In recent years we have observed that merger
reviews under the Competition Act are becoming more
complex and that regulatory intervention under the Investment
Canada Act is increasing, particularly in connection with
small, non-reportable transactions. A consequence of this trend is
that some parties are opting to litigate, and we expect this to
continue in 2016.
Recent Regulatory Disputes in Canada
In 2015, its ruling in the Tervita case marked The Supreme Court
of Canada's first merger decision under the Competition
Act since 1997. The transaction involved the acquisition of a
waste landfill site with a value of only C$6 million, falling well
below the notification threshold for mandatory merger review under
the Competition Act. In allowing the merger, the Court
resolved a matter that had begun in 2010, when the deal was
originally challenged by the Competition Bureau. The case involved
complex litigation proceedings before the Competition Tribunal and
Federal Court of Appeal.
Last year, the Competition Bureau also challenged the
acquisition by Parkland Industries of 17 Pioneer gas stations or
supply contracts to non-corporate stations. The Commissioner of
Competition alleged that the transaction would result in a
substantial lessening of competition in 14 communities in Ontario
and Manitoba. Following an application by the Commissioner, the
Competition Tribunal granted an interim injunction requiring
Parkland Industries to preserve and "hold separate" six
gas stations and eight supply agreements that it acquired from
Pioneer pending the outcome of the contested proceedings. The
litigation is ongoing.
Similarly, Industry Canada reviews of foreign investments under
the "net benefit" and "national security"
provisions of the Investment Canada Act (ICA) have been on
the rise, with numerous transactions being blocked or restructured.
Last spring, the government used the national security provisions
of the ICA to block a Chinese state-owned enterprise from
establishing a new business in Canada. The Chinese investor, Beida
Jade Bird, planned to build a C$30-million fire alarm manufacturing
facility in Saint-Bruno de Montarville, Québec. The
investment was reportedly prohibited because the site was located
close to facilities operated by the Canadian Space Agency.
In August 2015, O-Net Communications, a Hong Kong-based
investor, sought judicial review of a Privy Council national
security order requiring O-Net to divest itself of a
Québec-based company called ITF Technologies, which it
acquired in 2014. The case is notable because it involves a
post-closing "national security" review and
divestiture order. As in the Beida Jade Bird matter, the investment
was not initially subject to the normal-course "net
benefit" review, in this case because of its small size. The
litigation is ongoing.
M&A and Regulatory Scrutiny
At a minimum, these cases illustrate an interventionist
government and parties willing, at least in some circumstances, to
litigate transactions important to them rather than settle
regulatory proceedings. The prospect of litigation has and will
continue to impact M&A transactions in a number of important
Regulatory risk assessments should be part of any transaction,
regardless of size. Enforcement actions have been taken in numerous
small, non-reportable mergers in recent years.
Parties should consider structuring transactions to minimize
the likelihood of lengthy or complex regulatory reviews that could
lead to litigation. This could include offering upfront
"hold-separate" commitments or, in the case of foreign
investment reviews, carving out sensitive assets or business lines,
or avoiding establishing businesses in the proximity of sensitive
Also in the case of foreign investment reviews, parties should
consider early, confidential pre-consultations with relevant
government agencies. Investors will not get informal
"green-lights," but might be given advance warning of
potential problems. Vendors and targets should consider similar
Parties should ensure their M&A agreements reflect due
consideration of risks and potential outcomes pre-and post-closing.
This could include requirements to seek early "national
security" clearance, indemnification provisions for vendors in
case they get swept into a post-closing review or even litigation,
long outside dates to permit time for extended reviews, or reverse
break fees to compensate for uncompleted deals.
Aside from taking these steps, as regulatory intervention in
M&A increases, M&A players should recognize litigation as
an option if regulatory outcomes are not commercially satisfactory,
and strategize accordingly with "eyes wide open."
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.
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