The re-election of a Conservative minority government on October 14, 2008 (now with 143 seats in the House of Commons, up from 124 in the 2006 election), keeps alive the Harper Government's pre-election plans to change Canadian competition and foreign investment laws.
In a September 12, 2008 speech, the Prime Minister announced that, if re-elected, a Conservative Government would implement a number of recommendations made in the June 2008 Report of the Competition Policy Review Panel ("Wilson Report") 1.
Investment Canada Act
Many of the proposed changes pertain to existing restrictions on foreign investment under the Investment Canada Act and other legislation. More specifically, proposed amendments include:
- over a four year period, raising the monetary threshold for review of foreign investments from C$295 million2 to C$1 billion;3
- increasing the limit for foreign investments in Canadian airlines to 49% from 25% through bilateral negotiations with Canada's trading partners, and changing current foreign ownership rules for the Canadian uranium industry so as to raise the current minimum level (with minor exceptions) of 51% Canadian ownership to a higher not yet announced level of foreign ownership, provided that such ownership meets a proposed new national security test and that the investor's home country provides reciprocal benefits to Canada;
- with the aim of improving transparency, requiring the responsible Minister under the Investment Canada Act to provide explanations when an investment is rejected following its review; and
- establishing a mechanism that would allow the responsible Minister to block investments on the grounds of national security.4
While it remains to be seen whether the creation of a national security review mechanism for foreign investments will have a chilling effect on the flow of foreign investment into Canada, hopefully any such mechanism will stipulate criteria that are sufficiently clear so as to permit potential investors to appropriately assess whether a proposed investment will be subject to a national security review and, if so, the likely outcome of such review. That said, certainly in the initial period, some uncertainly is to be expected.
It should be emphasized that the Conservative Government does not possess a voting majority in the House of Commons and therefore any Bill introduced by the Government containing proposed amendments to foreign investment laws will require the support of at least one other party before passing. The election platforms of the Liberal Party and Bloc Quebecois were silent on the issue of foreign direct investing. Meanwhile, the New Democratic Party's election platform advocated for more restrictive foreign investment laws. Thus, it is not at all certain that the Conservative Government's proposals will become law. There is, however, broad support among the parties for the introduction of a national security review mechanism.
It is also noteworthy that the Prime Minister did not commit to implement many of the other recommendations in the Wilson Report pertaining to the Investment Canada Act. These are discussed in our recent bulletin "Competition Policy Review Panel Proposes National Competitiveness Agenda": http://www.fasken.com/competition_policy_review/.
In his speech, the Prime Minister also hinted at a proposal to amend Canada's cartel laws as recommended in the Wilson Report. This proposal, along with other proposals intended "to protect Canadians from anti-competitive practices and other abuses" was elaborated upon in a Government Backgrounder to a campaign announcement by the Prime Minister on September 25, 2008.5
Among the proposed amendments to the Competition Act are the following:
- creation of a non-criminal track, with evidentiary thresholds that are lower than those for criminal offences,6 for anti-competitive agreements that do not rise to the level of hardcore cartels and other serious cases of collusion;7
- increased penalties for bid-rigging and cartels from the current maximums of a C$10 million fine and 5 years imprisonment to a C$25 million fine and 14 years imprisonment;
- increases in civil and criminal penalties for deceptive marketing;8
- increased penalties for obstructing Competition Bureau investigations;9
- introduction of provisions that will empower the Competition Tribunal to order companies to pay restitution to victims of deceptive marketing practices, including the ability to freeze assets and prevent the disposal of property to ensure money remains available for restitution; and
- introduction of administrative monetary penalties ("AMPs") for abuse of dominance; namely, AMPs of up to C$10 million for a first infraction and up to C$15 million for repeat offenders.10
Interestingly, the Prime Minister did not commit to establish a per se offence for hardcore cartels, which has usually been advanced as a concomitant of liberalizing the treatment of anti-competitive agreements that do not rise to the level of hardcore cartels. This may reflect the difficulty in establishing an appropriate per se test.
With respect to the proposed amendments to the Competition Act, the two most striking proposals are the non-criminal track for practices or agreements that do not constitute hardcore cartels or bid-rigging and AMPs for abuse of dominance. In fact, both of these proposals (and others announced by the Conservative Government, such as increased fines for cartels and restitution for deceptive marketing) were tabled in 2004 (in Bill C-19) before the House of Commons by the then Liberal Government, but did not become law due to the 2006 election.11
The decriminalization and shifting to a non-criminal track of vertical price maintenance, price discrimination and predatory pricing, has been called for previously in Canada.12 While the Government Backgrounder does not specify how the non-criminal track would operate, one possibility is that it would fit within the current abuse of dominance regime under the Competition Act. Ultimately, decriminalization of practices that are not anticompetitive in and of themselves may encourage firms without significant market power to engage in such practices, allowing them to compete more effectively with firms having a stronger position in a relevant market.
The introduction of AMPs for abuse of dominance may be considered as an attempt to fill a perceived gap under current laws; namely, that there is not a sufficient deterrent in the remedies currently available for abuse of dominance. Another view is that AMPs are an easier remedy to apply than, for example, a divesture of assets or an order requiring certain actions that may necessitate monitoring subsequent to the issuance of the order. The AMPs proposal, however, may impose new costs on businesses with a significant share in a particular market; if the AMP amendments become law, such businesses will have to conduct thorough reviews of proposed plans or agreements that are potentially predatory, exclusionary or disciplinary vis-ŕ-vis competitors and could result in a substantial prevention or lessening of competition in one or more markets.
