Canadian COMPETITION LAW

On June 13, 2011, the Maple Group Acquisition Corp., a consortium of 13 Canadian financial institutions, launched a Cdn. $3.7 billion hostile bid to acquire 70% of the TMX Group Inc. for $48 per share.

(Maple is composed of 13 banks, pension funds and institutional investors:  Scotia Capital Inc., TD Securities, National Bank of Canada, Canadian Imperial Bank of Commerce, Alberta Investment Management Co., Caisse de depot et placement du Quebec, Canada Pension Plan Investment Board, Ontario Teachers’ Pension Plan Board, Fonds de Solidarite FTQ, Manulife Financial Corp., Dejardins Financial Group, GMP Capital Inc. and Dundee Capital Markets.)

According to the Globe and Mail and other media reports, the Maple bid is a cash and share offer with Maple valuing its offer for TMX at Cdn. $3.7 billion ($2.5 billion in cash with the balance in Maple shares or Cdn. $33 cash per share plus Maple shares).

The launch of the rival Maple bid follows the earlier proposed friendly TMX/London Stock Exchange Group (LSE) merger and also follows in the wake of a recently abandoned joint bid by the NASDAQ OMX Group Inc. and IntercontinentalExchange Inc. last month to acquire the NYSE Euronext, following a decision by the U.S. Department of Justice to block the transaction (see: NASDAQ OMX and IntercontinentalExchange Abandon Acquisition of NYSE Euronext).

In the failed NASDAQ/NYSE transaction, it appears from public statements by U.S. regulators that their concerns included overlap in several relevant markets, including stock listing services, stock auction services (used at the open and close of trading and periodically during market imbalances) and trade reporting facilities (used for the reporting of stock trades occurring outside of a stock exchange).

It is not yet clear whether the Maple hostile bid for the TMX will raise substantive competition law issues for the Bureau of the kind that resulted in the failed NASDAQ/NYSE transaction, or for the parties to the Maple/TMX transaction to avoid the imposition of remedies if successful.

Potential competition concerns include Alpha/TMX overlap in trading or market information services (five Maple investors have existing holdings in Alpha), Alpha having been described as “the TMX’s biggest domestic competitor” and “Canada’s main alternative trading platform” in the stock trading market.  The TMX itself described Alpha in its 2010 Annual Report as having posed the “largest competitive impact” on its trading business.

The integration of CDS, which handles the clearing of share trades and is Canada’s major stock clearing facility, with the TMX may also raise potential issues, based either on overlap with existing TMX clearing services or possible impacts on non-Maple investor customers.  In this regard, Maple’s bank investors and the TMX hold interests in CDS.

In this regard, existing remaining competition is a key substantive factor for the Competition Bureau in merger review under the Competition Act (see: Competition Bureau, Merger Enforcement Guidelines).

It also remains to be seen whether the proposed entry of Alpha in the listing services market will be a concern for the Bureau – i.e., whether the Bureau may see the Alpha/TMX merger as essentially removing a potential new entrant.

Having said that, unlike some other major jurisdictions including the U.S. and EU, fully contested merger proceedings are generally speaking rare in Canada with most substantive issues being resolved through negotiated settlements with the Bureau – i.e., through the imposition of structural or behavioural remedies to alleviate competition law concerns (see: Competition Bureau, Information Bulletin on Merger Remedies in Canada).

Potential remedies in this case, in the event the Maple bid is successful, may include the divestiture of the Maple investors’ holdings in Alpha.  If significant competition concerns are raised, “behavioural” remedies may also be possible – for example, steps to alter the Maple investors’ representation on the Alpha board or control provisions in Alpha shareholder agreements.

According to some media reports, Maple has in fact indicated that it may be willing to divest its interests in Alpha and CDS to obtain regulatory approval for the transaction.

With respect to the timing for the proposed transaction, the parties will be subject to an initial 30 day waiting period for a review of the transaction during which the Bureau may request additional information extending its review to a second phase review (or a timing agreement negotiated between the parties extending the time for the Bureau’s review, without the issuance of an additional information request).

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