Merger Enforcement Guidelines
Part 6
Process Matters
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6.1 Compliance Approach
The Director's enforcement of the Competition Act emphasizes compliance.
Increased compliance with the Act benefits all parties, and is best facilitated
by ensuring that persons involved in or affected by mergers are fully informed
with respect to the Director's enforcement policy. However, Merger Enforcement
Guidelines are no substitute for early contact with the Bureau to discuss
proposed or hypothetical transactions. Early contact usually provides helpful
insights into:
- the competition issues that are likely to be raised by a particular
transaction;
- the manner in which the assessment of these issues can be best facilitated;
- the time that will likely be required to complete the review of the merger;
whether the transaction is a good candidate for an Advance Ruling
Certificate;(59)
- whether short form or long form prenotification is likely to be required;
and
- whether restructuring will likely be necessary to ensure that competition
will not be prevented or lessened substantially.(60)
6.2 Prenotification
Part IX of the Act requires that the Director be notified of proposed
transactions where two thresholds are exceeded, relating to:
(i) the combined size of the merging parties and their affiliates;
and,
(ii) the size of the transaction.
With respect to the first threshold, section 109 requires notification of a
proposed transaction only when the transacting parties, together with their
affiliates, (61) have
assets in Canada or have gross annual revenues from sales in, from, or into
Canada that exceed $400 million.
The second threshold is addressed in section 110, where four types of
notifiable transactions are distinguished: asset acquisitions, share
acquisitions, corporate amalgamations, and business combinations otherwise than
through a corporation, e.g., a joint venture. With respect to asset
acquisitions, unless a transaction falls within one of the exemptions set out
in sections 111 to 113, (62) notification
is required for a proposed
acquisition of any of the assets in Canada of an operating business, (63) if the aggregate value
of the assets or the gross annual revenue from sales in or from Canada
generated by those assets exceeds $35 million.
With respect to share acquisitions, subject to the exemption provisions in
sections 111 to 113, notification is required for a proposed acquisition of
"voting shares" (64) of a
corporation that carries on an
operating business or that controls a corporation that carries on an operating
business, where:
(i) the corporation has assets in Canada, or gross annual revenues
from sales in or from Canada, that exceed $35 million; and,
(ii) the acquiror will have a greater than 20 percent voting
interest in a public company or a greater than 35 percent voting interest in a
completely private company.
Where the proposed acquiror already has a greater than 20 percent or 35
percent voting interest prior to the proposed transaction in question, but less
than a 50 percent voting interest, notification is also required where that
acquiror together with its affiliates will have a greater than 50 percent
voting interest in the target corporation subsequent to the transaction. (65)
Amalgamations are also subject to the exemptions in sections 111 to 113.
Notification is required for a proposed amalgamation of two or more
corporations where:
(i) the value of the assets in Canada or the annual gross revenue
from sales in or from Canada of the continuing corporation exceeds $70 million;
and,
(ii) one or more of the amalgamating corporations carries on an
operating business or controls a company that carries on an operating business.
Notification is required in respect of a proposed combination of two or more
persons to carry on business, otherwise than through a corporation, if one or
more of those persons propose to contribute assets of an operating business to
the combination, and if the value of the assets in or sales in or from Canada
of the combination exceeds $35 million. The various exemptions set forth in
sections 111 to 113 apply equally to combinations.
In all cases, notification must be made by the person proposing the
transaction. For amalgamations, combinations and other circumstances where the
transaction is proposed by more than one person, one of the parties may be
authorized by the others to give notice and supply information on their behalf.
The prenotification provisions cover both direct and indirect acquisitions.
Accordingly, if a foreign or Canadian company purchases a foreign company and
thereby indirectly acquires a Canadian operating business, the transaction is
notifiable under the Competition Act, if the abovementioned thresholds are
crossed. The same rules apply if a foreign company is buying a Canadian
company.
A notifier has the option of supplying information set out in either section
121 (short form) or section 122 (long form). The information required under
both sections includes:
- any legal documents that have been prepared in relation to the transaction;
- a description of the proposed transaction and its underlying objectives;
information relating to the parties to the transaction, their principal
businesses and the businesses of their affiliates;
- sales figures;
- asset values;
- principal categories of products produced;
- significant customers and suppliers; and,
- to the extent available, pro forma financial statements.
The main difference between the short and long form filings is that the long
form requires considerably more information on affiliates and products.
Parties must wait seven days, where a short form filing is made, and 21 days
in the case of a long form filing, before completing a proposed transaction.
Where shares are to be acquired through a stock exchange, parties filing long
form information may complete the transaction after 10 trading days, or such
longer period, not exceeding 21 days, that may be allowed by exchange
rules.(66) The
waiting period runs from the time that complete information, as determined by
the Director, is received by the Director. Pursuant to section 123, the
abovementioned periods may be reduced by the Director.
Failure to notify in accordance with sections 114 or 123 is a criminal
offense under section 65(2) and is subject to a fine of up to $50,000. In
addition, the Director may apply to the Tribunal pursuant to section 100 for an
order preventing the completion or implementation of the proposed merger until
proper notification is filed.
