Merger Enforcement Guidelines

Draft for Consultation
March 2004

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Part 1 - Definition of Merger

1.1  Section 91 of the Competition Act defines a "merger" 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, buyer or other person.¹

1.2  The definition of "merger" is broad enough to cover any manner in which control over, or a significant interest in, the whole or a part of a business of another person is acquired or established. While these Guidelines focus primarily on horizontal mergers, section 91 also covers vertical and conglomerate transactions.

Control

1.3  With respect to corporations, "control" is defined in section 2(4) of the Act to mean de jure control, that is, a direct or indirect holding of more than 50 per cent of the votes that may be cast to elect directors of the corporation, and which are sufficient to elect a majority of such directors.Acquisition of de jure control constitutes a merger.

1.4  The Competition Bureau (hereinafter "the Bureau") also treats the acquisition of de facto control (control in fact with 50% or less of the votes) of a business or part of a business as a merger.

Significant Interest

1.5  The Act provides no guidance with respect to the meaning of the words "significant interest", leaving them to be construed according to the purpose of the Act.

1.6  In determining whether an interest is significant, the Bureau considers both the quantitative nature and qualitative impact of the acquisition or establishment of the interest. Given that the Act is concerned with the competitive market behaviour of firms, qualitatively a "significant interest" in the whole or a part of a business is held when the person acquiring or establishing the interest obtains the ability to materially influence the economic behaviour (such as decisions relating to pricing, purchasing, distribution, marketing or investment) of the business.

Notifiable Transactions

1.7  In the absence of any evidence to the contrary, the proposed transactions described in Part IX section 110 of the Act constitute the acquisition or establishment of a significant interest in the whole or a part of a business.However, transactions, which fall outside of those described in section 110, may nevertheless constitute the acquisition or establishment of a significant interest as stated above, if the person(s) acquiring the interest are able to materially influence the economic behaviour of the business.²

Acquisition of Voting Equity Interests

1.8  The Bureau finds that a significant interest in a corporation exists when one or more persons, directly or indirectly, hold enough voting shares:

• to obtain a sufficient level of representation on the board of directors of the corporation to materially influence that board; or
• to block special or ordinary resolutions of the corporation.

1.9  In the absence of other relationships, a direct or indirect ownership of less than 10 per cent of the voting interests in a business does not generally constitute ownership of a "significant interest".³ While inferences about situations that result in a direct or indirect holding of between 10 per cent and 50 per cent are more difficult to make, a much greater level of voting interest is ordinarily required to materially influence a private company than a widely-held public company. The merger notification requirements in Part IX of the Act are triggered at 35 per cent for private corporations and 20 per cent for public corporations.⁴

Non-voting & Convertible Securities

1.10  A merger can occur both at the time of the purchase of convertible debentures, non-voting shares or options and at the time of their conversion or exercise.⁵ To determine whether the purchase of convertible securities constitutes a significant interest, the Bureau examines the nature of and circumstances in which the rights attached to these securities may be exercised.

Asset Acquisitions

1.11  Asset transactions that generally fall within the scope of section 91 include the purchase or lease of an unincorporated division, a plant, distribution facilities, a retail outlet, a brand name or intellectual property rights. The Bureau treats the acquisition of any or part of these essential assets to be the acquisition or establishment of a significant interest in that business. Further, acquiring part of the assets of a business that are capable of being used to carry on a separate business is also considered as the acquisition or establishment of a significant interest in the business.

Interlocking Directorships

1.12  Transactions may fall within the scope of section 91 if:

• one company is able to materially influence the board of directors of two competitors by directly or indirectly obtaining the ability to elect a sufficient number of directors to each board; or
• representatives of two competitors are able to materially influence the board of a third company.

1.13  Such transactions are typically assessed in terms of whether competition is likely to be substantially prevented or lessened in the market where the two competitors compete⁶. In either case, the Bureau is generally not concerned if the board representation of one of the competitors is solely through "independent" directors. Concerns may arise when directors are persons who are employees, executives or members of the board of directors of the other company being represented, or who have other interests in that company.

Other Considerations

1.14  Depending on the specific terms of the arrangements, significant interest can be acquired or established pursuant to shareholder agreements, management contracts and other contractual arrangements involving corporations, partnerships, joint ventures, combinations and other entities. ⁷ In addition, loan, supply and distribution arrangements that are not ordinary-course transactions and that confer the ability to materially influence management decisions of another business (that is, financing arrangements and terms of default relating to such arrangements; long-term contractual arrangements or pre-existing long-term business relationships and the economic significance of these relationships) may constitute a "merger" within the meaning of section 91.⁸

1.15  In determining whether the acquisition or establishment of a significant interest constitutes a merger, the Bureau examines the relationship between the parties prior to the transaction; the likely relationship between the parties subsequent to the transaction; the access that an acquiring party obtains to confidential business information of the target business; and any evidence of intentions to affect the behaviour of the target business or to change the behaviour of the acquiring party.

Increasing an "Interest" in a Business

1.16  Persons already holding a significant interest in the whole or a part of a business may trigger the merger provisions of the Act by acquiring or establishing a materially greater ability to influence the economic behaviour of the business.Therefore, movement from a minority, yet significant interest to control would likely be found to constitute a merger.Notably, the merger notification requirements under Part IX that pertain to the acquisition of voting shares of corporations are also triggered when holdings are increased above 50 per cent.

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¹ R.S.C. 1985, c. C-34 [hereinafter, the "Act"]

² See for example Nova Corporation of Alberta / Polysar Energy & Chemical Corporation, Canada, Annual Report, Director of Investigation and Research, Competition Act, March 31, 1989, at p.11.See also Miller Brewing Company / Molson Companies and Foster's Brewing Group [Canada, Annual Report, Director of Investigation and Research, Competition Act, March 31, 1993, at p.8.

³ This position is consistent with other Canadian statutes. See for example Bank Act, S.C. 1991, c.46, s.8. (See also Cooperative Credit Associations Act, S.C. 1991, c.48, s.9; Insurance Companies Act, S.C. 1991, c.47, s.8; Trust and Loan Companies Act, S.C. 1991, c.45, s.8).

⁴ The notification provisions, applying to high transaction-value mergers, are discussed in the Bureau's Notifiable Transactions and Advance Ruling Certificates under the Competition Act: Procedure Guide and the Interpretation Guidelines for Notifiable Transactions under Part IX of the Competition Act.

⁵ However, the notification provisions will only be triggered upon conversion or exercise of such rights, provided that the thresholds in Part IX of the Act are exceeded.

⁶ See for example News Release – "Competition Bureau Review of Cinema Mergers Opens the Door to Competition", April 22, 2002.

⁷ See for example Shell Canada Products Ltd. / Pay Less Gas Co. (1972) Ltd., Canada, Annual Report, Director of Investigation and Research, Competition Act, March 31, 1991 at p.8, where the Bureau determined that contractual arrangements collectively resulted in obligations of Pay Less to Shell that would give Shell a considerable measure of control over the business operations of Pay Less and therefore constituted the establishment of significant interest.

⁸ See D.I.R. v. Dennis Washington et al., (1996) CT-1996/001 CT-96-1 (Comp.Trib.), Second Amended Notice of Application, Statement of Grounds and Material Facts, December 17, 1996 (hereinafter "Seaspan") at ¶ 8. The Bureau's determination that a significant interest was acquired or established was based on several factors including: the indirect acquisition of voting equity interest; the acquisition of equity warrants; board representation; the purchase of senior subordinated debentures; and the terms of a Joint Investment Agreement between Dennis Washington and the largest shareholder of Seaspan.