Canada: Canada’s Competition And Foreign Investment Rules Under Review

Last Updated: September 5 2007
Article by Mark C. Katz, Anita Banicevic and John Bodrug

On July 12, 2007, the Canadian government announced the creation of a Competition Policy Review Panel tasked with reviewing key elements of Canada’s competition and investment policies. The panel’s "core mandate" is to review the Competition Act and Investment Canada Act ("ICA"). The panel will also examine the foreign ownership restrictions affecting specific sectors (such as telecom, financial services, broadcasting and airlines) and consider the competition and investment regimes of other jurisdictions to assess reciprocity between their rules and those of Canada. Finally, the panel will consider how to encourage Canadian outbound investment.

The five-person panel (consisting of a mix of Canadian legal and business representatives) will consult with executives, academics, business and international organizations, as well as individual Canadians across the country before making its recommendations. The panel is to report back to the Minister of Industry by June 30, 2008.

Competition Review

Unlike previous competition law reform efforts, which have been largely initiated or encouraged by the Competition Bureau to strengthen enforcement of the Competition Act, this latest review has a different purpose and much wider scope, namely, to assess and address the impact of competition regulation on Canada’s economic performance and international competitiveness. As such, rather than proposing legislative tweaks to the Competition Act, as has been the case in the past, it appears that the panel’s focus will likely be on more fundamental issues of how Canada’s competition legislation should be structured to promote efficient markets while protecting Canadian consumers from unfair practices within an increasingly global economy.

While much of the recent political attention in the Canadian competition policy area has been focussed on mergers and acquisitions, the panel’s mandate extends to all aspects of competition policy. For example, the government’s "backgrounder" on the panel suggested that the panel may also wish to examine the meaning of market dominance in global markets and how markets can work efficiently but still protect consumers. (Companies who "dominate" markets in Canada may be subject to greater restrictions under the Competition Act than other companies with respect to marketing practices that may be viewed as excluding competitors. Overly aggressive enforcement of competition laws against a major Canadian company could carry the risk of hampering the company’s competitiveness either domestically or in international markets.)

In any event, it is possible that the panel could review the Competition Act’s restrictions on pricing, distribution and marketing practices, particularly where they are more onerous than Canada’s major trading partners, to assess their effect on the competitiveness of Canadian businesses. Conversely, the panel is likely to hear some representations that Canadian competition policy should recognize that, because Canada is a relatively small economy, it ought to permit greater degrees of domestic concentration or collaboration than its larger trading partners, in some contexts.

Foreign Investment in Canada

The review panel will also be called upon to consider the impact on Canada’s economic performance of the ICA and sectoral restrictions on foreign investment. According to a recently published report from the OECD, there are more restrictions on foreign investment in Canada than in most OECD countries, which the OECD says hampers productivity and slows the diffusion of new technology and management practices to Canadian businesses.

The review panel’s appointment comes at a time of growing controversy over foreign investment in Canada. The recent spate of foreign takeovers of Canadian business "icons" (such as Hudson’s Bay, Inco and Alcan) has reinvigorated the always latent concern about a "hollowing out" of corporate Canada. Specific concerns have been raised that the ICA review process does not adequately protect Canadian interests, notwithstanding that foreign acquirors are required to demonstrate that their transactions are of "net benefit" to Canada. The review panel will examine the efficacy of the "net benefit" test as well as another favourite target of foreign investment critics - acquisitions by large foreign stateowned enterprises with non-commercial objectives. In addition, the panel will consider whether the ICA needs to be amended to address national security concerns.

The growing complaints about foreign investment in Canada do not always seem to be supported by empirical evidence. For example, various Statistics Canada reports issued recently demonstrate that: (i) the share of foreign control of the Canadian economy has remained stable over time, at approximately 21% of corporate assets and 30% of corporate operating revenues and operating profits; (ii) more head offices have in fact been created than were closed as a result of foreign takeovers, leading to a net increase in head office employment; and (iii) Canadian direct investment abroad actually exceeds foreign direct investment in Canada. There are also many persons - including Canada’s Commissioner of Competition, Sheridan Scott - who believe that foreign ownership rules ought to be liberalized in order to promote greater domestic competition.

Although the government press release announcing the review panel’s appointment strikes an overall positive tone about the benefits of foreign investment, there is no telling what direction the review will take once it gets underway. What does seem certain, however, is that the panel’s deliberations concerning foreign investment will take place in an especially contentious and politically charged environment.

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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Mark C. Katz
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