Pursuant to section 119 a notification in respect of a merger lapses if the
merger is not completed within one year or such longer period as the Director
may specify in any particular case.
Parties are encouraged to contact the Bureau's Prenotification Unit before
filing, to discuss whether a short-form or long form filing should be made; to
discuss the possibility of pursuing an Advance Ruling Certificate (as an
alternative to prenotification); (67) to
expedite review of the transaction; or
to seek any other assistance that may be required regarding the review process
or the Director's interpretation of specific provisions of the Act.
6.3 Confidentiality
Section 29 (68) of
the Act prohibits the Director and his authorized representatives from
communicating to another person information obtained pursuant to the provisions
of sections 11, 15 and 16; (69) and
information obtained pursuant to a
prenotification filing or from a person requesting an advance ruling
certificate. Section 29 also prohibits disclosure of the identity of any person
from whom information has been obtained pursuant to the Act; and the
communication of whether notice has been given or information obtained in
respect of a particular transaction that has been prenotified under section
114. The prohibitions of section 29 do not apply in respect of information that
has been made public. In addition, the Director may communicate information
obtained to a Canadian law enforcement agency or for the purpose of the
administration and enforcement of the Act.
In general, the Bureau will respect requests by merging parties that
information not be sought from third parties about the likely effects on
competition of mergers that have not been made public. However, such a request
for confidentiality may seriously restrict the ability of the Director to
assess fully the likely impact on competition of a merger, and may extend the
period that would otherwise be required for the Bureau's review. Accordingly,
information from third parties may be sought if the merging parties indicate an
intention to proceed with their merger before the Director's assessment is
completed and it has not been determined that the merger will not prevent or
lessen competition substantially. In deciding whether to seek third party
views, the Director will take into account whether the merging parties have
provided an undertaking to ensure that the ability of the Tribunal to remedy
the effect of the merger on competition would not be impaired. Parties who
intend to proceed with their merger before the Director's assessment is
completed face the risk that the Director will make an application for an
interim order under section 100 or that the Director will bring an application
for an order after the merger has been substantially completed, within the
three year period permitted by section 97.
In addition to the provisions of section 29, where an inquiry is commenced
by the Director, section 10(3) provides that all inquiries are to be conducted
in private. Accordingly, the Director will not comment on whether a section 10
inquiry has been initiated, unless the existence of the inquiry has otherwise
been made public.
Where an application is made to the Tribunal, the Director will advise the
Tribunal of any request that has been made for confidentiality.
6.4 Substantial Completion
In general, substantial completion of a merger is considered to arise when:
(i) an ability to materially influence the economic behaviour of
the business that is the subject of the transaction has been acquired or
established; and,
(ii) it is no longer possible for one of the parties to withdraw
from the merger if an outstanding condition is not met or a regulatory approval
is not obtained.
6.5 Timing
The time required by the Bureau to review a merger is largely a function of
when the Bureau is provided with sufficient information to assess the likely
effects of the merger on competition. Accordingly, the time periods set forth
in this section are contingent on obtaining such information, and are only
approximate guides.
Persons who have submitted prenotification filings are generally informed on
the day that the relevant waiting period expires either that the transaction
does not raise concerns under the substantive provisions of the Act or that the
Bureau's assessment is not yet complete. Merging parties who have notified the
Bureau with respect to a merger that falls below the prenotification thresholds
are generally informed, either that the transaction does not raise concerns
under the Act or that the merger requires further review, within three weeks of
providing the Director with sufficient information to make this preliminary
determination. Regardless of whether a merger is subject to the prenotification
provisions of Part IX of the Act, the Bureau ordinarily endeavors at this time
to communicate to the merging parties any preliminary concerns that have been
identified. Similarly, it generally endeavors to communicate with the parties
as additional issues are identified.
Where parties are informed that no concerns have been identified, they can
generally proceed with their transaction without facing a significant risk that
the merger will be challenged within the three year period permitted by section
97, unless new information which would affect the Director's decision comes to
the Bureau's attention. By contrast, where the parties are informed that the
review of the merger has not been completed, they may be requested to provide
an undertaking not to proceed with the closing of their transaction without
giving the Bureau a minimum of ten working days notice of an intention to do
so. Where such an undertaking is not provided:
(i) any attempt to complete or implement the merger may cause the
Director to bring an application for an interim order pursuant to section 100
of the Act; or,
(ii) subsequent to the merger, an application challenging the
merger may be brought pursuant to section 92, together with an application
pursuant to section 104 for an interlocutory order.
When competition concerns have been identified, they are conveyed to the
notifying party and additional information is generally requested. The time
that it takes for the review of the merger to be completed is then largely a
function of the speed with which this information is provided.
In general, at this stage parties are advised to provide a thorough
competitive assessment document, if they have not already done so, together
with responses to a detailed information request. The competitive assessment
document should address the matters highlighted in these Guidelines. To the
extent that documentation prepared for the purpose of making the decision to
merge exists, it should also be provided to the Bureau, together with
identification of its authorship.