As mentioned above, most of the Conservative Government's proposed changes to the Competition Act, including the more contentious ones, were previously before the House of Commons in 2004 in Bill C-19. More recently, in the last session of Parliament before the election, Bill C-454 (a private member's bill introduced by a Bloc Quebecois MP) passed second reading and was at the Parliamentary Committee stage of review.13 Bill C-454 was similar to the prior Liberal Government's Bill C-19 and, as such, also contained most of the current proposed changes to the Competition Act of the Conservative Government. During the debates for Bill C-454, there was general support for the Bill by all parties in the House of Commons.14 Thus, the prospect of a Bill containing the Conservative Government's proposed changes being passed into law are reasonably good. Of course, it is difficult to predict whether any such Bill will contain proposed amendments that were not in Bill C-19 or Bill C-454 that would result in the other parties refusing to support it. It is also possible that some of the Conservative Government's proposed changes would be rejected or substantially altered by a Parliamentary or Senate committee, which can be expected to thoroughly review any Bill with such proposed changes.
1. See our July 2008 bulletin for a discussion of the Wilson Report: http://www.fasken.com/competition_policy_review/.
2. Such monetary thresholds apply to World Trade Organization ("WTO") investors. The determination of whether an investor is a WTO investor is complex; however, very generally, a WTO investor is an individual that is a permanent resident or has a right of permanent residence in a WTO-member country or an entity that is WTO investor-controlled. Currently, thresholds under the Investment Canada Act are adjusted annually based on a formula that takes into account Canada's National Gross Domestic Product. The threshold for 2008 is C$295 million.
3. The Prime Minister's announcement regarding the threshold increase did not specify whether the new threshold would be based on book value of assets (as it currently is) or enterprise value (as the Wilson Report recommends). The concept of "enterprise value" is similar to fair market value and is described in the Wilson Report as follows:
Enterprise value is a measure used to evaluate the potential acquisition value of a business. It is equal to the sum of the 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.
The Wilson Report's rationale for its proposed switch from a "gross assets" standard to an "enterprise value" standard is that the latter "better reflects the increasing importance to our modern economy of service and knowledge-based industries in which much of the value of an enterprise is not recorded on its balance sheet because it resides in people, know-how, intellectual property and other intangible assets not recognized in a balance sheet by current accounting methods."
4. The Prime Minister's announcement regarding the introduction of a national security review mechanism is effectively a reaffirmation of a promise made by the Minister of Industry prior to the release of the Wilson Report.
5. See the Conservative Party website: http://www.conservative.ca/EN/1004/106618.
6. Convictions under criminal offences require proof of economic harm "beyond a reasonable doubt".
7. Cartels and other collusive activities include agreements to fix prices, allocate markets or restrict output. Other activities that are currently criminal offences under the Competition Act, but will likely be placed on the non-criminal track, if adopted, are price discrimination, discriminatory promotional allowances and predatory pricing; the anticompetitive nature of such practices typically depends on the surrounding circumstances in which such practices are engaged. Such practices are not unambiguously harmful and may be efficiency-enhancing in some circumstances. While the Government Backgrounder does not specifically identify vertical price maintenance as one of the practices to be decriminalized and shifted to the non-criminal track, the Government may consider including it as is not unambiguously harmful and may be pro-competitive in some instances.
8. The maximum civil penalties for deceptive marketing would be raised from C$50,000 to $750,000 for a first offence and to C$1 million for repeat offences. Maximum terms of imprisonment for criminal deceptive marketing would increase from 5 years to 14 years.
9. The maximum fine for obstruction would be raised from C$5,000 to C$100,000 on summary conviction and the maximum term of imprisonment would be increased from 2 years to 10 years for an indictable offence.
10. Currently, with the exception of the power to impose an AMP against an entity that operates a "domestic service" (i.e. air service) as defined in s. 55(1) of the Canada Transportation Act, the Competition Tribunal's remedial power in respect of a finding of an abuse of dominance is limited to prohibition orders and orders requiring actions (e.g. the divesture of assets or shares) to restore competition in a relevant market.
11. See Bill C-19, tabled November 2, 2004, available online: http://www2.parl.gc.ca/HousePublications/Publication.aspx?Docid=2333899&file=4. The Bill died on the order table after the call of the 2006 election.
12. See ibid and A. VanDuzer and G. Paquet, Anticompetitive Pricing and the Competition Act Theory, Law and Practice, October 22, 1999, online: http://strategis.ic.gc.ca/SSI/ct/vdreport.pdf, which is a report that was commissioned by the Competition Bureau in 1999 in the context of Bill C-235 (later Bill C-201). Bill C-235 was a private member's bill proposing to amend the Competition Act with the objective of improving the treatment of pricing activities that can be anticompetitive. The Bill died on the order table when the 2000 election was called.
13. See Bill C-454, available online: http://www.parl.gc.ca/LEGISINFO/index.asp?Language=E&Chamber=N&StartList=A&EndList=Z&Session=15&Type=0&Scope=I&query=5250&List=toc-1.
14. Although, the Conservative Government did express concern about Bill C-454's proposed amendment to lower the standard by which competition would have to be harmed for there to be an offence under the criminal conspiracy provisions of the Competition Act and the Bill's proposed amendment to lower the monetary thresholds that must be exceeded for a proposed transaction to be notified to the Commissioner for her review.
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