On June 26, the Competition Policy Review Panel released its recommendations to reduce restrictions on foreign investment, align the Canadian antitrust regime with that of the United States and increase the competitiveness of Canadian business. Although the overall objectives of the report are commendable, some of the specific recommendations for legislative changes are of questionable merit and unlikely to be implemented over the short term.
The government-commissioned panel focused on two key Canadian statutes – the Competition Act and the Investment Canada Act – and also examined sectoral restrictions on direct foreign investment and recommended other policy initiatives to encourage investment and competitiveness.
Foreign Investment Review
The Investment Canada Act establishes a regulatory framework for the review of foreign investments in Canadian businesses. Currently, transactions are approved if the government is satisfied that the investment is likely to be of "net benefit to Canada."
- The panel recommended that the review
threshold for all investments (except those in the
cultural sector) be increased to $1 billion and be based
on the enterprise value of the target rather than its gross
assets. We welcome this proposal because the current
thresholds are complex and too low: they vary from $5million
to $295million depending upon the investor's country
of origin, the structure of the transaction and the
activities of the Canadian business. The move to an
enterprise-value threshold may, as the panel suggests, better
reflect the value of a Canadian business than the current
asset-value test, but there is also benefit to retaining the
clear, bright-line threshold. Nor would the change eliminate
a problem with the current threshold – that is, a
Canadian business can have a high asset or enterprise value
based on global operations but very little activity in
Canada.
- The onus of the review test ought to be
reversed, says the panel, to require the government to be
satisfied that the transaction would be "contrary to
Canada's national interest," instead of
requiring investors to prove that an investment is of net
benefit to Canada. Although such a change would be positive
in that it would reduce the burden on foreign investors, it
remains to be seen whether this change would make any
practical difference. Both tests are highly subjective and
investors will likely still feel a positive obligation to
satisfy the government that an investment ought to be
approved.
- Enforcement officials are also encouraged to increase
transparency and predictability through
guidelines and other advisory materials, and by publicly
announcing reasons for disallowing any particular
transaction. Increased transparency is highly desirable, and
several of these suggestions could (and should) be
implemented quickly without legislative change.
- The panel recommended further study of investments in the
cultural sector as well as the creation of a
de mimimis exemption. The recommendation for more
study is somewhat disappointing, given that the panel
considered the issue for a year. Change is urgently needed
because the current rules result in the "cultural
business" designation being applied to a wide range of
businesses not commonly considered "cultural"
(e.g., supermarkets that sell magazines).
Competition/Antitrust
The Competition Act establishes the legal and institutional framework for competition law in Canada. Under the Act, the Commissioner of Competition is responsible for investigating alleged anticompetitive conduct, including criminal matters such as price fixing and resale price maintenance, and civil matters such as mergers and abuse of dominance.
- With respect to mergers, the panel
recommended aligning the notification and review process with
that of the United States by establishing an initial review
period of 30 days and empowering the Commissioner to
initiate a second-stage review that would extend the review
period until 30 days following full compliance with a
second request for information. These changes are neither
necessary nor desirable. In practice, the Bureau completes
its review of the vast majority of non-complex mergers within
two weeks, so this proposal could result in lengthier reviews
for many straightforward transactions. In complex
cross-border mergers, the current Canadian system is
sufficiently flexible to align review timelines across
multiple jurisdictions, including the United States, and so
divergent review timelines are rarely a problem. It is also
surprising that the panel recommended the adoption of the
burdensome, costly and much-criticized second-request
document production process, which, if implemented, would
dramatically increase the cost of complex merger review in
Canada.
- The panel recommended replacing the existing
conspiracy provisions with a per se offence
for hard core cartel conduct and a civil provision to deal
with other types of agreements between competitors that have
anticompetitive effects. Under the new criminal provision, it
would be unnecessary to prove that the conduct had an adverse
effect on competition (as is currently the case). Similar
proposals have been debated for years within the competition
community and are highly controversial. The main difficulty
has been developing legislation that does not criminalize
legitimate business conduct; but the panel report does not
offer a solution to that problem.
- Major changes were also advocated with respect to the
criminal pricing provisions in the Act. The
panel recommended repealing the price discrimination,
promotional allowances and predatory pricing offences and
replacing the current price maintenance offence with a new
civil provision. The current offences, some of which were
enacted in the 1930s, are out of step with modern economic
thinking and U.S. law. Quickly enacting these changes would
receive widespread support from the business community.
- In the area of unilateral conduct, the panel recommended
that the Competition Tribunal be authorized to order
administrative monetary penalties of up to $5million for
conduct found to constitute an abuse of dominant
position. Monetary penalties for abuse of dominance
have also been long and widely debated in Canada, with no
consensus on their desirability. The concern is that it is
often difficult to distinguish between vigorous competition
(which may harm inefficient competitors) and abuse of
dominance. In this highly controversial area of competition
law, rules that permit heavy fines may chill legitimate but
aggressive competitive behaviour to the detriment of Canadian
consumers.
Foreign Ownership Restrictions
The panel recommended liberalizing foreign ownership restrictions in uranium mining, air transportation (on a reciprocal basis) and telecoms, and removing the de facto prohibition on mergers of large financial institutions, subject to regulatory safeguards. The government has already announced that it has no intention of adopting some of these suggestions.
The panel also considered a number of broad public policy priority areas bearing on Canada's competitiveness, ranging from taxation to the role of directors in mergers and acquisitions. Its recommendations for action in these areas aim to make "Canada a location of choice for global talent, capital and innovation."
Next Steps
A task force has been established within the Industry Department to review the panel report and consider legislative amendments. Observers expect the government to announce an economic agenda in the autumn that will reflect at least some of the panel's recommendations. However, with the combination of a minority government, a possible general election before the end of the year and several controversial policy recommendations, it is not at all certain that the panel's report will or should lead to the overhaul of Canada's key economic legislation in the near future.
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