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

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.