Canada: Merger Review: Issues Facing Domestic And Foreign M&A

The past year saw several important developments in merger review under the Competition Act. Perhaps most notable, however, was the degree of attention paid to the review process under the Investment Canada Act, which reached unprecedented levels in connection with Xstrata plc's unsolicited takeover of Falconbridge Limited, the largest successful all-cash offer in Canadian history.

Competition Act

Merger Reviews

In an effort to promote transparency in its decision-making processes, the Competition Bureau (the "Bureau") released a series of "technical backgrounders" and "information notices" explaining why it decided not to challenge several mergers in 2006 (in some cases, the decision not to challenge was a consequence of the acquiring party agreeing to divestitures or other remedies). In the absence of contested merger applications being decided by the Competition Tribunal (the "Tribunal"), these Bureau documents are an important source of information for merging parties and their counsel on the factors that may be taken into account in assessing their transactions.

What emerges from the various Bureau decisions made public in 2006 is that the Bureau is increasingly willing to accept fairly high post-merger market shares, based on mitigating factors such as the extent of competition remaining in the market, easy entry and the countervailing power of customers. On the other hand, the Bureau will not hesitate to seek remedies in respect of mergers where there are insufficient counterbalancing factors to alleviate its concerns.

In June 2006, for example, the Bureau released a backgrounder explaining its decision not to challenge the acquisition of Maytag Corporation by Whirlpool Corporation. Davies acted for Maytag in this matter. The Bureau's review focussed foremost on washers and, to a lesser extent, on dryers. The Bureau determined that the merged firm would have a market share "in the combined top and front load laundry segment" of more than 35% and "a still higher share" in the "top load washer segment". (The Bureau's Merger Enforcement Guidelines use a 35% market share as a threshold for identifying potential competition concerns.) However, a more detailed consideration of other factors, notably ease of entry, remaining competition and countervailing buyer power, led the Bureau to conclude that the merger would not lessen competition substantially. The Bureau also noted that it was "conscious that there would be some efficiencies".

Similarly, in August 2006, the Bureau issued a backgrounder explaining its decision to not challenge the acquisition by Rona Inc. of 51% of the operating businesses of Materiaux Coupal Inc. The Bureau's analysis focussed primarily on the impact of the merger on the sales of lumber and building materials to home building contractors in various local markets in and around Montréal. The highest local market share was in the Granby area, where the merged entity would have accounted for approximately 50% of total retail sales of lumber and building materials to home building contractors. Notwithstanding these relatively high market shares, the Bureau ultimately concluded that there was not sufficient evidence to oppose the transaction, based on factors such as the extent of remaining competition, conditions of entry and the impact upstream on purchasing from suppliers. The Bureau indicated that it would monitor the effects of the merger for a period of three years to determine if enforcement measures are required.

The same type of analysis is evident in the Bureau's November 2006 technical backgrounder explaining why it did not challenge the amalgamation of Alderwoods Group, Inc. with a wholly-owned subsidiary of Service Corporation International ("SCI"). SCI and Alderwoods were, respectively, the largest and second largest providers of funeral, cemetery and cremation (collectively "deathcare") products and services in North America. The Bureau focussed on three product markets: (i) funeral products and services, (ii) cremation services and (iii) burial services. Geographically, the analysis centered on certain local markets in Ontario and British Columbia. Although market shares in some of these markets were high (e.g., exceeding 60%), the presence of significant legislative and other industry changes was sufficient to alleviate the Bureau's concerns. In particular, new legislation in Ontario to permit on-site funeral homes was expected to substantially change the competitive landscape since neither SCI nor Alderwoods owns cemeteries in Ontario. In British Columbia, SCI's recent loss of its status as preferred provider for the largest memorial society in Canada and the growing success of storefront operations were cited as factors likely to result in sufficient effective competition to the merged entity.

Where necessary, however, the Bureau will require remedies in order not to challenge a proposed merger. For example, in March 2006, PaperlinX Canada Ltd. and the Bureau entered into a consent agreement regarding PaperlinX's acquisition of the assets of the fine paper and distribution division of Cascades Fine Papers Group Inc. The Bureau determined that the transaction would likely prevent or lessen competition substantially in the distribution of fine paper by full-line merchants to commercial printers in regional western Canadian markets. To remedy these concerns, the consent agreement required PaperlinX to divest all of the Cascades assets relating to the fine paper merchant business in Alberta and British Columbia. The Bureau's technical backgrounder identifies several of the factors it took into consideration in requiring a remedy, including potential concerns regarding coordinated effects, an increasing area of interest for the Bureau.

Remedies Bulletin

As is obvious from the foregoing, the Bureau rarely seeks to prohibit merger transactions outright. To the extent that issues are raised, they are usually resolved by means of a negotiated remedies package, which is then set out in a consent agreement filed with the Tribunal (as was the case in the PaperlinX merger). As such, providing an orderly and effective remedies process is an important objective of Canada's merger control system.

To that end, the Bureau released its "Information Bulletin on Merger Remedies in Canada" (the "Bulletin") in September 2006. While the Bureau has previously signalled some of its views on merger remedies through cases and speeches, the Bulletin represents the Bureau's first systematic treatment of merger remedies and is intended to provide greater guidance to merging parties on this important issue.

For the most part, the Bulletin summarizes established Bureau practices and policies. For example, the Bulletin reiterates the Bureau's stated preference for structural remedies over behavioural remedies, i.e., divestiture of assets rather than restrictions governing conduct. The Bureau is of the view that divestitures are a more clear-cut way of dealing with the anti-competitive effects of mergers and also avoid the ongoing monitoring that is sometimes required with behavioural-type remedies.