In most cases, a determination can be made of whether a merger prevents or
lessens competition substantially within eight weeks after the merging parties
have provided all requested information. This period of time is required in
order to review this information, to review information relating to the
industry that is already in the Bureau's files, and to gather and review
information provided by customers, suppliers, competitors, experts, others in
the industry and government departments that have information pertaining to the
market(s) in question. Where information is not provided upon request by
merging parties or others, the Director may initiate a formal inquiry and seek
to exercise the powers provided under sections 11, 15 or 16 of the Act.
In those cases where a determination cannot be reached within this time
frame, additional information may be sought with respect to contentious issues.
At this stage, the timing of a final determination can vary significantly from
case to case. In the Bureau's experience, the most complex of these cases can
require up to six months after all requested information has been obtained from
the merging parties, before the Director's position is finalized. This
additional time has in part been attributable to continued discussions
initiated by the parties to the merger. The Director will be briefed throughout
the assessment process, and will provide merging parties with an opportunity to
discuss a determination before it is finalized.
6.6 Information Exchanges Between Merging Parties
Information exchanged during merger negotiations which do not ultimately
lead to a merger (70)
could raise questions which may require examination pursuant to the conspiracy
provisions of section 45 of the Act. This risk can be reduced by limiting the
information exchanged to that which is reasonably necessary to make a decision
to merge, and by ensuring to the extent possible that such information is
restricted to persons involved in negotiating the transaction, e.g., lawyers,
accountants, chief executive officers or merger counsellors. Unless there are
legitimate reasons why commercially sensitive information needs to be shared in
both directions, such risk can also be reduced by ensuring that information
flow is one way.
6.7 Investment Canada
Investment Canada reviews certain acquisitions in Canada by non-Canadians in
terms of a "net benefit to Canada" test. One of the six factors
considered in the assessment of this test is the likely effect of the merger on
competition. Investment Canada generally seeks, but is not bound by, the
Director's assessment of the likely implications of a transaction on
competition. Similarly, decisions reached pursuant to the Investment Canada Act
do not bind the Director.
As a matter of practice, the Bureau receives all Investment Canada filings
and attempts to complete the competition evaluation of Investment Canada cases
that do not appear to raise concerns under the Competition Act within l5 days
of receiving notification from Investment Canada. Where the documentation
provided in the parties' filing to Investment Canada is insufficient to enable
a proper assessment to be made under the Competition Act, the companies
involved are ordinarily approached directly. The Director will normally
communicate to Investment Canada officials a conclusion that the competition
factor should be given a positive, neutral or negative weight in Investment
Canada's overall net benefit assessment. (71) Investment Canada may conclude that the
merger is of net benefit to Canada notwithstanding that the competition factor
has been given a negative weighting.
59. The Director's approach to advance
ruling certificates is discussed in the Advance Ruling Certificates bulletin,
released by the Bureau in December 1988.
60. Additional information regarding the
compliance approach is set forth in the Bureau's Program of Compliance
bulletin, released by the Bureau in June 1989.
61. Affiliates, for purposes of the Act,
are defined in section 2 (2) on the basis of de jure control. Cf. Part 1 of
these Guidelines.
62. Cf., Appendix 3.
63. The term "operating
business" is defined in subsection 108(1) as "a business or
undertaking in Canada to which employees employed in connection with the
undertaking ordinarily report for work.
64. The term "voting share" is
defined in subsection 108(1) as "any share that carries voting rights
under all circumstances or by reason of an event that has occurred and is
continuing"
65. Provision is made in section 115 for a
proposed acquiror to notify with respect to both voting thresholds at the same
time if it is anticipated that sufficient additional shares to cross the fifty
percent threshold will be purchased within one year of notice being given for
an acquisition that results in a crossing of either the 20 percent or the 35
percent thresholds.
66. Securities commissions and stock
exchanges in Canada allow takeover bids to be conditional on compliance with
Part IX of the Act.
67. See note 59 above.
68. Section 29 states: (1) No person who
performs or has performed duties or functions in the administration or
enforcement of this Act shall communicate or allow to be communicated to any
other person except to a Canadian law enforcement agency or for the purposes of
the administration and enforcement of this Act: (a) the identity of any person
from whom information was obtained pursuant to this Act; (b) any information
obtained pursuant to section 11, 15, 16 or 114; (c) whether notice has been
given or information supplied in respect of a particular proposed transaction
under section 114; or (d) any information obtained from a person requesting a
certificate under section 102. (2) This section does not apply in respect of
any information that has been made public.
69. These sections provide for the
obtaining of information through oral examination, production of documents,
written returns, searches and seizure and computer searches
70. It should be noted that even where a
such negotiations lead to a agreement to merge, section 98 of the Act
contemplates that the Director can elect to proceed pursuant to section 45
rather than the merger provisions.
71. A negative weighting may be given even
if the merger does not prevent or lessen competition substantially.
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