Canada: Termination Of Franchise Agreements Required In Minority Interest Acquisition

On November 1, 2013, the Competition Bureau (the Bureau) announced a Consent Agreement with La Coop fédérée (LCF) and Groupe BMR (BMR) in relation to LCF's acquisition of a minority interest in BMR. A position statement was released on November 13, 2013, outlining the Bureau's analysis of the proposed merger.

Under the terms of the Consent Agreement, LCF and BMR are required to (i) terminate franchise agreements with certain retail store franchisees in four Quebec regions; and (ii) continue to supply these franchisees on competitive terms until a new franchisor is found or until December 31, 2014. In essence, the Consent Agreement will require the affected franchisees to find new competitor banners under which to carry on their retail businesses in these regions or to otherwise carry on business independently of LCF and BMR.

Notwithstanding that the transaction involved the acquisition of a minority interest, the transaction was reviewed by the Bureau as a "merger" within the meaning of section 91 of the Competition Act(the Act). As noted in the Bureau's Merger Enforcement Guidelines(the MEGs), section 91 of the Act defines a "merger" broadly to include any acquisition or establishment of control over or a significant interest in the business of a competitor, supplier, customer or other person. The MEGs define a "significant interest" as "the ability to materially influence the economic behaviour of the target business, including but not limited to decisions relating to pricing, purchasing, distribution, marketing, investment, financing and the licensing of intellectual property rights".

LCF and BMR are both engaged in the wholesale supply of hardware, renovation, agricultural machinery and gardening products to retailer networks that are mostly comprised of franchised stores. As part of its assessment of the transaction, the Bureau examined the extent to which the parties' franchisees are independent from their respective networks and considered a number of factors, including:

  • purchasing requirements;
  • retail pricing practices;
  • obligations related to flyers and marketing practices; and
  • the parties' integration plans post-transaction.

The Bureau concluded that both LCF and BMR were in a position to materially influence the economic behaviour of their franchisees and, moreover, that LCF, post-acquisition, would have the ability to materially influence the economic behavior of both LCF and BMR franchisees.

The Bureau identified the geographic scope of the market as local, and found that the relevant geographic market in rural areas generally did not extend beyond a 30km radius from a retail store. In such local markets, the Bureau found that sufficient competition from established players such as Rona, Home Hardware, Ace and Canac would remain post-transaction and that barriers to entry or expansion into new lines of products were relatively low for existing retailers. However, the Bureau identified four Quebec regions where the Bureau found LCF and BMR to be each other's closest competitors, and that little or no remaining competition and high barriers of entry would exist in those areas post-transaction.

The Bureau ultimately found that the proposed transaction would likely result in a substantial lessening or prevention of competition in the retail sale of hardware products and building materials in Saint-Pampile, Saint-Cyprien, Lac Megantic and Montmagny, Quebec.

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