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Archived — Pre-Merger Notification Interpretation Guideline Number 14: Duplication Arising From Transactions Between Affiliates

Enforcement Guidelines

Draft for Public Consultation — March 23, 2012


This publication is not a legal document. It contains general information and is provided for convenience and guidance in applying the Competition Act.

For information on the Competition Bureau's activities, please contact:

Information Centre
Competition Bureau
50 Victoria Street
Gatineau QC  K1A 0C9

Tel.: 819-997-4282
Toll free: 1-800-348-5358
TTY (for hearing impaired): 1‑866‑694‑8389
Fax: 819-997-0324
Website: www.competitionbureau.gc.ca

This publication can be made available in alternative formats upon request. Contact the Competition Bureau's Information Centre at the numbers listed above.

Permission to reproduce

Except as otherwise specifically noted, the information in this publication may be reproduced, in part or in whole and by any means, without charge or further permission from the Competition Bureau provided due diligence is exercised in ensuring the accuracy of the information reproduced; that the Competition Bureau is identified as the source institution; and that the reproduction is not represented as an official version of the information reproduced, nor as having been made in affiliation with, or with the endorsement of the Competition Bureau. For permission to reproduce the information in this publication for commercial redistribution, please Apply for Crown Copyright Clearance or write to:

Communications and Marketing Branch
Innovation, Science and Economic Development Canada
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Ottawa, ON K1A 0H5

Email: ISED@Canada.ca

Aussi offert en français sous le titre Avis d'interprétation no 14 sur les préavis de fusion : Montant comptabilisé en double à la suite de transactions entre affiliées




This Interpretation Guideline is issued by the Commissioner of Competition ("Commissioner"), who is responsible for the administration and enforcement of the Competition Act ("Act"). The purpose of this Guideline is to assist parties and their counsel in interpreting and applying the provisions of the Act relating to notifiable transactions. This Guideline sets out the general approach taken by the Competition Bureau ("Bureau") and supersedes all previous statements made by the Commissioner or other Bureau officials. This Guideline is not intended to be a binding statement of how discretion will be exercised in a particular situation and should not be taken as such, nor is it intended to substitute for the advice of legal counsel to the parties, or to restate the law. Guidance regarding a specific proposed transaction may be requested from the Merger Notification UnitFootnote 1 ("MNU").

Background

Section 114 of the Act places an obligation on parties to a proposed transaction that exceeds the party size and transaction size thresholds under sections 109 and 110 of the Act, respectively, to notify the Commissioner. The section 109 party size threshold is measured by either the value of the parties' assets in Canada, or the gross revenues from sales in, from or into Canada. The section 110 transaction size threshold is measured by either the value of the parties' assets in Canada, or the gross revenues from sales in or from Canada generated from those assets.

Subparagraph 4(1)(a) and subsection 5(2) of the Notifiable Transactions Regulations ("Regulations") provide that, in determining these amounts, any amount that represents duplication arising from transactions between affiliatesFootnote 2 shall be deducted.

Policy

A determination of whether an amount represents duplication arising from transactions among affiliates of a party to a proposed transaction must be made in accordance with accounting principles that are normally used by that party (or those affiliates) and that are generally accepted for the type of business carried on by that party (or those affiliates).

The purpose of deducting amounts that represent duplication is to avoid double counting. When determining the party size or transaction size for purposes of evaluating if a threshold in the Act is exceeded, subsection 5(2) of the Regulations allows a party to deduct revenue from the sale of a product only if it duplicates an equivalent amount of revenue from another sale of that product that is already included in the party size or transaction size calculation.

Examples

The examples below are hypothetical and are intended only to illustrate the Bureau's interpretation of this Guideline, as outlined above.

Example One

A and B are Canadian corporations and are subsidiaries of C, another Canadian corporation. Corporation A manufactures a widget and sells it to B for $100. Corporation A records gross revenue from sales of $100 in its audited financial statements from this transaction. B then sells the widget to a customer located in the United States for $150, and records gross revenue from sales of $150 in its audited financial statements from this transaction. As a result of these transactions, Corporation A has gross revenues from sales "in" Canada of $100, and B has gross revenues from sales "from" Canada of $150. If these amounts were added together, the total gross revenues from sales in or from Canada (or in, from or into Canada) of A, B and C arising from these transactions would be $250.

In determining the party size under section 109 of the Act, $100 of these sales represents duplication arising from a transaction between A and B and a subsequent sale by B, and may be deducted. For the purpose of section 109, the gross revenues of A and its affiliates from these sales are $150.

