Closing the Transaction Over Competition Bureau Objections
December 4, 2009
There has been a good deal of discussion recently about the extent to which the amendments to the Competition Act’s merger review process that came into effect on March 12, 2009 centralize power and discretion in the Commissioner of Competition. To be sure, the amendments have the potential to lengthen the time for closing complex transactions. However, it is important to bear in mind the limits of those amendments.
As discussed in ourMay 2009 issue, before the amendments, merging parties could close 42 days after complying with the standard disclosure requirements prescribed by subsection 114(1) of the Act. If the Commissioner objected, she could seek an injunction from the Competition Tribunal pursuant to Section 100 of the Act for up to 60 days if she could prove that closing would "substantially impair the ability of the Tribunal to remedy the effect of the proposed merger." Merging parties rarely challenged the Commissioner, and consequently, the Commissioner had only twice sought Section 100 injunctions — in Commissioner of Competition v. Superior Propane and in Commissioner of Competition v. Labatt Brewing. The Commissioner failed both times; accordingly, the transactions in these cases were able to close over her objections.
In Superior Propane, the Commissioner also challenged the completed transaction. After four years of appeals, the Commissioner lost on the basis of the ‘efficiencies defence’ in Section 96 of the Act. In Labatt, the Commissioner investigated for almost two years after completion of the transaction before concluding that the merger did not substantially lessen competition.
The current amendments were enacted after the Labatt matter, and bring the Canadian merger review process closer to the US "second request" system. Now, the Commissioner may, within 30 days of receiving the standard disclosure pursuant to subsection 114(1) of the Act, seek "additional information that is relevant to the Commissioner’s assessment of the proposed transaction" pursuant to subsection 114(2) of the Act. This is the Supplementary Information Request (SIR) — the Canadian equivalent of a US "second request." While the additional information must be "relevant," relevance is determined by the Commissioner herself pursuant to subsection 116(3) of the Act. The ‘relevance’ limitation is a thin protection.
Once the merging parties — not the Commissioner — believe they have complied with the Commissioner’s second request, they can certify that they have done so pursuant to Section 118 of the Act. The transaction may then close 30 days after compliance, pursuant to subsection 123(1) of the Act.
Thus, the Commissioner cannot unilaterally block closing. Her only recourse if she believes there has been non-compliance is to apply for an injunction as described below. So, although it would be highly desirable for the parties to attempt to obtain the Commissioner’s agreement that compliance is complete, her approval is not necessary if she is recalcitrant.
The Commissioner has three possible recourses if the parties insist upon closing over her objections at that point.
First, she can apply to the Competition Tribunal for an injunction pursuant to Section 100 of the Act to delay closing for up to a further 60 days on the basis that she needs more time. If the parties have already complied with substantial SIRs, the Competition Tribunal may be unlikely to give the Commissioner still more time in view of the Competition Tribunal’s decisions against the Commissioner’s applications for injunctions under Section 100 in the Superior Propane and Labatt matters.
Second, the Commissioner may apply to the "court," defined as any one of the Competition Tribunal, the Federal Court or a provincial superior court, pursuant to new Section 123.1 of the Act, for an injunction or other relief if she believes that the merging parties are likely to close prior to full compliance with her information request. The merging parties can defeat the injunction application by demonstrating to the court that they have "good and sufficient cause" to believe they have complied with her second request, and that the time permitted for closing has passed pursuant to Section 123 of the Act.
Third, the Commissioner can challenge the merger on the merits up to one year post-closing pursuant to Section 92 of the Act on the basis that (i) the merger is likely to substantially lessen competition in a market; and (ii) the anti-competitive effects from that merger (even if they are substantial) are not outweighed by the efficiencies pursuant to Section 96 of the Act. Where the Commissioner challenges a merger under Section 92, she can also seek an interim order under Section 104 of the Act prohibiting the parties from closing the transaction pending the outcome of her challenge.
McCarthy Tétrault Notes:
It is noteworthy that the Commissioner has challenged six mergers in the Competition Tribunal since the Act was promulgated in 1986, and has lost five of the challenges. It is also noteworthy that members of the McCarthy Tetrault Competition Group have been the lead counsel for the successful party in all six cases.
Thus, while the Commissioner can now delay closing for longer periods, the Commissioner cannot unilaterally veto closing. Absent an order of the Competition Tribunal or a court to the contrary, the merging parties can proceed to close their transaction over the Commissioner’s objections 30 days after they have complied with her second request for information. After closing, the negotiating dynamics between the merging parties and the Commissioner change dramatically.
For most transactions, the recent amendments to the merger review process under the Act will have little significance. For large complex transactions, however, a strategy for merging parties to consider is to seek to close the transaction as soon as it is legally permitted, with — or without — the Commissioner’s approval.