Published in The Lawyers Weekly, July 18, 2008
The Competition Policy Review Panel's recent report has commendable objectives, but those hoping for innovative proposals for real reform have been badly let down. The panel wants to reduce restrictions on foreign investment, align the Canadian antitrust regime with the U.S. and make Canadian business more competitive. Unfortunately, the specific recommendations it makes to achieve these objectives are of uneven quality: although some are welcome, many are uninspired and unoriginal; several simply have no merit.
The government-commissioned panel's main task was to assess two key statutes — the Investment Canada Act and the Competition Act.
The Investment Canada Act establishes a regulatory framework for the review of foreign investments in Canadian businesses. There are a number of important issues addressed in the report related to this Act:
- A welcome proposal is the recommendation that the
threshold for the review of most foreign investments in
Canada should be increased to $1 billion. Currently, the
thresholds are complex and too low, and only acquisitions of
very large Canadian businesses should be subject to
government approval. However, the panel also recommended that
the threshold be based on the "enterprise value" of
the target (which is price to be paid for the equity of an
acquired business and the assumption of liabilities on its
balance sheet minus its current cash assets) rather than the
book value of its assets. The move to an enterprise-value
threshold may better reflect the value of a Canadian business
than its asset-value, but the benefit of an asset-value
threshold is that it is usually easy for investors to know
whether they are under or over the threshold.
- 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." In theory, this would be a positive change
since it would reduce the burden on foreign investors. But in
reality, both tests are highly subjective and investors will
likely still feel they should 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 an exemption for
the acquisitions of businesses whose cultural activities are
small relative to the overall size of the business. The
adoption of such a de minimis exemption is long
overdue, but the recommendation for even more study of
cultural sector investments is disappointing, given that the
panel considered the issue for a year. The current regime
results in expensive and time-consuming government reviews of
a wide range of investments in businesses that most Canadians
would probably not consider to be part of the
country's cultural heritage. This needs to
change.
The second statute, the Competition Act, establishes the legal and institutional framework for competition law in Canada. The report addresses the following issues on this Act:
- For mergers, the panel recommended aligning the
notification and review process with the U.S. by establishing
an initial 30 day review period and empowering the
Competition Bureau to initiate a second-stage review to
extend the review period after full compliance with a second
request for information. These changes are neither necessary
nor desirable. In practice, the Bureau completes its review
of most non-complex mergers within two weeks and in
cross-border mergers, the current Canadian system is
sufficiently flexible to align review timelines across
multiple jurisdictions. Surprisingly, the panel also
recommended the burdensome, costly and much-criticized
second-request document production process, which would
dramatically increase the cost of complex merger review in
Canada. This is the only really original proposal in the
Competition Act section of the report, and it is not
a good one.
- The panel recommended replacing the existing conspiracy
provisions with a "per se" offence for hard core
cartel conduct, such as price-fixing arrangements between
competitors, and a civil provision to deal with other types
of agreements between competitors that may have
anticompetitive effects. Under the proposed new criminal
provision, the Crown would not have to prove that the conduct
adversely affected competition. These kinds of proposals are
highly controversial and have already been widely debated.
The main difficulty has been developing a specific proposal
that does not criminalize legitimate business conduct; the
panel report offers no solution to that problem.
- The panel advocated for major changes to the provisions
in the Act that criminalize certain sorts of pricing
arrangements between suppliers and their customers. The panel
would repeal the price discrimination, promotional allowances
and predatory pricing offences and replace 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. Quickly enacting these
changes would receive widespread support from the legal and
business communities.
- For unilateral conduct, the panel recommended that the
Competition Tribunal be authorized to order penalties of up
to $5 million for conduct found to be an abuse of dominance.
Monetary penalties for abuse of dominance have been
controversial, with no consensus on their effectiveness. It
is often difficult to distinguish between vigorous
competition (which may harm inefficient competitors) and
abuse of dominance.
A task force has been established within the Industry Department to review the panel report and consider legislative amendments. However, with 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.