Canada: Canadian Competition And Foreign Investment Law: What To Watch For In 2010 February 9, 2010

1. Will 2010 See Increased Enforcement under the Competition Act?

On March 12, 2009, Canada's Parliament passed legislation incorporating the most significant amendments to Canada's Competition Act (the "Act") since the statute was first enacted in 1986. The government said the amendments were necessary for optimal enforcement of Canadian competition law.

As noted in previous Davies publications, one of the key amendments involved a fundamental change to the Act's conspiracy offence. Pursuant to this amendment, which is scheduled to come into force in March 2010, the current conspiracy offence will be replaced by a new per se criminal prohibition against agreements between competitors to fix prices, restrict production, or allocate sales, customers or territories; unlike the current offence, there will no longer be a requirement to prove an "undue" or "unreasonable" impact on competition or prices. The penalties for the conspiracy offence also will be increased, from the current maximum prison sentence of five years and the current maximum fine of CDN$10 million per count to a new maximum of 14 years imprisonment and/or CDN$25 million per count. Finally, the Bureau also will be able to apply to the Competition Tribunal under a new civil provision for relief in respect of any other category of agreement among competitors that has the effect of substantially lessening or preventing competition.

By eliminating the requirement to prove market impact, the new conspiracy offence should make it easier for the Bureau to pursue cartel conduct in Canada. The increased penalties will also substantially raise the stakes for parties caught participating in such conduct. While guidelines issued by the Bureau indicate that the Bureau intends to limit its enforcement of the new offence to "hard core" cartel conduct, these guidelines are not binding on the courts, private parties, or even the Bureau itself. And, of course, there is also the new civil provision to contend with.

In addition to cartels, top Bureau officials have stated that the Bureau intends to bring more abuse of dominance cases in 2010. (There have been only six contested proceedings since the abuse of dominance provision was enacted in 1986.) The Bureau announced the first of these cases on February 8, 2010, with the filing of an application against the Canadian Real Estate Association ("CREA"). The Bureau alleges that certain of CREA's rules prevent real estate agents from offering more innovative service and pricing options to consumers and require consumers to pay for services that they do not need.

One reason for the Bureau's renewed emphasis on abuse of dominance may be that, as a result of the 2009 amendments, the consequences associated with contravening the Act's abuse of dominance provisions are much more severe than before. Sanctions for abuse of dominance now include significant monetary penalties of up to CDN$10-$15 million.

In 2009, the Bureau also staked out a new and more aggressive position with respect to "joint" abuses of dominance, eliminating the requirement in its prior guidance that there be some form of coordination between competitors for them to be considered collectively dominant. The Bureau has indicated that it hopes to test its new enforcement approach to joint dominance in 2010.

The consistent message from the Bureau is that it wants to be more proactive in enforcing the Act. This has certainly been a point of emphasis for Canada's new Commissioner of Competition, Melanie Aitken, who was appointed to head the Bureau in August 2009. The question for 2010 is whether the recent amendments, coupled with a new administration at the Bureau, will – in fact – lead to more proceedings and greater penalties.

2. Canada's New Merger Review System – How Will It Perform?

Another issue that bears watching in 2010 is how the Act's new merger review process (which also came into force in March 2009) will develop. Under the new Canadian process (which is now very similar to the U.S. merger notification regime), the Bureau must decide within 30 days of receiving a complete filing whether to issue a "supplementary information request" ("SIR"). If SIRs are issued, the parties cannot close until 30 days after all of the requested information has been provided to the Bureau.

The Act's new merger review process generated significant debate. In particular, concerns were expressed that the SIR process would impose unreasonable costs and time delays on merger transactions because (i) faced with having to close its investigation in 30 days, the Bureau would resort to SIRs too readily; and (ii) SIRs would be too unwieldy and not focused on relevant issues or information, thereby driving up costs and unnecessarily preventing transactions from closing on a timely basis.

After approximately 10 months of experience, prospective merging parties can take comfort in the fact that the worst fears about the Act's new merger regime have not materialized....yet. The Bureau appears to be using its enhanced authority responsibly and, by all accounts, has generally co-operated with merging parties in narrowing the scope of SIRs and negotiating alternative arrangements where appropriate.

Nonetheless, the positive experience so far must be tempered with the caveat that the Canadian system remains a "work in progress", whose definitive character is still taking shape. In particular, it must be recognized that the dynamics of Canada's merger review system are now different, with the Bureau much more able to control timing than under the previous regime. Moreover, even if used responsibly, the SIR process still holds the potential for greater costs and related burdens for merger participants.

3. Will There Be More Competition Class Actions in Canada?

Two class action decisions issued in 2009 by Canadian courts could substantially broaden the scope of civil recovery for indirect purchaser claims in Canada.

On September 28, 2009, the Ontario Superior Court of Justice certified a class action on behalf of all persons in Canada (excluding the defendants) who had purchased either hydrogen peroxide, products containing hydrogen peroxide or products using hydrogen peroxide in Canada between January 1, 1994 and January 5, 2005. A month and a half later, on November 12, 2009, the British Columbia Court of Appeal certified a class action on behalf of a class of direct and indirect purchasers of semiconductor memory chips (known as dynamic random access memory (or "DRAM")), overruling a lower court decision denying certification.

