Since 1986, mergers in Canada, large and small alike, have been subject to the civil provisions of the Competition Act (Canada) (the "Act")1 and may be reviewed by the Commissioner of Competition (the "Commissioner") and her staff at the Competition Bureau (the "Bureau"). Since 1987, larger mergers have been subject to the notification procedure2 under the Act. Criticism had been levelled at the Canadian model of merger notification because the Canadian rules have been different from rules of other jurisdictions. Critics have often called for a Canadian process to be more closely aligned to the U.S. process because many larger mergers in Canada are international in scope and often involve a U.S. component.3 It has been said that the convergence in Canada and the U.S. of certain rules would allow for a greater degree of predictability by businesses being required to deal with regulatory processes in Canada and the U.S. Recent developments have brought the Canadian system closer to the U.S. system, for better or for worse.
Parties which propose to enter into merger discussions should be aware at an early stage, and before plans are formulated, as to the impact of new Canadian rules relating to document disclosure under the Act. The statements, analyses, marketing plans and other documentation which are normally designed by corporate officials, outside accountants and investment bankers alike in order to analyze and sell the deal may be those documents which provide a road map to the regulators and which later may have a significant impact in delaying or otherwise materially altering or cratering the deal!
Bill C-104 enacted several changes to the Act, including aligning the period before which a transaction may close more closely to the U.S. process.5 Gone is the 14-day or 42-day waiting period depending on the type of form filed; now, there is a uniform, 30-day waiting period6 which must be observed before a transaction may be closed, as is generally the case in the U.S.
These regulatory changes bring with them a different approach to form filing as well. Gone are the so-called short-form notice and the long-form notice; now, there is one uniform form of notice.7 The new form is substantially the same as the old, short-form notice but with one, extremely important addition. Prior to the enactment of Bill C-10, only the long-form notice required the filing of the types of preparatory studies referred to below; and, to be sure, most notice requirements were accomplished through the filing of the short-form notice. Now, every notice filed under Part IX of the Act will be accompanied by deal documentation, so-called 16(d) documents,8 prepared for the purpose of evaluating or analyzing, and indeed selling, the proposed transaction. As at the date of this writing, the wording providing for 16(d) documents has not yet become law. Again, such Canadian practice will be more aligned to the U.S. practice which, for years, has required the filing of similar documents, referred to as so-called 4(c) documents in the U.S.9
Some Things That you Wish for...
As time passes, businesses will grow accustomed to what, in most situations, will be the new document filing requirements of Part IX of the Act. However, equally important will be pro-active steps taken by businesses and their advisors alike to ensure that the deal that is sold is not the deal that is changed or craters just because of statements in 16(d) documents which cause the Commissioner and the Bureau to pay more attention to a transaction which otherwise would close following the initial waiting period. Accordingly, statements like:
- the merger will give the merged business a dominant market share;
- the merged entity will be able to increase prices without fear of competition;
- the market in which the merging entities compete has significant technological, cost or regulatory barriers preventing competitors entering the market; or
- following the merger, the merged entity will no longer have any effective remaining competition,
are all statements which if included in 16(d) documents will catch the regulator's attention and will surely attract further scrutiny during the merger review process.
Clients and their advisors alike are well advised to have draft selling documentation sent first to counsel for review. Such process may assist in protecting solicitor-client privilege, where possible, with respect to these draft documents and, at the same time, allow counsel to suggest alternate wording which may avoid a self-fulfilling prophecy of delay and problems arising from draft documentation which otherwise contains obvious wording of an anti-competitive nature.
To SIR with Love...
While most mergers do not result in substantive competition concerns, a poor choice of wording in 16(d) documents can outline a negative roadmap which may be problematic for the merging parties.
Recently published Merger Review Process Guidelines10 describe the new, two-stage merger process. For the moment, the Bureau continues to follow its Fee and Service Standard Policy11 by classifying mergers as non-complex, complex and very complex. Non-complex mergers should be reviewed within a two-week service standard and will likely be granted either an advance ruling certificate,12 where requested, or a so-called no-action letter. Very complex mergers used to attract a five-month plus service standard because of the complexity of the review process underlying a proposed transaction which generally was marked by a high market share post-merger and significant barriers to entry. Now, certain complex and very complex mergers will receive a supplementary information request13 or SIR from the Bureau before the 30-day waiting period has expired.14 The SIR will mirror, at least from a delayed timing perspective, the HSR second-request process in the U.S. If a second request is issued in the U.S., it is not uncommon for a delay of two months to six months to occur before the additional documentation burden can be satisfied. In Canada, once the demands of a SIR have been met and the delivery is certified complete, an additional 30-day waiting period ensues before the parties may complete the transaction.15 And, as is not uncommon in the U.S. following the issuance of a second request, the issuance of a SIR may serve to kill the deal!
