Canadian COMPETITION LAW

January 21, 2014

Steve Szentesi
Kevin Wright (Davis LLP)

Extract from a chapter to be published in CLEBC
Annual Review of Law & Practice – 2014

The following are some of the key merger and Investment Canada Act developments in Canada in 2013 (late 2012 to early 2014) from our forthcoming chapter in CLEBC’s Annual Review of Law & Practice – 2014.

For the first post (misleading advertising) see: here.

Over the rest of the week I’ll be posting developments from last year in other key areas: civil and criminal competition law matters, competition law private actions, trade and professional associations and new Competition Bureau guidelines.

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Court of Appeal Upholds
“Prevent” Merger Decision

In February 2013, the Federal Court of Appeal rejected the appeal of Tervita Corporation (formerly known as CCS Corporation) from the May 2012 Tribunal order (discussed in our Annual Review of Law & Practice competition law chapter last year) requiring Tervita to divest certain assets of Babkirk Land Services on the grounds that its acquisition of such assets prevented competition in a market for secure solid hazardous waste landfilling services in North Eastern British Columbia:  Tervita Corporation v. Canada (Commissioner of Competition), 2012 FCA 223.  The Supreme Court of Canada granted leave and is scheduled to hear Tervita’s appeal from that decision in April 2014.

There were two main issues before the Court of Appeal: the proper application of section 92 of the Act to allegations of prevention of competition and the section 96 efficiencies defence.

The Tribunal had concluded that but for the merger, Babkirk (whether in the hands of the vendors or a person to whom they would have sold) would have competed against Tervita in about two years after the merger closed.  The Court of Appeal agreed with the Tribunal that the time for assessing whether the new competition would have occurred is within a “reasonable period of time” following the merger as opposed to the time that the merger occurred as contended by Tervita.   The reasonable period will vary from case to case but it must be discernible and should normally fall within the temporal dimension for the barriers to entry into the market at issue.  The Court of Appeal accepted the reasonableness of the Tribunal’s findings and rejected Tervita’s argument that the Tribunal had engaged in unbridled speculation as to future events or had reversed the Commissioner’s onus in a prevent case to establish likely entry of new competition.

The Court of Appeal concluded that the Tribunal erred in its approach to the efficiencies defence.  Section 96 of the Act requires that the efficiencies be greater than and offset the effects of any prevention or lessening of competition resulting from the merger.  As such, it involves a weighing of the likely efficiency gains against both quantitative and qualitative anti-competitive effects.  The Court of Appeal confirmed that the Commissioner bears the burden to quantify the anti-competitive effects known as the “dead-weight loss” and concluded that the Tribunal erred by allowing the Commissioner to seek to discharge the burden through a reply report using a deficient methodology.  Interestingly, the Court of Appeal found that the weight to be attributed to such effects should have been “undetermined” as opposed to zero (as Tervita contended).

The Tribunal had held that even where the anticompetitive effects were not (or could not be) quantified, it could give qualitative weight to such effects.  Further the Tribunal held that section 96 required “subjective judgment to determine whether the efficiencies compensate for the likely [anticompetitive] effects referred to in section 96.”  Rejecting an approach based on subjective judgment, the Court of Appeal held that the offset analysis must be as “objective as is reasonably possible, and where an objective determination cannot be made, it must be reasonable”.  Further, the Tribunal should not consider a quantitative effect, which the Commissioner has not in fact quantified, as a qualitative effect.

Nevertheless, because the Court of Appeal concluded that the likely efficiency gains established by Tervita were “marginal to the point of being negligible”, it found that they could not have outweighed the anti-competitive effects and dismissed the appeal.

Pre-Merger Notification Filing
Threshold increases to $82 million

Subject to certain exemptions and qualifications, the Act requires that the acquisition of interests in an operating business through the acquisition of assets, shares or interests in a combination or by amalgamation be notified to the Bureau in advance if prescribed “size of parties” (section 109) and “size of transaction” (section 110) thresholds are both exceeded.

The size of transaction test asks if the book value (as determined in accordance with the Notifiable Transactions Regulations) of the target’s assets in Canada or its gross revenues from sales in or from Canada exceed a prescribed amount, which is indexed and reviewed each year.  On January 20, 2014, the Bureau announced that this threshold will increase from $80 million to $82 million.

The size of parties threshold remains at an aggregate $400 million calculated based on assets in Canada or gross revenues from sales in, from or into Canada of the parties and their respective affiliates.

Investment Canada Act

Industry Canada has advised that it is expected that the threshold under the Investment Canada Act (“ICA”) for requiring advance review of most direct foreign acquisitions (involving investors or purchasers from WTO-member states) of control of Canadian businesses to increase from $344 million in 2013 to $354 million for 2014.  Formal announcement has not yet been made in the Canada Gazette (but is expected prior to publication of this chapter).  A much lower threshold of $5 million will continue to apply to direct acquisitions of control of Canadian businesses engaged in cultural activities, or acquisitions in which neither the investor nor the purchaser are from WTO states.

In June 2013, Parliament passed amendments to the ICA primarily directed at review of acquisitions by foreign state-owned enterprises (“SOE”).  This followed on the heels of the revised guidelines for review of SOE acquisitions announced in December 2012.  Under the amendments, SOEs are broadly (and vaguely) defined to include entities that are directly or indirectly controlled or “influenced” by foreign governments or agencies.  Further, in addition to the operation of the rules of control established in the ICA, the Minister has the ability to trigger reviews by determining that an entity is controlled in fact by an SOE or that an SOE has acquired control of a Canadian business.  Within four years from the time the amendments are in force, the net benefit review thresholds for private sector investments will rise to $1 billion.  However, the corresponding threshold for SOE investments will remain at $344 million.  The amendments also address use of “enterprise value” instead of book value when applying review thresholds and extensions of the deadlines for national security reviews.

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