The decisions marked a notable departure from previous case law, in which Canadian courts had repeatedly refused to certify indirect purchaser class actions on the grounds that the indirect plaintiffs could not adduce sufficient evidence to support a methodology for calculating harm on a class-wide basis. Both the Ontario Superior Court of Justice and the B.C. Court of Appeal held that a more relaxed burden of proof should apply to the methodology issue, making it easier for direct plaintiffs to overcome this hurdle at the certification stage.

If left undisturbed on appeal, these decisions could lead to a significant lowering of the bar in at least two key Canadian jurisdictions and, potentially across the country, for the certification of indirect purchaser, price-fixing class actions. This would represent a substantial expansion of the scope of civil liability in Canada for criminal violations of the Act.

4. Telecommunications: Do Changes to the Foreign Ownership Restrictions Lie Ahead?

A CRTC decision, a Cabinet reversal and a Federal Court challenge have created uncertainty surrounding the interpretation and application of Canada's foreign ownership and control restrictions in the telecommunications sector.

In November 2007, in an effort to bring more wireless competition to Canada, Industry Canada set aside 40 MHz of Advanced Wireless Services ("AWS") spectrum for new entrants. Globalive Wireless Management Corp. ("Globalive") bid $442,099,000 in the AWS spectrum auction which took place over a two-month period in the summer of 2008 and was provisionally awarded 30 spectrum licences by Industry Canada subject to compliance with the Radiocommunication Regulations which prohibit corporations that are not Canadian-owned and controlled from being eligible to hold a licence. On March 13, 2009, Industry Canada determined that Globalive satisfied the ownership and control criteria in the Radiocommunication Regulations.

However, in order to be eligible to operate as a telecommunications common carrier, licensees must also meet the ownership and control requirements of section 16 of the Telecommunications Act which, like the Radiocommunication Regulations, provide that the carrier must be a Canadian-owned and controlled corporation. On October 30, 2009, following a rare public proceeding that included a two-day oral hearing, the CRTC determined that Globalive had not met the requirements of the Telecommunication Act's ownership and control regime and was therefore not eligible to operate as a telecommunications common carrier and provide wireless services in Canada. The CRTC based this decision on its view that Globalive is controlled in fact by a non-Canadian, Orascom Telecom (an Egyptian-based telecommunications company). The CRTC pointed to various factors in support of this conclusion, including that Orascom Telecom holds 65% of Globalive's equity, is the principal source of Globalive's technical expertise, provides Globalive with access to an established wireless trademark and provides the vast majority of Globalive's debt financing. The CRTC was particularly concerned that Orascom held both 65% of Glovalive's equity and the vast majority of Globalive's debt, which represents most of Globalive's enterprise value.

Matters did not end with the CRTC decision. On December 10, 2009, the Federal Cabinet exercised its review powers over the CRTC and issued an Order-in-Council varying the CRTC decision and ruling that Globalive is a Canadian-owned and controlled company. This allowed Globalive to offer wireless service in Canada, which it did immediately after the Cabinet's decision was announced.

There has been much speculation about the impact, if any, that the Globalive Order-in- Council may have on the broader question of foreign investment in the Canadian telecom sector.

On the one hand, the Globalive Order-in-Council stated that "in varying the CRTC decision, the Government is not removing, reducing, bending or creating an exception to Canadian ownership and control requirements in the telecommunications and broadcasting industries. The Government's decision to vary is specific to the facts of this case".

The CRTC also signalled that it will continue to apply the existing jurisprudence relating to determinations of control in fact. One week after the Order-in-Council was released, the CRTC advised Public Mobile, another new wireless entrant and successful bidder in the AWS spectrum auction, that it will proceed with a Type 2 review of the ownership and control of that company and, in doing so: "will apply the existing jurisprudence relating to determinations of control in fact, cognizant of the fact that in varying Telecom Decision CRTC 2009-678, the Government stated that the 'decision to vary is specific to the facts of this case'".

Public Mobile, on the other hand, has taken the position in court proceedings that the Globalive Order-in-Council has effectively neutered foreign ownership restrictions in the telecom sector. On January 8, 2010, Public Mobile applied to the Federal Court of Canada for an order quashing the Order-in-Council and a declaration that the Order-in-Council was contrary to law. In a news release issued at the time, Public Mobile stated: "[w]e believe Cabinet's decision is unfair to other wireless carriers, especially new entrants like Public Mobile that have played by the rules and secured substantial Canadian investment. Furthermore, while we respect the Government's authority we believe what it has done amounts to a change in law, and only Parliament can change Canadian law." The Government has refused to produce to Public Mobile the records and materials that it considered in arriving at its conclusion.

Recent news reports have indicated that the Government may announce some form of liberalization of the foreign ownership rules governing Canada's telecommunications sectors in the next Budget or in the Speech from the Throne. These reports have not been officially confirmed, so it remains to be seen if the Government truly has the appetite for such reform.

