Other related factors that contribute to the deficits include the increasing volume of documents and data requiring analysis, higher costs associated with hiring economic and industry experts, and an increase in the salaries of Bureau officers as a result of collective bargaining agreements. The Bureau is also subject to a 5 percent budget reduction over the next three years associated with a restructuring within ISED to support the Government of Canada’s Innovation and Skills Plan announced in 2017.

Table 1: Merger program financial highlights 3 year summary
  2014‑15 2015‑16 2016‑17
Revenues ($M) 11.9 10.5 10.8
Costs ($M) 12.1 13.4 13.6
Deficit ($M) .2 2.9 2.8

The Bureau has taken some steps to address these challenges, such as using in‑house economists and Bureau officers for econometric or efficiencies analyses. However, despite these efforts, the deficits continue to rise, making an increase in the filing fee a necessary and appropriate solution

What is the proposed fee and how was it determined?

The Bureau is proposing a single fee of $72,000 for PMNs and ARC requests (single fee for both). To establish the costing basis for the proposed fee, the Bureau calculated current and forecasted merger review costs and full costs of the merger program. Merger review costs are costs incurred by the Mergers Directorate, and other Bureau Branches that provide support to the Directorate, such as for activities relating to electronic evidence collection, finance and administration, planning, communications, legal services, and economic analysis. Merger review costs also include costs incurred by federal government departments that support the Directorate’s operations. Full costs were determined by calculating direct costs, and Bureau and ISED internal services support provided to the mergers program.

Direct costs associated with merger reviews can be broken down into salary costs, such as the salaries of officers who conduct reviews, and non-salary costs, such as the costs of hiring lawyers and economic and industry experts. In 2016-17, the Bureau reviewed 217 mergers. The direct costs of the Mergers Directorate during this period were $6,673,000, while the direct merger related costs from other Bureau Branches providing support to the Directorate were $4,476,000.

Costing analysis for the proposed new fee also included indirect costs. Indirect costs associated with merger reviews include internal IT and administration support provided to the Mergers Directorate. In 2016-17, these costs were $979,000 for accommodations (i.e, rent) and $1,507,000 for employee benefits.

The Bureau’s cost-cutting measures were also factored into the costing analysis. Limited funding for the merger program has led the Bureau to cut back on work performed by external industry, economic, and efficiencies experts, as well as external legal counsel. Cost-cutting has also resulted in understaffed case teams. These cut-backs have created constrained capacity for officers and paralegals, which can impact on costs or availability of staff.

What other factors did the bureau consider when setting the fee?

To determine the level of the proposed revised merger filing fee, the Bureau consulted the Guide to Establishing the Level of a Cost‑Based User Fee or Regulatory Charge, which outlines factors that should be assessed when setting a fee. These factors include the private and public benefit of the service, the impact of the fee on stakeholders, the public policy objectives associated with the fee, and stakeholder consultations. The guide also recommends that federal departments and agencies compare proposed fees to those in other jurisdictions.

Private vs public benefit

With the guidance of the Treasury Board, the Bureau has assessed the benefit of the service to be 100 percent private. Merging parties are also impacted by other activities undertaken as part of the merger program. For example, non-notifiable merger reviews brought before the Competition Tribunal or the courts can result in judicial guidance that provides clarity to merger program stakeholders; developing Technical Guidance publications supports transparency and predictability of the merger review process; improvement of electronic information gathering and analytics help to speed up merger reviews; efforts to coordinate with foreign competition agencies can speed up review times or lead to cooperation on remedial action for mergers; and, MOUs or arrangements with other government agencies to coordinate timing or share information can result in more timely outcomes for stakeholders.

Impact analysis

The Bureau is of the view that the proposed fee does not place an unreasonable financial burden on merging parties. To assess the impact of the fee on merging parties, the Bureau considered the fee against the size-of-transaction thresholds for PMNs and ARCs. The assessment revealed that a $72,000 filing fee represents .08 percent of the minimum $88 million size-of-transaction threshold. At the $400 million size-of-parties threshold, the fee represents .02 percent of merging parties’ assets or revenues.

Public policy objectives

The proposed filing fee increase outlined in this document will contribute to revenues that will help support the activities of the Bureau’s merger program. By reviewing proposed mergers to ensure they do not substantially lessen or prevent competition, the Bureau is contributing to the Government’s efforts to keep the Canadian economy competitive, innovative and accessible to businesses. The proposed fee increase also aligns with the Government’s 2017 initiative to modernize business service fees. An increase in the merger filing fee will ensure that merging parties pay their share of the costs associated with reviewing mergers.

Did the Bureau consider other fee options?

