Canadian COVID-19 considerations – temporary competition law and foreign investment policies

August 2020  |  SPECIAL REPORT: COMPETITION & ANTITRUST

Financier Worldwide Magazine

August 2020 Issue

As the COVID-19 pandemic has brought global economic activity to a near standstill, regulators in many countries have been grappling with how best to mitigate the potential competition law and foreign investment risks. Canada has been no exception. On the competition law front, the Canadian Competition Bureau has issued a statement saying that it will relax enforcement against competitor collaborations that might otherwise be criminally or civilly prohibited, provided that the collaborations are necessary to ensuring the supply of critical products and services. With respect to foreign investment, the Canadian government released a policy statement indicating that it will apply enhanced scrutiny when reviewing investments related to public health or the supply of critical goods and services, as well as investments made by foreign state-owned enterprises or private investors influenced by a foreign state.

Competition law regulators around the world quickly acknowledged that competitor collaborations, which are often prohibited under competition laws (including in Canada), could be imperative for the protection of critical supply chains and the facilitation of expedient responses to product-specific demand spikes during the pandemic. By the end of March, the US Department of Justice (DOJ) and Federal Trade Commission (FTC), the European Commission (EC), the UK Competition and Markets Authority (CMA) and the Australian Competition & Consumer Commission (ACCC) had all released statements to that effect.

The Competition Bureau followed suit shortly thereafter, releasing a policy statement on 8 April assuring businesses that the Bureau would relax its enforcement of the Competition Act’s competitor collaboration provisions where the collaborating companies are engaged in efforts to ensure continued access to critical goods and services during the pandemic. Under Canada’s Competition Act, it is a criminal offence for competitors to fix prices, restrict supply or output, or to allocate markets or customers.

The Bureau’s assurance was tempered by its prevailing concern that any relaxation of the rules could be exploited by companies to the detriment of consumers and competition. Conscious of this risk, the Bureau specified that it will only provide leeway where: (i) the collaborating competitors are acting in good faith; (ii) the collaboration is “necessary to meet the urgent needs of Canadians during the crisis”; and (iii) the collaboration is limited in both scope and duration to what is necessary to achieve the legitimate joint objective.

The Bureau also offered to provide guidance as to whether a particular COVID-19 collaboration falls within the scope of the policy. The consultation process involves providing detailed information to the Bureau, which reserves the right to consult with other government bodies and stakeholders, impose conditions on – or reject – the proposed collaboration, and make public the guidance it provides. Additionally, it remains to be seen how quickly the Bureau can process such requests. Companies that choose to exercise this option rather than rely on their own judgment must, therefore, be prepared for a degree of delay, loss of confidentiality and conditions, or even rejection.

Any attempts to abuse the Bureau’s flexibility would be subject to ‘zero tolerance’. Moreover, unlike the UK and Australia, Canada lacks a statutory scheme to issue exemptions from the application of competition laws without amending the Competition Act. This exposes collaborating competitors to residual risk. While the Bureau may relax its enforcement activity, conduct that would otherwise be criminal remains so. As such, businesses remain vulnerable to potential private actions, including class proceedings, seeking damages resulting from alleged criminal competitor collaborations. The policy is also limited to collaboration on critical products, so collaborations that relate to scarce, but not critical, products or offering relief to customers may not benefit from its protection.

Turning to foreign investment, a different set of considerations is at play. As with other countries, such as Australia, the Canadian government is concerned that the recent devaluation of many Canadian businesses due to the current COVID-19-induced economic crisis exacerbates the risk of acquisitions by opportunistic foreign buyers. On 18 April, the Canadian government released a policy statement expanding the scope of its review measures under the Investment Canada Act (ICA) for foreign investments during the pandemic.

Typically, scrutiny under the ICA is focused on direct foreign acquisitions of control of Canadian businesses with an enterprise value over C$1bn, for which pre-closing approval is generally required. In granting such approvals, the government assesses whether the transaction is likely to be of ‘net benefit to Canada’, but its mandate under the ICA also includes screening foreign investments on national security grounds. However, the pandemic policy has broadened the net. More specifically, all foreign investments in Canadian businesses related to ‘public health’ or the ‘supply of critical goods and services’ to Canadians or the Canadian government, including provincial and local governments and government agencies, are now subject to ‘enhanced scrutiny’. In addition, all investments by state-owned enterprises or by private investors suspected of being closely tied to, or influenced by, foreign states will be similarly subjected to enhanced scrutiny. In justifying the latter, the policy explains that state-owned or state-influenced buyers are more likely to be motivated by ‘non-commercial imperatives’ that could harm Canada’s economic or national security interests.

The policy’s enhanced scrutiny would be exercised under the Canadian government’s existing national security powers under the ICA. A national security review can be ordered in respect of foreign investments of all sizes, regardless of whether control is acquired. If deemed injurious to national security, an investment may be subject to remedial conditions or rejection. The change that the policy brings about is that national security considerations will play a material role in more transactions than previously.

The theoretical breadth of the policy’s scope has raised concerns among foreign buyers for the following reasons. First, the Canadian government has the authority to define what businesses relate to ‘public health’ or ‘critical goods and services’. Though these could be defined conservatively to include only healthcare necessities, such as pharmaceuticals and personal protective equipment, it appears that the government has thus far adopted a more expansive definition. Second, the policy statement does not elaborate on what exactly ‘enhanced scrutiny’ might entail. Instead, it only warns that there may be additional requests for information and elongated reviews. The Canadian government has considerable latitude in its application of the policy, which could breed uncertainty among foreign investors considering acquisitions of Canadian businesses.

Further complicating matters is the recent introduction of proposed COVID-19 legislation that would, among other unrelated items, temporarily give the government the power to extend the period during which it could launch a national security review of an investment under the ICA from 45 days to six months. The proposed legislation is retroactive to 13 March 2020 and ends 30 September 2020, which may be an indicator of when the policy might end.

Though the policy’s scope and effects have yet to be seen, it is conceivable that the levels of Canada’s inbound investment may be affected, with some foreign buyers opting for opportunities in less daunting jurisdictions. Undoubtedly, however, the policy raises a number of strategic questions and considerations for foreign inbound investment and businesses operating in Canada, such as contractual risk allocation and the consideration of alternative investment structures not subject to the ICA, such as debt investments.

To conclude, for the foregoing reasons, it is unsurprising that both the competition law and foreign investment pandemic response policies have been met with scepticism from businesses, though the policies’ ultimate impact remains to be seen. Arguably, the approach on competitor collaborations is too conservative and fails to provide sufficient relief from potential liability, while the foreign investment policy overcorrects in that it arguably discourages helpful foreign investment in attempting to block potentially harmful investments. Due to these complexities, both policies necessitate caution and consultation with counsel for businesses dealing with these issues.

Jonathan Bitran is a partner and Erin Keogh is an associate at McCarthy Tétrault LLP. Mr Bitran can be contacted on +1 (416) 601 7693 or by email: jbitran@mccarthy.ca. Ms Keogh can be contacted on +1 (416) 601 4320 or by email: ekeogh@mccarthy.ca.

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Jonathan Bitran and Erin Keogh

McCarthy Tétrault LLP

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