The 2021 updates to the merger thresholds under Canada's Competition Act and Investment Canada Act have been announced. Most notably, for the first time , the Competition Act's size-of target threshold decreased by C$3 million to C$93 million.
The Competition Act requires advance notification of certain merger transactions involving operating businesses in Canada where "size-of-parties" and "size-of-target" financial tests both are exceeded:
- The "size-of-target" test requires that the value of assets in Canada to be acquired, or owned by the corporation the shares of which are being acquired, or the annual gross revenue from sales in or from Canada generated by those Canadian assets, exceeds a specified threshold. The Competition Bureau has announced that the "size-of-target" threshold will be reduced to C$93 million for 2021. This represents a 3% decrease from the C$96 million threshold that was in place for 2020 and 2019. The C$93 million threshold is subject to an annual adjustment based on the annual percentage change in nominal Gross Domestic Product, with the next adjustment to come in early 2022.
- The "size-of-parties" test requires that the parties to a transaction, together with their affiliates, have assets in Canada, or annual gross revenues from sales in, from or into Canada, exceeding C$400 million. (The "size-of-parties" threshold remains unchanged from 2020, as it has been since 1986.)
The Competition Bureau's filing fee for submitting a merger notification currently remains at C$75,055.68. This fee is expected to be adjusted for inflationary changes on April 1st.
Investment Canada Act
The Investment Canada Act requires that any Non-Canadian that acquires control of a Canadian business (whether or not that business is controlled by Canadians prior to the acquisition) must file either a notification or an application for review. For the purposes of the Act, a Non-Canadian includes any entity that is not controlled or beneficially owned by Canadians.
Investors controlled in the EU and certain other countries with most-favored nation treatment under Canada's free trade agreements (including the United States, Australia, Chile, Colombia, Honduras, Japan, Mexico, New Zealand, Panama, Peru, Singapore, South Korea and Vietnam ) that are not State-Owned Enterprises generally will be required to file a pre-closing application for review and approval when directly acquiring a Canadian business where the enterprise value exceeds C$1.565 billion in 2021. This represents a 3% decrease from the C$1.613 billion threshold for 2020. The threshold also applies in respect of investments to acquire control of a Canadian business that was, immediately prior to the investment, controlled by an investor from one of these countries. The C$1.565 billion threshold is subject to an annual adjustment based on the annual percentage change in nominal Gross Domestic Product, with the next adjustment to come in January of 2022.
It is important to highlight that, post-Brexit, the United Kingdom is no longer a member of the EU, so it no longer benefits from the materially higher most-favored nation trade threshold. In November 2020, it was announced that a new trade agreement has been reached between Canada and the United Kingdom. Once this agreement goes into effect, the United Kingdom will once again benefit from the trade agreement investor threshold.
WTO Investors (firms controlled in WTO countries) that are not State-Owned Enterprises and that do not enjoy the benefit of the most-favored nation trade agreements noted above generally will be required to file a pre-closing application for review and approval when directly acquiring a Canadian business where the enterprise value exceeds C$1.043 billion in 2021. This represents a 3% decrease from the C$1.075 billion threshold for 2020. The threshold also applies for non-WTO Investors that directly acquire control of a Canadian business that was, immediately prior to the investment, controlled by a WTO Investor. The C$1.043 billion threshold is subject to an annual adjustment based on the annual percentage change in nominal Gross Domestic Product, with the next adjustment to come in January of 2022.
For direct acquisitions by WTO country State-Owned Enterprises, the threshold for transactions requiring review and approval is based on asset value (book value) rather than enterprise value. The 2021 asset size threshold has been decreased to C$415 million. This represents a 3% decrease from the previous C$428 million threshold in 2020. This asset value threshold also applies for non-WTO country State-Owned Enterprises that acquire control of a Canadian business that was, immediately prior to the investment, controlled by a WTO Investor. This asset size threshold is subject to an annual adjustment based on the annual percentage change in nominal Gross Domestic Product, with the next adjustment to come in January of 2022.
The asset size review and approval thresholds for investments by non-WTO Investors that are not described above, and for investments in Canadian cultural businesses, remain at C$5 million for direct acquisitions, and C$50 million for indirect acquisitions.
As mentioned earlier, any acquisition by a Non-Canadian of a Canadian business that is not subject to an application for review is required to file a notification under the Investment Canada Act. This notification can be filed any time pre-closing or within 30 days following closing. As well, any Non-Canadian that establishes a new business in Canada is required to file a notification.
The Investment Canada Act also contains a national security review regime. Any investment (even the acquisition of minority interests) by a non-Canadian in a Canadian business that "may be injurious to national security" can trigger a national security review. A national security review can be initiated within 45 days following submission of a notification or an application for review, or in respect of an investment for which no notification or application for review is required (eg, a minority non-controlling investment), until 45 days after the investment was implemented. Where a transaction raises potential national security concerns, purchasers may wish to consider submitting the notification or application for review well in advance of closing.
Additional Background on Mergers in Canada
Thresholds Chart : Please see our Canadian Competition Act and Investment Canada Act Thresholds Chart showing the 2021 thresholds.
Getting the Deal Through : For a more detailed discussion of the Canadian merger review regime, see Neil Campbell , James Musgrove, Mark Opashinov and Joshua Chad "Canada", Merger Control 2021 – Getting the Deal Through (Law Business Research), pp. 95-105.
1 This list includes the six non-Canadian countries that have ratified the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) as of the date of this bulletin. Brunei, Chile, Malaysia and Peru have not yet ratified the CPTPP. However, Chile and Peru already benefit from existing free trade agreements with Canada. Brunei and Malaysia will obtain the benefit of the higher threshold once they ratify the CPTPP.
The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.
© McMillan LLP 2020