The changing face of merger control in Canada

April 2024 | EXPERT BRIEFING | MERGERS & ACQUISITIONS

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The last two years have witnessed the most significant overhaul of Canadian competition law and policy in more than a decade. Initial amendments to the Competition Act were enacted in June 2022, with a second tranche of amendments passed in December 2023. A third set of proposed amendments is now before the Canadian parliament in government-sponsored legislation, with passage expected imminently.

These changes to the Act affect all key areas of competition law enforcement in Canada. They also represent a significant victory for Canada’s competition law enforcement agency, the Competition Bureau, which has persuaded the Canadian government that enhancing enforcement of the Act will help reduce inflation and address issues of affordability affecting the Canadian public.

In this article, we focus on what the amendments (enacted and proposed) will mean for the Act’s merger control process, which is a central component of the Act’s enforcement framework. At a high level, the intention of the amendments is to make merger control more onerous in Canada, both from a substantive and procedural point of view. Investors and merging parties will now have to take these changes into account in their strategic planning for merger transactions in Canada.

How will merger control in Canada change?

The amendments to the Act do not purport to alter the fundamental architecture of the merger control process in Canada. In brief, that process will continue to involve mandatory pre-closing filings where certain thresholds are met; suspensory waiting periods which can be extended significantly if a Phase II-type of investigation is commenced, substantive review by the Competition Bureau to determine if the merger is likely to prevent or lessen competition substantially, and the authority of the Competition Tribunal to issue remedies in respect of anticompetitive mergers.

That said, the amendments do affect key aspects of this process, both in terms of substantive review and pre-merger notification, in ways that are designed to enhance the Competition Bureau’s enforcement authority overall.

Repeal of the ‘efficiencies’ defence

The most prominent change ushered in by the amendments, although not necessarily the most impactful one, is the repeal of the Act’s ‘efficiencies’ defence. This defence prevented the Competition Tribunal from prohibiting a transaction if certain efficiencies generated by the transaction outweighed and offset its alleged anticompetitive effects. Although the defence has been applied in only a handful of cases since 1986, when it was first enacted, the Bureau has sought its repeal for many years, mostly because it tended not to win such cases, at least until very recently.

There had been some thought that efficiencies might at least be retained in the Act’s provision that expressly lists factors that are relevant for merger review, such as effective remaining competition and barriers to entry. However, that was not the case. It is therefore unclear what role, if any, efficiencies will play in Canadian merger review going forward. In remarks supporting the amendments, the responsible federal minister said that “if a proposed merger creates efficiencies that strengthen competition in a sector, the [Competition] Tribunal would be able to consider them in its deliberations”. While that is no doubt true in theory, the practical implication is to considerably diminish potential importance of efficiencies now that they may no longer qualify as a trump card and are just one factor among many to be considered.

Impact on labour markets

The Act sets out a non-exhaustive list of factors that are relevant to merger review in Canada. Although the amendments refrain from including efficiencies in this list, they do add several new factors, such as network effects, the potential entrenchment of leading incumbents, effects on non-price competition, including with respect to quality, choice or consumer privacy, and the impact on labour (the latter change is currently before parliament).

The first three factors tie into a broader push to address perceived competition concerns created by new technologies and the ‘digital economy’. The latter factor reflects the Competition Bureau’s newfound interest in employees and labour markets: the amendments also added a new cartel offence to the Act prohibiting wage-fixing and no-poaching agreements between employers.

Of these changes, adding impact on labour markets as a relevant review factor would be the most far-reaching. Although nothing prevented the Competition Bureau or the Competition Tribunal from considering labour issues previously, the reality is that these issues had never been considered an appropriate area of inquiry for merger review in Canada. We are thus entering a ‘brave new world’ where parties may have to consider whether to proactively address labour issues in their submissions, respond to detailed and extensive information requests focused on such issues, and face challenges to transactions based on adverse effects to labour markets. In the US, which in many ways served as the inspiration for Canada’s new interest in labour issues, the Federal Trade Commission (FTC) has just brought its first merger challenge based (in part) on alleged harm to employees. There is no reason to believe that this could not happen in Canada as well.

