Canada: Proposed Amendment To Competition Act Broadens "Affiliate" Definition

Last Updated: December 19 2014
Article by Mark Opashinov and William Wu, Student-at-Law

On December 9, 2014, the federal Minister of Industry introduced Bill C-49, the Price Transparency Act. Media attention has focused to date on Bill C-49's stated objective of addressing the cross-border price gap between identical or similar products in Canada and the United States (please see McMillan's bulletin). But, Bill C-49 also proposes to expand the scope of what comprise "affiliates" under the Competition Act (the "Act"), potentially impacting a wide range of competition law matters, from cartel offences to merger notifications.

The key concept underlying the definition of "affiliate" in the Act is that of "control". At present, this concept applies in a thorough-going way to corporations. A corporation is defined to be an affiliate of the person that controls it through ownership of a majority of its voting securities; corporations under common control are affiliates of one another; and two corporations that are affiliated with the same corporation at the same time are deemed to be affiliated with each other. As a result of accidents of statutory drafting, however, the concept of control does not apply to the same extent to partnerships and sole proprietorships and not at all to trusts. For example, where a partnership owns all of the shares of a corporation, the relationship between the partnership and the corporation does not appear to fall into the current "affiliate" definition, since a partnership is not a person at law. There is no reference at all to trusts in the current "affiliate" definition. As a result, a control relationship between a trust and any other entity does not make them affiliates under the Act. These legislative gaps lead to the anomalous situation of one business structure triggering obligations and attracting potential liability under the Act, while another substantively identical situation does not.

Bill C-49 would address these gaps by two means. First, it would add a new definition for "entity" which, in addition to a corporation, would also include a partnership, sole proprietorship, trust or other unincorporated organization capable of conducting a business. It would make further consequential amendments to many other sections of the Act to incorporate this new "entity" concept. Second, the Bill would also expand the concept of "control" for non-corporate entities to track the Act's current approach to corporations: such non-corporate entities as a partnership or a trust will be controlled by a party if that party "directly or indirectly, whether through one or more subsidiaries or otherwise" is entitled to receive a majority share of profits or assets of the non-corporate entity. As a result, the concept of affiliation will apply to partnerships, sole proprietorships, trusts and other non-corporate entities in more or less the same way it does to corporations.

"Affiliates" are relevant in many contexts within the Act: agreements among affiliates are exempt from the application of the criminal conspiracy offence and its civil analog. Likewise, transactions amongst affiliates are exempt from the Act's notifiable transaction regime and affiliates amongst themselves are exempt from restrictions against price maintenance, exclusive dealing and tied selling. Business groups with non-corporate business vehicles such as partnerships or trusts will benefit from the broadened scope of what comprise "affiliates".

However, in other contexts, the broadened "affiliate" definition will invite more frequent and extensive application of the Act. For example, the mandatory notifiablility of proposed transactions is determined by reference to the assets and revenues of all affiliates. A broadened "affiliate" definition will as a result make more transactions subject to mandatory notification, as the assets and revenues of non-corporate entities will now be included in that analysis. This will be of particular importance to private equity firms and other investors that hold their investment through partnerships.

Bringing a more consistent treatment of corporations and non-corporate business vehicles is generally a welcomed approach. However, this Bill seems to have been hastily drawn. For example, while references to "corporation" are proposed to change to "entity", in the all-important section addressing situations of common control, no similar change is indicated for the word "person" in the same provision. As a result, two "entities" under the common control of a non-person such as a partnership will remain unaffiliated if Bill C-49 becomes law without a correcting amendment. Similarly, the "or otherwise" language in the newly proposed provision dealing with control of non-corporate entities is so broad that it arguably captures situations where control is established through a contractual or beneficiary relationship, rather than relationships premised on ownership. It is doubtful that either of these outcomes were intended by the drafters, given the direction of the Bill in all other respects, and given the Act's well-established goal of drawing a bright, unambiguous line for notification requirements.

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2014

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