The Moral of the Story is...
In Canada, 16(d) documents will be new to most merging parties. Careful review of studies, surveys, analyses and reports ahead of time by competition counsel may assist in achieving a successful completion of the regulatory process on a timely basis. Otherwise, loaded documents will, in certain instances, surely result in the requirement to comply with a SIR, thus extending the review period considerably and reducing the chances for a successfully completed merger.
1 Competition Act (Canada), R.S.C. 1985, c. C-34.
2 See Part IX of the Act. Currently, the so-called parties threshold is $400 million. As a result of amendments under Bill C-10 (see endnote 4 below), the so-called transaction threshold is now $70 million.
3 See page 54 of the 134-page report entitled Compete to Win, as published by the Competition Policy Review Panel on June 26, 2008 (the "Report").
4 Bill C-10, or the Budget Implementation Act, 2009. Bill C-10 received First Reading on February 6, 2009 and, generally, became law effective March 12, 2009. Many of the amendments to the Act contained in Bill C-10 followed recommendations from the Report.
5 In the U.S., the pre-notification statute is called Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("HSR").
6 Section 123(1)(a) of the Act.
7 Section 114 (1)(a) of the Act requires that:
the parties to a proposed transaction shall, before the transaction is completed, notify the Commissioner that the transaction is proposed and supply the Commissioner with the prescribed information ...
On April 4, 2009, proposed amendments to the Notifiable Transactions Regulations (the "Proposed Regs") were published in the Canada Gazette, Part I. Part of the explanatory notes to the Proposed Regs state:
These amendments relate to the introduction of a new merger review process and the elimination of the separate "short form" and "long form" notification information requirements in favour of a uniform requirement.
As at the date of this writing, the Proposed Regs have not yet become law.
8 The Proposed Regs require the filing of certain documentation with each notice. The current wording of the proposed regulation relating to this documentation is found in section 16(d) of the Proposed Regs, which reads as follows:
(d) In respect of each party, and each of its affiliates referred to in subparagraph (c)(iii), all studies, surveys, analyses and reports that were prepared or received by a senior officer for the purpose of evaluating or analysing the proposed transaction with respect to market shares, competition, competitors, markets, potential for sales growth or expansion into new products or geographic regions and, if not otherwise as set out in that document, the names and titles of the individuals who prepared the document and the date on which it was prepared.
9 Item 4(c) of the HSR notification and report form contains the following instructions:
4(c) – all studies, surveys, analyses and reports which were prepared by or for any officer(s) or director(s) (or, in the case of unincorporated entities, individuals exercising similar functions) for the purpose of evaluating or analyzing the acquisition with respect to market shares, competition, competitors, markets, potential for sales growth or expansion into product or geographic markets, and indicate (it not contain in the document itself) the date of preparation, and the name and title of each individual who prepared each such document.
10 The Bureau published the Merger Review Process Guidelines (the "Guidelines") on September 18, 2009. It is notable that the Guidelines have been published before the coming into force of the Proposed Regs.
11 Published by the Bureau, as revised, on December 4, 2003.
12 Issued in accordance with section 102 of the Act.
13 See section 114(2) of the Act.
14 At the time of this writing, various reports indicate that the Commissioner has issued as many as 5 SIRs since the enactment of Bill C-10.
15 Section 123(1)(b) of the Act.
Bill VanderBurgh practises in the area of corporate law, serving the Canadian legal needs of foreign-controlled multinational clients. He has represented foreign-based clients in connection with highly sensitive matters under the former Foreign Investment Review Act (Canada), the current Investment Canada Act and in connection with other matters involving foreign direct investment in Canada. Bill assists foreign-based clients with merger and other competition law matters arising under the Competition Act (Canada).
Martin E. Kovnats practises both domestically and internationally in the area of public and private debt and equity financings, merger and acquisition activities, take-over bids, venture capital transactions and general corporate/ commercial matters. Martin has been recognized as one of the leading midmarket M&A lawyers in Canada and has extensive cross-border experience and expertise. Recent transactions involve acting for both Canadians and non-Canadians in transactions in Canada and where Canadians are involved outside Canada.
Peter K. Czegledy practice includes assisting a spectrum of clients ranging from start-up private businesses to large multinationals. His work is focused in three key areas: mergers and acquisitions, high technology businesses and financing. Many of Peter's clients are American or other international businesses seeking opportunities in Canada. Peter seeks to provide innovative and efficient solutions to client needs by tailoring legal solutions to suit the unique circumstances of each client.
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