Market shares

Currently, there is a specific provision precluding the Competition Tribunal from deciding that a proposed transaction is likely to substantially lessen or prevent competition based solely on evidence of post-merger concentration or market share. The proposed amendments would repeal that provision, theoretically opening up the possibility that a transaction could be prohibited based on post-merger market shares alone. Ominously, the Competition Bureau is also on record as supporting the adoption of structural presumptions and has indicated its intention to continue to advocate for such changes.

In that regard, a member of the House of Commons (who also happens to be the leader of the junior party of the current governing coalition), has proposed an additional amendment that would automatically prohibit any merger that is likely to result in a market share over 60 percent and block any merger that results in a market share between 30 and 60 percent, unless the parties can demonstrate substantial procompetitive outcomes, including reduced prices, increased wages and increased product or service quality. Even if that amendment is not ultimately adopted by the government, it is apparent that the Competition Bureau is leaning toward a more structural and thus less permissive approach to merger reviews.

New provision to deter avoiding notifications

The amendments also introduce a new provision, which would apply where parties allegedly adopt transaction structures that are “designed to avoid” the application of the pre-merger notification requirements. If invoked by the Competition Bureau, this anti-avoidance provision means that the Bureau would effectively treat the transaction as being notifiable, with all the requirements that entails, including filing the requisite materials and not closing until the statutory waiting period expires or is waived.

It is not clear why the Competition Bureau thought it needed this anti-avoidance provision or even how it will determine that a transaction was structured with the intent to avoid notification. Indeed, we have already seen a case where parties shied away from revising a transaction structure because of concerns about the new anti-avoidance rule. One option for parties in dealing with such uncertainty could be to document a clear, credible and consistent business rationale for the transaction’s structure to mitigate the risk of avoidance allegations.

Extended time to challenge non-notified transactions

Another longstanding Competition Bureau concern is that it did not have sufficient time to detect and review non-notifiable transactions for potential anticompetitive effects. Since 2009, the “limitation period” for challenging non-notifiable transactions has been one-year post-closing (prior to that, it had been three years). The Bureau’s concern was that, in retrospect, this one-year period was too short, especially with respect to transactions in digital industries, where it is common for larger firms to pre-emptively acquire innovative but small “nascent competitors”. The Bureau claimed that the competitive implications of the acquisition of such firms, which would not be large enough to trigger the notification thresholds, might only become apparent over a more extended period.

The proposed amendments would address this concern by extending the period within which the Bureau can challenge a non-notified merger from one year to three years post-closing, i.e., return the law to where it was before 2009. The limitation period for challenging notified transactions would still be one year. However, the amendments add a twist by providing that parties to a transaction that falls below the notification thresholds can still benefit from the one-year limitation period by ‘voluntarily’ filing materials with the Competition Bureau. Parties to non-notifiable transactions would be faced with a new (and not always easy) decision: do not file since there is no legal obligation to do so, and assume the risk that the Bureau could review and challenge the transaction up to three years following closing, or file (and initiate a review) even though this is not legally required, in order to abbreviate the time period post-closing within which the transaction could be overturned.

Conclusion

The Competition Bureau considers the Act’s merger control system to be the first line of defence in securing a competitive Canadian economy, and the amendments now in place or to be enacted as essential to shoring up those defences. Only time will tell if that is the case. But what is certain is that investors will now be looking at an even less friendly and more onerous merger control system in Canada.

Mark Katz is a partner and Teraleigh Stevenson is an associate at Davies Ward Phillips & Vineberg LLP. Mr Katz can be contacted on +1 (416) 863 5578 or by email: mkatz@dwpv.com. Ms Stevenson can be contacted on +1 (416) 367 7627 or by email: tstevenson@dwpv.com.

Mark Katz and Teraleigh Stevenson

Davies Ward Phillips & Vineberg LLP