In Lang Michener's Mergers & Acquisitions Brief, we discussed the Competition Bureau's (the "Bureau") draft Information Bulletin on Merger Remedies in Canada (the "Bulletin"). The Bureau recently finalized and expanded its Bulletin, which now sets out the Bureau's current policy on the formulation of merger remedies in Canada under the Competition Act (Canada) (the "Act").
The Bulletin provides guidance on the general principles applied by the Bureau when it seeks, designs and implements remedies, and sets out the "essential elements" it will consider in cases requiring remedial action. An outline consent agreement is to be issued as an appendix to the Bulletin to "facilitate negotiated settlements" between merging parties and the Bureau.
In this article, we discuss the key aspects of the final Bulletin and its potential impact on domestic and cross-border Canadian transactions.
The final Bulletin confirms the Bureau's continuing preference for "structural" rather than "behavioural" remedies, which involve the disposition of assets or similar changes to the marketplace. As a result of this focus, much of the final Bulletin focuses on the design and implementation of divestitures. In this regard, the Bureau has stated that, for a divestiture to provide effective relief, the divested assets must be viable and sufficient to eliminate the prevention or lessening of competition, the divestiture must occur in a timely manner, and the buyer must be independent and have the ability and intention to be an effective competitor.
The Bulletin provides that a divestiture may be full or partial (e.g. the sale of a stand-alone business or components of a business). However, it must include all the assets necessary for the buyer to be an effective long-term competitor who will restore or preserve competition in the relevant market.
The Bureau will require a full divestiture when something less than a stand-alone business cannot be separated or the creation of a viable competitor requires the sale of the entire business unit. Conversely, divestiture of part of a stand-alone business may be acceptable if it eliminates the substantial prevention or lessening of competition and some components required to operate the business are otherwise available.
However, the Bureau states that it will apply "greater scrutiny" to divestitures of less than a stand-alone operating business because there is "limited or no proven track record that the components of the business will be able to operate both effectively and competitively" and that it generally prefers a divestiture of a stand-alone operating business from one merging party to a single buyer (a so called "clean sweep" as opposed to a "mix and match" approach where assets are divested from both merging parties).
In addition, once the Bureau determines that a merger is likely to lessen or prevent competition substantially, it will normally require the merging parties to enter into a "hold-separate" arrangement for divestiture assets until the completion of the divestiture. While the Bureau's general approach to hold-separate provisions is not a departure from past practice, the Bureau takes a very broad approach and will "usually
require that hold-separate provisions apply to asset(s) beyond those that are to be divested."
The final Bulletin also confirms the Bureau's strong preference for a quick disposition of assets. It strongly prefers "fix-it-first" solutions where the divestiture of assets to an approved buyer occurs before closing or simultaneously with the merger. Where an upfront remedy is not available, the Bureau sets out the following criteria for timely post-merger divestiture:
- Short Time Periods. The Bureau will typically agree to allow initial and trustee sale periods to divest assets of three to six months and may grant short extensions in "exceptional circumstances." These sale periods are significantly shorter than in the past, where initial and trustee sale periods ranged between six to 12 months or more. This may be an unrealistically short time frame in some cases to locate a suitable buyer.
- No Minimum Price. The Bureau will not agree to any minimum price at which the trustee may sell the relevant assets during the trustee period. While not a departure from the Bureau's past approach, in a market characterized by relatively few potential purchasers, this could significantly prejudice the selling party and give potential purchasers significantly increased bargaining power.
- Crown Jewels. Finally, the Bureau states that an additional asset package may be required as part of the remedy package to reduce "uncertainty as to whether the remedy will be viable." According to the Bureau, crown jewel provisions are meant to provide an assurance that there will still be a viable remedy in the event the initial divestiture is unsuccessful and will, "as much as possible," relate to the competitive harm.
The final Bulletin also codifies the Bureau's approach to buyer approval, which is central to a divestiture, setting out the following criteria: (i) the divestiture to the proposed buyer must not itself adversely affect competition; (ii) the buyer must be independent from the vendor; (iii) the buyer must have the managerial, operational and financial capability to compete effectively in the relevant market; and (iv) the assets being divested must be used by the buyer to compete in the relevant market(s), post-divestiture.
Quasi-Structural and Behavioural Remedies
Despite a continuing preference for structural remedies, the Bureau states that in "certain circumstances" an effective remedy may require the merging parties to take some action, in addition to, or other than, divestiture that may have "structural implications for the marketplace," such as the licensing of intellectual property or granting non-discriminatory access to networks. However, the Bureau states that it will only accept such "quasi-structural" remedies if they adequately eliminate the substantial lessening or prevention of competition arising from the merger without requiring future intervention or monitoring.
In addition, while the Bureau states that stand-alone behavioural remedies are seldom accepted, they may be implemented when they are sufficient to eliminate the substantial lessening or prevention of competition arising from a merger, there is no appropriate structural remedy, and minimal or no on-going monitoring and enforcement is required. Somewhat in contrast to the Bureau's relatively rigid stance on behavioural remedies articulated in the Bulletin, the Bureau has accepted partial or total behavioural remedies in a number of past cases.
The Bureau's recent formalized approach to merger remedies may have a number of impacts on Canadian and international transactions. These include:
While there may be instances when behavioural remedies will be employed, the Bureau confirms its preference for structural remedies and the quick disposition of assets, with very short divestiture periods and up-front or fix-it-first remedies. Whether these preferences can be met will depend on the circumstances of each case.
The Bureau is developing a standardized approach to merger remedies, including uniform consent agreements, short divestiture periods and standardized buyer approval guidelines. It remains to be seen to what extent merging parties may negotiate consent agreements that deviate from the Bureau's increasingly standardized model.
Finally, despite a recent speech by the Commissioner that indicates that efficiencies will be given a more prominent role in the Bureau's review of proposed mergers, the Bulletin is silent on the role efficiencies will play in the Bureau's evaluation of merger remedies (e.g., whether the Bureau may be less likely to seek a divestiture of assets where a merger may result in productive, dynamic or other forms of efficiencies).
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.