Canada’s Competition Act amendments: merging parties stay tuned

September 2022 | SPOTLIGHT | COMPETITION & ANTITRUST

Financier Worldwide Magazine

September 2022 Issue

It has been 13 years since the last major overhaul of Canada’s Competition Act. Since that time, conversations surrounding merger review have changed. The unforeseeable evolution of the digital economy has transformed market dynamics.

Concentration and winner-takes-all trends have become characteristic of data-driven markets, leading to widespread discussions around their propensity for anti-competitive outcomes, such as from network effects, market tipping and killer acquisitions. As a result, many argue that technology giants are wielding more power (and acquiring more) than ever before, and competition enforcers worldwide have been struggling to keep pace.

Many competition enforcers have accordingly been advocating for change to their respective legislative regimes in order to adapt to the evolving economy and crack down on alleged monopolistic conduct. Canada’s regulator, the Competition Bureau, joined the chorus of proponents in recent years, advocating for – among other things – more effective merger review provisions. So, have their calls been answered? In part, yes.

To summarise, the Canadian government implemented a first round of wide-ranging amendments to the Competition Act in June of 2022, with a second set expected to follow in the near to medium term. The new changes to the merger provisions are the intended first steps toward strengthening the Bureau’s ability to detect, review and challenge anticompetitive mergers. This article focuses on the major merger control amendments, which target the unique concerns of mergers in the digital space, while also reviewing perceived loopholes in the merger notification and review process.

First, the amendments added three factors to the non-exhaustive list of factors for Canada’s specialised competition law court, the Competition Tribunal, to consider when weighing the competitive impact of a merger. The three factors are: network effects within the market, whether the transaction would contribute to the further entrenchment of a leading incumbent, and any impacts on price or non-price competition (such as quality, choice and consumer privacy). The inclusion of these factors is a clear nod to the Bureau’s intention to scrutinise mergers in the digital economy.

What is the impact of this change?

As the existing list was non-exhaustive to start with, the implications of this change for merging parties may be negligible. These additions simply codify factors that were often already of chief concerns for the Bureau. However, their explicit inclusion in the Competition Act demonstrates that they reflect the government’s priority and intention for those issues to be considered when assessing a merger and, therefore, the Competition Tribunal should lend weight to these considerations when adjudicating a contested merger. For example, where the purchaser is a leader in a market, its acquisition of a relatively small player in a related space may not move the needle in terms of its total market share but evidence that the acquisition would further cement its dominance may be persuasive.

Second, the amendments introduced a provision specifically to address notification of a hostile takeover bid. Prior to the amendments, the Competition Act included a provision that broadly applied to any instance where the purchaser notified a transaction, but the target did not. The provision allowed the Bureau to compel the non-notifying party to provide the requisite information. However, the timing of when the other party complied would not impact the ability of the notifying party to commence the statutory waiting period (i.e., start the clock counting down the time period after which parties are in a legal position to close).

Now, only purchasers in a hostile takeover bid scenario can unilaterally commence the waiting period to the extent that the other party does not notify. Many critics have contended that this application is too narrow. When making this change, it is possible that the drafters did not consider other scenarios whereby the target may not voluntarily notify. While rare, these situations do exist. For example, if a significant – yet minority – shareholder of a private corporation were to sell more than a 35 percent voting interest to a third party in a transaction that exceeds the notification thresholds, the deal would likely be subject to pre-merger review.

In this case, the target corporation may not itself be party to the transaction agreement. However, the target corporation would be a party to the transaction for Competition Act merger control purposes and filing of its notification would be necessary to commence the waiting period. As it is not a hostile takeover bid situation, the purchaser and seller would be without a mechanism in the Competition Act to commence the waiting period without the cooperation of the target corporation. Should the corporation choose not to notify, the purchaser and seller would be unfairly beholden to that decision.

Third, and perhaps most importantly, the amendments introduced an anti-avoidance provision. The anti-avoidance provision stipulates that where a transaction is “designed” to avoid obligatory pre-merger notification under the Competition Act, the pre-merger notification provisions will apply regardless. Unlike other jurisdictions, Canada has never had an explicit anti-avoidance provision in its competition regime. Rather, the Competition Act grants the Bureau jurisdiction to review non-notifiable transactions for up to a year following closing (although this leaves the Bureau scouring the headlines and relying on tips and complaints in order to detect anticompetitive non-notifiable mergers).

Without anti-avoidance provisions, parties have technically been able to structure transactions in order to avoid a pre-merger notification requirement. Though the extent to which parties have taken advantage of such strategies is unknown, this loophole likely has been exploited in the past (although tax and corporate structuring largely dictates how the vast majority of deals unfold).

While the introduction of an anti-avoidance provision is not unexpected, the language used has been criticised as being vague and therefore potentially unenforceable. It is unclear how the Bureau would prove that a transaction was ‘designed’ to avoid notification, especially since transaction structure is typically decided with many other considerations in mind as well, like tax implications, the transfer of liabilities and accounting treatment.

Where one of several benefits of a particular structure is the coincidental avoidance of notification, would that be sufficient to satisfy the definition of ‘designed’? We would hope not. In addition, how would the Bureau ever detect and then confirm that avoidance was the intention? Proving intent to avoid notification would be a difficult burden to meet. A more targeted and preferable approach would have been to identify any technical gaps in the notification provisions and address them specifically.

Despite the somewhat limited scope of the new amendments, it is important to remember that the above changes have been characterised by government officials as a preliminary step toward modernising Canada’s competition regime. Further changes are expected in the coming years, and it is expected that the most significant amendments to the merger provisions are yet to come. For instance, the controversial merger efficiencies defence is potentially on the chopping block.

The efficiencies defence prevents a tribunal from issuing a remedial order where doing so would eliminate efficiency gains that are likely to be greater than and offset the competitive harm from the merger. Citing outcomes that are detrimental to consumers and the practical difficulties of applying the efficiencies analysis, the Bureau has consistently advocated for its removal from the Competition Act. It argues that efficiencies should be considered as one factor among many when assessing a merger (which is the standard approach in other jurisdictions).

Another suggested amendment with significant consequences would be to shift the burden of proof on to the merging parties to demonstrate that mergers resulting in significant concentration would not substantially lessen or prevent competition. Currently, a tribunal cannot issue an order to block or dissolve a merger solely on the basis of market shares and concentration levels. The Bureau bears the burden of proving that high concentration would likely result in a substantial prevention or lessening of competition, which can be a significant burden that drains resources.

For now, the timing and content of future amendments are speculative and merging parties could have been burdened with more onerous amendments than were actually implemented. As things stand, the impact of the recent new merger amendments will likely be felt by only a few.

Erin Keogh is an associate at McCarthy Tétrault LLP. She can be contacted on +1 (416) 601 4320 or by email: ekeogh@mccarthy.ca.

Erin Keogh

McCarthy Tétrault LLP