5. Will the Investment Canada Act's New National Security Review Process Make Life Tougher for Non-Canadian Investors?

Major changes to the Investment Canada Act ("ICA") were also enacted in March 2009. Foremost among these changes was the establishment of a new "national security" review process, which arms the federal government with broad powers to review, and prohibit or unwind, foreign investments in Canada on the grounds that they "could be injurious to national security". The term "national security" was deliberately left undefined to allow the government maximum discretion. The government can also invoke the process before or after closing and without regard to the value of the investment or the level of interest acquired.

The potentially broad scope of the new national security review process has raised legitimate concerns about how many and what type of transactions the government will review. On the one hand, a variety of investments that, in theory, might have raised national security concerns (broadly defined) were approved in 2009, although the investors were obliged to provide undertakings as part of the standard "net benefit to Canada" review.

For example, PetroChina's investment in two projects in the Alberta Oil Sands was approved on the basis of a series of commitments provided by the company. In addition to fairly standard commitments relating to capital expenditures, employment and participation by Canadians in management, PetroChina also agreed to maintain a listing on the New York Stock Exchange and the Hong Kong Stock Exchange or on another designated major stock exchange.

On the other hand, the initiation of a review under the new national security provisions appears to have prevented the completion of at least one transaction since they were enacted, namely, the proposed acquisition of Forsys Metals Corp. ("Forsys") by George Forrest International Afrique S.P.R.L. ("GFI").

According to reports, Forsys (a publicly-traded mineral exploration company with a uranium project in Namibia) terminated the proposed transaction after the Canadian government notified GFI that it was prohibited from implementing the investment pending further notice. Although the reason for the government's intervention was never made public, it is believed that its concerns related to potential "national security" issues revolving around GFI's potential acquisition of the Forsys uranium project, even though the project and deposits are not in Canada. In particular, there appear to have been concerns about certain of the countries from which GFI sought funding for the acquisition.

"National security" also became an issue in the proposed acquisition by Ericsson of Nortel's wireless unit, announced in July 2009. Although the transaction was not ultimately derailed, opponents of the deal tried their best to persuade the government to use the national security provisions to do so.

Ericsson, a Swedish telecom company, successfully bid for Nortel's wireless unit as part of an auction stemming out of Nortel's bankruptcy proceedings initiated in January 2009. During the auction process and following its conclusion, RIM, Canadian makers of the Blackberry and one of the companies losing out to Ericsson, argued that the federal government should prevent the sale because it would "jeopardize Canada's national interests". Various federal and provincial politicians agreed that Nortel's wireless unit should not fall into foreign hands. The House of Commons' Industry Committee even held an emergency session to investigate the transaction.

Notwithstanding these protests, the federal government announced on September 16, 2009 that it would not challenge the Ericsson/Nortel transaction. The Minister of Industry, Tony Clement, said that the government had "no grounds to believe that the transaction could be injurious to Canada's national security". The case demonstrates, however, the extent to which a determined opponent can now appeal to "national security" concerns as an additional basis upon which to attack a proposed transaction.

The new "national security" review process remains an unknown quantity for non-Canadian investors. It is to be hoped that 2010 will offer opportunities for greater clarification and transparency regarding the application of this process.

6. Will the Canadian Government Prevail against US Steel for the Alleged Breach of Investment Canada Act Undertakings?

The recession of 2009 forced the Canadian government to confront the difficult issue of how to enforce undertakings provided under the ICA in the context of global economic dislocation.

A number of non-Canadian investors renegotiated their undertakings with the federal government. But, in a case involving US Steel, the government went one step further and started court proceedings to enforce certain undertakings. This marked the first time that the Canadian government had gone to court for such an order.

US Steel committed to the undertakings in question in 2007, to obtain approval for its acquisition of Stelco. In the spring of 2009, US Steel shut down most of its Canadian operations. US Steel argued that it was justified in taking these measures because of the unique circumstances created by the global economic crisis. According to guidelines under the ICA, investors will not be held accountable for being unable to fulfill undertakings when this failure is "clearly the result of factors beyond the control of the investor".

The Canadian government took a different view of US Steel's actions. In July 2009, the government filed an application with the Federal Court of Canada seeking an order requiring US Steel to increase its Canadian steel production, maintain employment levels in Canada, and pay a fine of CDN$10,000 per day for each day that it allegedly failed to comply with its undertakings.

US Steel responded by not only denying that it had breached the ICA, but by challenging the constitutionality of the legislation itself. US Steel claimed that the ICA contravenes the Canadian Charter of Rights and Freedoms and the Bill of Rights by infringing the rights of non-Canadian investors to a fair hearing and the presumption of innocence.

Arguments in the constitutional challenge were heard by the Federal Court on January 11-12, 2010. A decision is not expected for at least a month, if not more, and will determine whether the government's application can proceed. The outcome of the case will no doubt have a significant impact on the extent of any future enforcement actions under the ICA.

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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Mark C. Katz
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