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The Merger Review Process – What Lies Ahead? – M&A/Private Equity

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As discussed in our previous
blog post
, on November 17, 2022, the Honourable
François-Philippe Champagne, Minister of Innovation, Science
and Industry, launched the much anticipated public consultation on the second stage of
potential amendments to the Competition Act (the
Act“).

As part of this consultation process, the Department of
Innovation, Science and Economic Development
(“ISED“) issued a discussion paper,
titled The Future of Competition Policy in Canada
(the “Discussion Paper“), which
considers numerous issues and potential areas of reform, including
in the mergers, unilateral conduct, competitor collaboration,
deceptive marketing and administration/enforcement context. The
Discussion Paper does not include any particular recommendations or
proposed amendments to the Act. Rather, it simply sets the stage,
invites feedback from interested stakeholders on the issues and
discusses a number of potential areas of reform. Feedback can be
provided on or before February 27, 2023.

To help businesses better understand the issues and potential
areas of reform included in the Discussion Paper, we are releasing
a series of blog posts discussing these issues and potential areas
of reform on a topic-by-topic basis. This is the first blog post in
the series, which is focussed on potential reforms to merger review
in Canada.

Merger Review

According to the Discussion Paper, “[c]oncerns have been
raised with respect to the reach of the Act’s remedial
framework, given the potentially harmful effects of
concentration”, including in connection with the acquisition
of start-ups and potential innovators in the digital economy. For
example, the Discussion Paper points out that
“[n]on-notifiable, yet ultimately important acquisitions may
evade detection, while even known mergers may cause competitive
harm that is too difficult to forecast with precision at the time
of acquisition, yet too late to remedy once it becomes
apparent”. In light of these and other concerns, the Federal
Government is considering several possible reforms and would
welcome input on each of the merger-related topics listed below, as
well as input on reforms to the merger review process more
generally.

  • The revision of pre-merger notification rules to better
    capture mergers of interest
    . Transactions that exceed
    certain financial thresholds are subject to mandatory pre-merger
    notification in Canada. However, the Discussion Paper notes that
    pre-emptive acquisitions of innovative or disruptive firms will
    often fall below these thresholds, making it more difficult for the
    Competition Bureau (the “Bureau“) to
    detect and review such transactions during the existing one-year
    limitation period. The Discussion Paper also notes that the
    existing “methods of calculation [for the pre-merger
    notification thresholds] can lead to some unprincipled results,
    such that a foreign merger that affects a great deal of commerce
    into Canada may fail to surpass the size of transaction threshold,
    while a sale to a completely new entrant can be notifiable due to
    the acquired company alone”. Pointing to these issues, the
    Discussion Paper states that “it is clearly time to re-examine
    notification criteria, even beyond the above-noted concerns with
    respect to nascent firms”.

  • Extension of the limitation period for non-notifiable
    mergers (e.g. extending the limitation period to three years), or
    tying it to voluntary notification
    . Section 97 of the Act
    prevents the Commissioner of Competition (the
    Commissioner“) from challenging a
    merger more than one year after it has been substantially
    completed. However, the Discussion Paper notes that harmful
    competitive effects may not become apparent within the first year
    after completion – something it suggests is “an
    increasingly likely scenario in the dynamic markets that typify the
    digital economy”. While some commentators have suggested that
    this concern can be addressed under the abuse of dominance
    provisions, the Discussion Paper notes that “this approach
    cannot remedy consequences of concentration, such as higher prices,
    that are not themselves an abuse”. The issue here is whether
    the merger limitation period should be readjusted, whether
    absolutely or conditionally, at least for non-notifiable
    mergers.

  • Easing of the conditions for interim relief when the
    Bureau is challenging a merger and seeking an injunction
    .
    The Act includes provisions allowing the Bureau to apply for
    interim injunctions preventing merging parties from closing a
    transaction following the expiry of the statutory waiting period.
    However, the Discussion Paper notes that “the increased
    complexity of mergers has made it challenging or impossible to
    review all of the … information, prepare court filings, obtain a
    hearing date, and complete the hearing all within the 30 [day
    waiting period], with the result that parties can still close
    – and potentially harm the market irreversibly – before
    the opportunity for interim relief even arises”. In light of
    these challenges, the Discussion Paper states that “[i]t is
    worth investigating whether a more practical mechanism could be put
    in place for short-term interim relief, from the time that the
    Commissioner declares an intent to seek an injunction pending a
    challenge, to the time the injunction is decided”. In effect,
    the Discussion Paper is raising the possibility of making it easier
    for the Commissioner to obtain interim relief in certain
    circumstances.

  • Changes to the efficiencies defence (e.g., restricting
    its application to circumstances where consumers or suppliers would
    not be harmed by the merger)
    . Section 96 of the Act,
    commonly known as the efficiencies defence, provides that the
    Competition Tribunal (the “Tribunal“)
    cannot make a remedial order where it finds that the efficiencies
    likely to arise from a merger are greater than, and will offset,
    the anti-competitive effects of the merger. The Discussion Paper
    notes that the efficiencies defence is “arguably unique”
    to Canada; that the effect of this defence is to allow mergers to
    proceed even where they lead to significant harm to consumers in
    the form of higher prices and/or reduced choices; and that critics
    have noted the potential for this defence to lead to adverse
    impacts on consumers without necessarily generating any of the
    intended benefits for Canadian firms in global markets. In this
    regard, the Discussion Paper states that the Canadian government
    will be examining possible reform of the efficiencies defence, with
    possible ways forward running the gamut from reforming aspects of
    the defence to its abolishment. At least some changes to the
    efficiencies defence are likely inevitable.

  • Revisiting the standard for a merger remedy (e.g. to
    better protect against prospective competitive harm, or to better
    account for effects on labour markets)
    .

    • The Tribunal is able to order remedies where it finds that a
      merger prevents or lessens, or is likely to prevent or lessen,
      competition substantially. The Discussion Paper raises issues with
      this standard and suggests that Canada needs a forward-looking
      framework that looks beyond current market conditions and allows
      for an examination of how transactions may affect the future
      welfare of market participants. In particular, the Discussion Paper
      highlights challenges to applying the merger provisions’
      competitive effects test to acquisitions in fast-moving digital
      markets. While the Discussion Paper does not recommend a particular
      framework or standard, it does refer to proposals that have been
      suggested in other jurisdictions, including the United Kingdom
      (i.e., a “balance of harms” approach, where both the
      likelihood and magnitude of the potential impacts of a merger are
      weighed together in considering whether to block or allow a merger,
      rather than having a separate threshold which must be met for each)
      and the United States (“an appreciable risk of materially
      lessening competition”). The Discussion Paper also notes other
      reform suggestions which have been raised in other jurisdictions,
      including “presumptions for already-dominant firms”,
      “special tests for digital platforms” or “reversing
      the burden of proof for certain types of mergers”. Changes
      along these lines would fundamentally re-shape the merger review
      process in Canada.

    • Separately, the Discussion Paper notes that it is worth
      considering whether amendments to the Act could give labour a more
      central role in competition analyses. This could include, for
      example, modifying the Act’s purpose clause; the addition of a
      consideration in the competitive effects test in section 93 of the
      Act that would expressly consider monopsony power and labour
      effects; or modification of the efficiencies defence to address
      employment-based efficiencies more directly.

Timing of Submissions

As noted above, interested stakeholders have been invited to
provide submissions on or before February 27, 2023. This can be
done using the online consultation form on ISED’s
website.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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