Canada: Canada’s Competition Policy Review Panel Recommends Major Changes

Last Updated: July 6 2008
Article by Omar Wakil

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.

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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