© 2007, Blake, Cassels & Graydon LLP
Originally published in April 2007
Timing and certainty of closing are critically important in transactions involving public companies, in deals involving foreign jurisdictions where only part of the deal involves Canada, and in corporate auctions, where vendors seek an expeditious closing and potential purchasers want to make bids with as few conditions as possible. The Labatt Decision made last week has ushered in a new timing paradigm for merger review in Canada that reflects these market realities. Blakes represented Labatt Brewing Company Limited in the case.
In Labatt, the Competition Tribunal (the equivalent of a competition court) rejected an application by the Commissioner of Competition (head of the Competition Bureau) for more time to review Labatt’s take-over bid for rival Lakeport on Wednesday, March 28, 2007. The transaction was subject to review by the Competition Bureau, and in light of last week’s decision, the deal successfully closed on March 29, 2007. The Tribunal’s decision allowed Labatt to close after the expiry of the statutory waiting period (42 days) under the Competition Act. Reasons for the decision were released on Friday, March 30, 2007.
Key Implications of The Decision
The main implications for businesses and law firms counselling merging parties regarding Canada are:
- The "Labatt Approach" is available where a client is willing to devote the legal and management resources to make use of this strategy. Labatt’s management and legal department were willing to do so and the effective use and commitment of its internal expertise and resources throughout the review process were critical to its success in closing.
- The Bureau’s current complexity classification and timing policy (which is based only on the Bureau’s own guidelines, as opposed to law), in which it routinely requires five months to review what it considers to be very complex cases, has no legal force or effect. We believe the policy will be significantly amended, if it survives at all.
- As the Tribunal indicated, there is now a "heightened expectation" that the Bureau will complete its review of mergers within the maximum 42-day waiting period provided for under the Competition Act.
- If the Bureau requires additional time, the Commissioner must apply to the Tribunal to obtain an order to delay closing beyond the 42-day time period. In order to obtain such an order, the Commissioner must establish that closing the deal would substantially impair the Tribunal’s ability to remedy the effect of the merger on competition.
- The longest that closing can be delayed (assuming the Bureau is successful in obtaining an order to delay closing beyond 42 days) is a maximum of 102 days from the filing of pre-merger notification forms, and likely much shorter. After this maximum time period, the Tribunal has historically allowed closing into a hold-separate arrangement should further legal proceedings be required.
- If the parties offer up a hold-separate undertaking, this is a factor that the Tribunal will consider in deciding whether to allow the merger to close. This contrasts with the Bureau’s articulated position in its Merger Remedies Bulletin, that it will not normally agree to a hold-separate arrangement, notwithstanding the Tribunal’s recognition and use of them in contested cases in the past.
In the short term, we expect some purchasers may still wish to obtain comfort from the Bureau before closing, (in the form of what is known as a "no-action" letter) that a deal will not be challenged after closing (the Commissioner can challenge a merger for three years after its completion). In the medium to longer term, however, we expect most companies will seek to obtain such comfort from experienced competition law counsel in advance of entering a transaction. Companies that prefer to close quickly now have a more viable strategic option to do so, based on the principles established by the Tribunal in Labatt.
The Case in Context
Unlike the laws of the United States, where a second request can bar closing for months, and the European Commission, where Commission approval is required before a transaction can proceed, in Canada, the legal regime in the Competition Actprovides for a maximum initial review period by the Bureau of 42 days, which can only be extended by an order of the Tribunal, and even then such extension is for a maximum of 60 days, and likely would be much less in practice.
Notwithstanding the provisions of the Competition Act, the Bureau had issued two sets of guidelines, in recent years, which altered the statutory landscape. First, in March 2003 it developed its Fee and Service Standards Policy. This policy created administrative time periods for the review of transactions depending on their complexity. For example, if the Bureau viewed a transaction as "very complex," it would advise the parties that it required five months to review the transaction.
The second guideline is the Merger Remedies Bulletin, released in September 2006, in which the Bureau indicates that it "will not normally agree to hold-separate arrangements prior to the merger closing" nor "pending completion of a merger investigation."
Thus, the Bureau’s two guidelines set up the situation where very complex transactions could not close for up to five months, in the Bureau’s view. As Labatt’s bid for Lakeport was a CAD 200-million public take over bid, Labatt sought to rely on its statutory rights to close as soon as possible, notifying the Bureau that it intended to close after the expiry of the 42-day waiting period and offering to close into a hold-separate arrangement should additional time be required.
The Bureau had not completed its review by the end of the waiting period and rejected Labatt’s offer of a hold-separate closing, citing its two guidelines. The Commissioner then brought this application to the Tribunal for an order to prevent Labatt from closing the transaction. The Tribunal dismissed the Commissioner’s application.
The last time the Commissioner sought to delay closing in this fashion was in the Superior Propane merger efficiency case in 1998. Blakes also represented Superior Propane. The Tribunal rejected the Commissioner’s case at that time as well. Following Superior Propane, the Commissioner initiated a change in the law to make it easier to obtain orders delaying closing. Those changes, however, also extended the initial review period from 21 to 42 days. In Labatt, the Tribunal noted that there is a "heightened expectation that 42 days should be sufficient to complete a merger review." Moreover, extensions of time to the 42-day review period are not to be granted lightly: only where the Commissioner can show that closing will substantially impair the Tribunal’s ability to remedy a merger.
As a result of the Tribunal's decision, it is more likely that parties to a merger that raises competition issues may be able to close on the basis of a negotiated hold-separate arrangement some time shortly after the initial 42-day waiting period. A negotiated hold-separate arrangement has two benefits: (1) no disruption to capital markets, allowing greater certainty of closing (on a hold-separate basis); and (2) separate functioning of the target so that the Tribunal can preserve and, if necessary, order an effective remedy should one ultimately be required by the Tribunal.