In other instances, however, the Bulletin signals a hardening of certain Bureau positions, which could pose issues for merging parties down the road. For example, the Bulletin states that the Bureau will only allow the acquiring party an "initial sale" period of three to six months to effect an agreed-upon divestiture after which a trustee appointed by the Bureau will take over the divestiture process. This is a shorter "initial sale" period than has typically been the case in Canada, and is clearly designed to put pressure on the acquiring party to divest quickly. Other measures that the Bureau may insist upon to enforce divestitures include: (i) that the trustee will be authorized to sell at whatever price is necessary to accomplish the divestiture (i.e., "no minimum price"); and (ii) the trustee may be authorized to include additional assets in the divestiture package (so-called "crown jewel" assets) to enhance its saleability. In some cases, the Bureau may even require that divestitures take place before the transaction has closed (i.e., a "fix-it-first" solution).

Efficiencies

In a speech to the Canadian competition bar on September 28, 2006, the Commissioner of Competition (the "Commissioner"), Sheridan Scott, offered three observations on how the Bureau approaches efficiency claims in merger analysis:

  • The Bureau is not now (unlike recent efforts) seeking to amend the provisions of the Competition Act regarding efficiencies, but instead will evaluate efficiencies within the existing statutory framework and case law.
  • The Bureau encourages parties to make "robust and thoughtful" submissions regarding efficiencies and to not be deterred by "an unfounded notion that to do so is somehow an admission of anti-competitive concern".
  • The Bureau will make its own independent assessment of efficiencies and is prepared in "rare" cases to clear mergers on the basis of efficiencies without necessarily subjecting parties to the Tribunal process.

The Commissioner's clarifications are welcome, even if they reflect to some extent the Bureau's already existing practices (e.g., encouraging efficiency submissions). Most importantly, it seems clear that the Commissioner is intent on restoring some much needed perspective in this area, after the Bureau had arguably become overly preoccupied with the efficiencies issue as a result of its loss on these grounds in the Superior Propane case in 2000.

Investment Canada Act

2006 witnessed one of the most extensive reviews undertaken to date under the Investment Canada Act, involving the proposed acquisition by Xstrata plc ("Xstrata") of Falconbridge Limited ("Falconbridge"). Xstrata is a global natural resources group based in Switzerland; Falconbridge was a Canadian-based mining company with worldwide operations in nickel, copper, zinc and aluminium production. Davies acted for Xstrata in this matter.

Apart from the sheer size of the transaction (the largest successful all-cash offer in Canadian history), and that it involved the always sensitive Canadian resource sector, the situation was complicated by the fact that Xstrata's bid for Falconbridge was both unsolicited and competing against an alternative "friendly" offer by Canadian-based Inco Limited ("Inco"). This created an unusual degree of political and public interest in the transaction, given that it pitted a potential foreign takeover against what was touted as a "made in Canada solution".

Because Inco was a Canadian company, its offer for Falconbridge did not have to secure Investment Canada Act approval. However, Inco had become embroiled in a protracted and difficult review process of its own involving competition authorities in the EU and the United States. This led to calls in Canada for a "level regulatory playing field", i.e. that the Minister of Industry should – at the very least – withhold Investment Canada Act approval for Xstrata's bid until Inco received its foreign antitrust approvals, so as not to give Xstrata an "unfair regulatory advantage" over Inco. Indeed, in an unprecedented step, the Standing Committee on Industry, Science and Technology of Canada's House of Commons convened a special meeting at which a unanimous motion to this effect was adopted.

Xstrata ultimately obtained its Investment Canada Act approval in July 2006, following an extension of the initial 45 day review period (and also after Inco had received its EU and US antitrust clearances). According to a press release issued by Xstrata at the time, the undertakings it provided to satisfy the "net benefit" test included the following commitments:

  • establishment of a new stand-alone global nickel business, headquartered in Toronto, Ontario, with the CEO and a majority of senior management consisting of Canadians;
  • establishment of a new technology research and development unit, based in Sudbury, Ontario;
  • establishment of new regional head offices for Xstrata's copper and zinc business units, to be located in Toronto, Ontario, with the COO and a majority of senior officers consisting of Canadians;
  • no layoffs of operating staff for three years at any of Falconbridge's operating facilities in Canada;
  • increased capital, R&D and exploration expenditures in Canada;
  • identification of a potential Canadian candidate for the position of non-executive director of Xstrata; and
  • funding for community and social initiatives in Canada, with a particular focus on supporting aboriginal communities.

Three days after Xstrata received Investment Canada Act approval, Inco announced that it had allowed its bid for Falconbridge to expire. Xstrata subsequently acquired control of Falconbridge in mid-August 2006. Although the Xstrata/Falconbridge acquisition also required competition clearances in Canada, the United States and Europe, it was the Investment Canada Act approval process that proved to be the deal-critical regulatory issue from Xstrata's perspective. This underscores that foreign acquirors of significant Canadian businesses must be mindful of how an Investment Canada Act review may impact deal timing, as well as result in significant commitments to the Canadian government.

Having said that, the Canadian government has since indicated that it may liberalize the Investment Canada Act review process in order to maximize the benefits of foreign investment. In a document released in November 2006, the government stated that it planned to review the Investment Canada Act's restrictions, hinting that intervention may be limited to foreign investments that give rise to national security concerns. As of the time of this writing, however, no further steps have been taken by the government in this regard.

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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