Originally published in Blakes Bulletin on Business Law, January 2007
In the high stakes world of mergers and acquisitions, the consequences of getting things wrong on the regulatory front are increasing. Where a transaction raises significant issues for the Competition Bureau (Bureau), its review can add millions of dollars to the cost of a deal, cause delays of up to five months, and even result in the transaction being blocked in whole or in part. Moreover, the Bureau can challenge a transaction for up to three years after it has closed and ultimately require its dissolution. The Competition Act contains mandatory pre-merger notification requirements for certain transactions and substantive merger review provisions that apply to all transactions. The purpose of the substantive review is to determine the likelihood of a merger substantially preventing or lessening competition in one or more relevant markets. Due diligence, a comprehensive merger agreement, well-controlled pre-merger co-ordination, and good communication with government lawyers can take the regulatory risk off the table and help bring a deal to a speedy and successful close. Counsel specializing in antitrust matters is essential to advising on these matters.
Before parties to a deal can allocate regulatory risk, they must first accurately perceive it. Due diligence involves assessing the likelihood that a merger will be challenged by the Bureau. Antitrust counsel will study the parties’ businesses, the market, the pre-merger state of competition, and the potential competitive impact of the merger on the industry. Information gathering requires discussions with key personnel involved in research and development, marketing, and sales, as well as a thorough review of corporate documents (e.g., business plans, competitive and strategic analyses, pricing plans, and sales and marketing materials).
A comprehensive merger agreement can mitigate costly misunderstandings. From a regulatory perspective, it is advisable to ensure that merger agreements contain the following types of clauses: co-operation, best efforts, divestiture limitations, termination, break-up fees, and regulatory fee payment and expenses.
A co-operation clause should require that counsel for the parties co-operate and consult with one another when corresponding with the Bureau. Parties should require one another to promptly disclose communications that they have had with the Bureau and ideally even prohibit the initiation of ex parte communications with government officials. A co-operation clause can also require that key decisions during a merger review are subject to the approval of both businesses, and that the parties agree to share experts as well as documents that are filed with the government. A best efforts clause that is specific to regulatory requirements can also be included.
In terms of divestitures, a seller may wish to negotiate a clause in the agreement that requires the buyer to make any and all divestitures that are necessary for Bureau approval of the transaction. On the other hand, the buyer may qualify a reasonable best efforts clause by adding that it is not required to dispose of or hold separate any material portion of its business or assets.
Alternatively, the buyer may wish to limit its divestiture obligation by reference to a specific sales level, thereby avoiding the sale of crown jewel assets or divisions that exceed this sales threshold. Divestiture provisions can also provide for price reduction to the seller or compensation to the buyer for the loss of an asset. The parties may even wish to agree that, while a Bureau investigation is pending, the acquiring party is prohibited from making additional acquisitions that might impair antitrust clearance. The drafting of such clauses requires careful judgment, as detailed and express divestiture provisions might reveal to the Bureau that the parties have competition concerns and will accept certain remedies.
Depending on the parties involved, certain antitrust events may be prohibitive in cost or result in unreasonable delays. It is therefore advisable to include event-specific termination rights in a merger agreement. For example, a termination right may be fixed to the launching of a formal investigation by the Bureau, an announcement by the Bureau that it will challenge the merger, a court order barring the deal, or a final court order prohibiting the transaction. As well, break-up fees may be collected by a party in the event that the transaction is blocked or delayed for antitrust reasons. Finally, it is a good idea to negotiate the inclusion of a clause resolving which party will pay the costs of any formal Bureau investigation or antitrust litigation.
Pre-merger co-ordination, such as due diligence and transition planning, is a legitimate and necessary part of closing a deal. However, prior to obtaining the Bureau’s approval, parties must continue to compete. They therefore must not combine their activities, exchange unreasonable amounts of information, or unduly co-ordinate their activities. As well, the buyer must not exercise de facto control over the seller’s business.
Potentially problematic conduct includes joint calls to customers for planning purposes, the wholesale movement of staff from the seller to the buyer, the assignment of decision-making authority to the acquiring company in respect of the seller’s business, and installing representatives of the acquiring business in the facilities of the acquired firm. This type of conduct, which is known as "gun jumping", can give rise to criminal charges under the Act and result in large fines. It is therefore advisable that, as part of the early planning and due diligence, antitrust counsel speak to key players about pre-merger co-ordination. Legitimate business objectives can be achieved by employing a third party or internal "clean team" to review sensitive information, and carry out post-merger integration planning.
Ultimately, the Bureau or Competition Tribunal will have the last word on approving a deal. It is therefore in the best interests of the parties to involve the Bureau and antitrust lawyers at the earliest possible stage of a transaction.
The more antitrust counsel know about a transaction, the better able they are to speak with the Bureau staff and guide them through their analysis of the merger. This function is especially helpful when the merger gives rise to complex issues that may not be apparent to the Bureau staff, whose knowledge is based on information that is public.
Where the Bureau expresses concerns about the transaction, antitrust counsel can advise the acquiring party on proposing a hold separate agreement that will result in setting aside a business for divestiture after closing. This kind of proposal can help to hasten the Bureau’s clearance of a transaction.
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.