Whether this $100 represents duplication for the purpose of determining the transaction size depends on the nature of the proposed transaction. With regard to a proposed acquisition of C, $100 of the above sales represents duplication and may be deducted, such that for the purpose of section 110 of the Act, the gross revenues of C and corporations controlled by C arising from these sales are $150. With regard to a proposed acquisition of B, the revenues of A are irrelevant and, for the purpose of section 110, the gross revenues of B from these sales are $150. With regard to a proposed acquisition of A, the revenues of B are irrelevant and, for the purpose of section 110, the gross revenues of A generated from these sales are $100. In other words, in regard to a proposed acquisition of A, even though the $100 revenue results from a transaction between affiliates, it is not deducted because it is not duplicative of another amount included in the transaction size calculation.

Example Two

A is a Canadian corporation. A is wholly-owned by B, which is incorporated in the United States. Corporation A manufactures a widget and sells it to B for $100. Corporation A records gross revenue from sales of $100 on its audited financial statements from this transaction. B then sells the widget to a customer located in Canada for $150, and records gross revenue from sales of $150 in its audited financial statements from this transaction. As a result of these transactions, Corporation A will have gross revenues from sales "from" Canada of $100, while B will have gross revenues from sales "into" Canada of $150. If these amounts were added together, the total gross revenues from sales "in, from or into" Canada of A and B would be $250.

In determining the party size under section 109 of the Act, $100 of these sales represents duplication arising from a transaction between A and B and a subsequent sale by B, and may be deducted. For the purpose of section 109, the gross revenues of A and B from these sales (in, from or into Canada) are $150.

In determining the transaction size, only sales in or from Canada generated from assets in Canada are included; as such, the sales by B into Canada are irrelevant. Accordingly, in a proposed acquisition of either A or B, for the purpose of section 110 of the Act, the gross revenues from these sales are $100.

Example Three

A is a Canadian corporation, while B is incorporated in the United States. Corporation A manufactures a widget and sells it to B, its affiliate, for $100. Corporation A records gross revenue from sales of $100 on its audited financial statements from this transaction. B then sells the widget to a customer located in the United States for $150, and records gross revenue from sales of $150 on its audited financial statements from this transaction. For the purposes of determining whether or not the party size and transaction size thresholds under sections 109 and 110 of the Act have been met, Corporation A will have gross revenues from sales "from" Canada of $100, while B's revenues are neither "in", "from", nor "into" Canada. Accordingly, there is no issue of duplication that could affect the section 109 and 110 thresholds, and no amounts may be deducted from gross revenues from sales. As a result, the total gross revenues from sales for the purposes of determining whether or not the section 109 threshold has been met (i.e., gross revenues from sales "in, from or into" Canada) are $100. Likewise, the total gross revenues from sales for the purposes of determining whether or not the section 110 threshold has been met (i.e., gross revenues from sales "in or from" Canada generated from those assets "in" Canada) are also $100.

Example Four

A is a Canadian corporation, while B is incorporated in the United States. Corporation A loans its affiliate, Corporation B, $100 million. The loan is recorded on the financial statements of Corporation A as an asset, and is considered an asset in Canada. However, the loan is recorded as "cash" on the financial statements of Corporation B and would therefore be considered an asset in the United States. Since the loan is an asset in Canada for Corporation A, and the cash is an asset in the United States for Corporation B, there is no duplication.

If the cash was an asset in Canada because, in a different scenario, Corporation B was a Canadian corporation, there would be duplication and the amount of the loan could be deducted.

For further information, please contact:

Merger Notification Unit
Mergers Branch, Competition Bureau
Competition Bureau
50 Victoria Street
Gatineau, Quebec K1A 0C9
Telephone: 819-953-4297
Toll-free: 1-800-348-5358
Fax: 819‑994‑0998
E-mail: ic.avisdefusionmergernotification.ic@canada.ca

How to Contact the Competition Bureau

Anyone wishing to obtain additional information about the Competition Act, the Consumer Packaging and Labelling Act (except as it relates to food), the Textile Labelling Act, the Precious Metals Marking Act or the program of written opinions, or to file a complaint under any of these acts should contact the Competition Bureau's Information Centre:

Website

www.competitionbureau.gc.ca

Address

Information Centre
Competition Bureau
50 Victoria Street
Gatineau, Quebec
K1A 0C9

Telephone

Toll-free: 1-800-348-5358
National Capital Region: 819-997-4282
TTY (for hearing impaired) 1‑866‑694‑8389

Facsimile

819-997-0324

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