The Bureau has periodically considered various fee structures for the merger filing fee. The Bureau considered fee structures in a 1993 internal review of service fees, during consultations in 2002 and 2007, and through internal studies conducted in 2012 and 2014. In addition to a flat fee, fees may be imposed through a tiered fee structure. Tiered fees can be based on the time used to examine a merger, the size of assets or revenues of merging parties, or the complexity of the merger review. The Bureau finds the flat fee to be a simple, efficient and transparent way to charge fees for merger reviews. In the Bureau’s view, the flat fee approach does not discriminate against industries and poses fewer issues than some of the other fee options available. For example, a time-based fee could suffer from inconsistent application. Although the Bureau is proposing a flat fee, it will continue to assess the benefits and suitability of the flat fee approach, as well as consider other fee options in the future.

International comparison

Since introducing a fee for merger filings in 1997, the Bureau has periodically compared its fee with the fees of competition agencies in other jurisdictions. An international comparison of fees shows that the proposed filing fee conforms with international norms, even when the fee structures of the agencies differ.

TABLE 2: International comparison of filing fees
Country Fees (2017)
Canada

Flat fee: $50,000 (CAD)

*proposed fee: $72, 000 (CAD)

United States

Tiered fees (based on size of transaction)Footnote 3:

$45,000 (USD) — transaction valued in excess of $80.8. million but less than $161.5 million

$125,000 (USD) — transaction valued at $161.5 million or greater but less than $807.5 million

$280,000 (USD) — transaction valued at $807.5 million or greater

United Kingdom

Tiered fees (based on value of revenues)Footnote 4:

£40,000 (GBP) — Value of revenues is £20 million or less

£80,000 (GBP) — Value of revenues is over £20 million but less than £70 million

£120,000 (GBP) — Value of revenues over £70 million but less than £120 million

£160,000 (GBP) — Value of revenues is over £120 million

Australia Flat feeFootnote 5: $25,000 (AUD)
Germany Variable fee (case-by-case basis)Footnote 6:
In principle, the fee will not exceed € 50,000 (EUR)

The proposed fee also aligns with the International Competition Network’s (ICN) recommendation that merger notification filing fees should be easily understood, readily determinable at the time of filing, easily administered, and consistent with the jurisdiction’s legislative and policy framework.

Service standards

Under the SFA, federal departments and agencies are required to establish performance standards and report annually on fees. The Bureau has had service standards in place for merger reviews since 1997, and reports its performance on merger reviews annually to ISED. Currently, the Bureau classifies mergers under two complexity levels: non‑complex and complex. The service standards for reviews are based on the complexity of the competition issues raised by a proposed merger. The service standard is 14 calendar days for non‑complex cases and 45 days for complex cases. When the Bureau issues a Supplementary Information Request (SIR), the service standard is 30 days after the parties have complied with the SIR. In 2016‑17, the Bureau met the service standards in 74 percent of complex cases and 99 percent of non‑complex casesFootnote 7.

The current merger review complexity levels and the related service standards are not expected to change with the submission of this proposal. However, the Bureau will continue to consider updating the complexity level designations and service standards to better reflect the time, work and information required to review mergers.

Remission of fees

The SFA requires that departments and agencies establish a mechanism for remitting fees when service standards are not met. Guidelines on remissions are currently being developed by ISED and the Treasury Board.

Annual adjustment of fees

The SFA includes a provision for adjusting fees to account for inflation. Each fiscal year, fees will be increased by the percentage change over 12 months in the CPI for Canada for the previous fiscal year. The adjusted merger filing fee will be published on the Bureau’s website annually.

Consultations with stakeholders

Consulting stakeholders on the proposed fee is a requirement under the DIA. Stakeholders will be invited to comment on the fee proposal, which will be published on the Bureau’s website for 30 days. The Bureau will review and consider comments on the proposed fee and costing analysis, fee approach, service standards for merger reviews, and the fee setting process. The Bureau will also prepare and share a summary of the consultations with the Minister.

The Bureau will be inviting input from key stakeholders, including consumer groups and industry associations from the real‑estate, oil and gas, manufacturing, grocery, telecommunications and retail sectors.

Next steps

Following the consultations, stakeholder feedback will be reviewed and considered. Once finalized, the proposal will be submitted for approval to the Minister, who has the option to fix the fee pursuant to the DIA. If approved by the Minister, the new fee would then be published in the Canada Gazette and permanently referred to a parliamentary committee for review. The expected date that the new fee will come into effect, if approved by the Minister, is April 1, 2018.

The Bureau’s Fees and Service Standards Handbook for Mergers and Merger‑related Matters will be updated to reflect the new fee and any changes stemming from the Service Fees Act. Annual adjustments made to the fee will also be published on the Bureau’s website yearly.

Conclusion

This document highlights the considerations the Bureau has made in proposing an increase to the filing fee for merger reviews. The Bureau is proposing a fee update that is in accordance with the SFA and DIA, and has conducted a thorough costing analysis of the proposed fee. The Bureau will also be seeking the feedback of stakeholders. The Bureau believes that mergers can have significant effects on the economy and that effective regulation of mergers can help increase and maintain competitiveness in Canada.

Appendix

Total Annual Notification & ARC Request Filings
Total Annual Notification & ARC Request Filings
Total Annual Notification & ARC Request Filings
2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17
181 245 259 268 300 207 201 219 207 214 217 240 212 217
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