Canada: Competition And Foreign Investment In Canada: Taking Stock Of 2011 And Looking Ahead To 2012

2011 saw a very active enforcement year for the Competition Bureau, while foreign investor jitters about Canada's openness to investment following the Government's rejection of BHP Billiton's bid for Potash Corporation of Saskatchewan were somewhat allayed. This review highlights the most significant events in competition law and foreign investment review in 2011 and identifies developments to watch out for in 2012.

A. TAKING STOCK OF 2011

I. Competition

The Competition Bureau was active in both criminal and civil enforcement under the Competition Act.

Criminal Conspiracies

In 2011, the Competition Bureau actively pursued domestic cartel activity, including a gasoline price fixing conspiracy in Quebec¹ , as well as bid-rigging. In January 2012, a price-fixing cartel for polyurethane foam was the first conviction under Canada's amended conspiracy provision, which does not require the prosecution to demonstrate that the agreement has an adverse impact on competition.

Abuse of Dominance (Civil)

Taking another swing at the real estate industry on the heels of its challenge (and ultimate settlement) of certain restrictive practices of the Canadian Real Estate Association, the Competition Bureau has alleged that the Toronto Real Estate Board (TREB) is abusing its dominant position in the supply of residential real estate brokerage services in the Greater Toronto Area (GTA). According to the Commissioner of Competition's application, TREB has enacted and implemented restrictive rules and policies respecting the use of its Multiple Listing Service to discipline and exclude innovative brokers.

Mergers Under the Gun

The Commissioner of Competition challenged two mergers within the first six months of 2011 – a relative rarity in Canada where competition concerns are typically addressed by consent agreement. One of these mergers involves two landfill companies in northern British Columbia, CCS Corporation and Complete Environmental. The case is significant for a number of reasons. The transaction was not notifiable under the Competition Act, underscoring the Bureau's willingness to scrutinize smaller transactions that may not have a significant national or even regional impact but may still have potentially substantial adverse consequences in an isolated or local geographic area. In addition, the case is notable because Complete had not yet commenced its operations and therefore, the Commissioner's case is based on the theory that competition will be substantially prevented. The case is also of interest because the transaction was challenged following its closing. Finally, the Commissioner is also seeking dissolution as a remedy. Dissolution is not a typical remedy and can be punitive for a vendor who has already made a decision to exit the business.

The other case being challenged under the merger provision of the Competition Act involves the proposed joint venture of Air Canada and United Continental on 19 transborder routes. The Commissioner is also challenging the airlines' coordination of "key aspects of competition" on transborder routes under the relatively new civil provision relating to agreements between competitors causing a substantial lessening of competition.

Enhanced Transparency: Guidelines, Interpretation Guidelines, Merger Register

The Competition Bureau produced a number of guidelines and other communications designed to increase transparency in 2011. Notable among these was the issuance of revised Merger Enforcement Guidelines (MEGs). The revised MEGs de-emphasize market definition, stating that it is not a required step in the Bureau's analysis but rather only an analytical tool in assessing competitive effects. In addition, they eliminate the two-year timeline for potential entry into a market, provide additional guidance on buyer power, and elaborate on the Bureau's treatment of minority interests and interlocking directorates.

The Bureau has also issued policies on hostile transactions, is planning to publish "position statements" setting out the Bureau's analysis in complex cases and will be establishing a merger register listing transactions that have received clearance from the Bureau.

Misleading Advertising

A number of significant misleading advertising cases were pursued in the telecommunications sector in 2011. Bell agreed to pay a $10 million administrative monetary policy (the maximum under the Competition Act) for price-related advertising of its services that the Bureau regarded as misleading. The Commissioner also continued to pursue its case against Rogers Communications for making allegedly unsupportable claims about its Chatr discount cell phone and text service. In January 2012 Rogers challenged the constitutional validity of imposing administrative monetary penalties for false or misleading claims before the Ontario Superior Court.

II. Foreign Investment Review

Potash II Averted?

With the abandonment of the London Stock Exchange Group's bid for the TMX Group (which owns the Toronto Stock Exchange), the Canadian Government was spared making a potentially contentious decision following its rejection of the bid by BHP Billiton for Potash Corporation of Saskatchewan (PotashCorp) in November 2010². In February 2011, the London Stock Exchange announced its bid for the Toronto Stock Exchange – a transatlantic merger subject to review under the Competition Act and ministerial approval under the Investment Canada Act as well as a number of provincial regulators. The merger agreement was terminated in June 2011 as a result of insufficient TMX shareholder support.

Investments by Chinese State-Owned Enterprises (SOEs) Approved

The Canadian Government approved a number of state-owned investments in 2011, including Sinopec's proposed acquisition of Daylight Energy, a Canadian oil and gas company, and CNOOC's acquisition of oil sands company, OPTI Canada. CNOOC acquired OPTI's 35 percent working interest in Long Lake and three other project areas located in northeastern Alberta. Both investments would have been subject to the Government's guidelines on state-owned investors which consider the SOE's corporate governance and commercial orientation in assessing whether the transaction would be of "net benefit" to Canada.

Enforcement of Undertakings

In 2010 the Canadian Government sued US Steel for alleged non-compliance with its employment and production undertakings. This represented the first time an investor has been taken to court over a failure to comply with undertakings. In December 2011 US Steel settled the dispute with the Canadian Government, committing to make additional capital investments in its Canadian facilities and to operate certain Canadian plants until 2015.

Review of Investment Canada Act

After its rejection of BHP Billiton's bid for PotashCorp, the Canadian Government indicated its willingness to review the Investment Canada Act. In the winter of 2011, the Parliamentary Standing Committee on Industry, Science and Technology invited foreign investment experts to speak about their views on the Investment Canada process (e.g., its transparency, the criteria for review). However, there has been no public indication since the Government won a majority in the May 2011 federal election that it intends to resume its reconsideration of the statute.

B. LOOKING FORWARD:

I. Competition

Monitoring Key Cases

2012 will be busy for the Competition Tribunal. For example, in the spring, the Tribunal will hear the Commissioner of Competition's case against Visa and MasterCard for implementing and enforcing agreements allegedly imposing significant restrictions on the terms upon which credit card network services are supplied to merchants. In the fall, the Commissioner's application against the Toronto Real Estate Board will be heard. In addition, given that the CCS/Complete case was heard by the Tribunal in late 2011, we can anticipate a decision by the Competition Tribunal.

SOE Acquisitions – Who is in the family?

Acquisitions by SOEs have raised questions about whether other entities owned by a foreign state will be treated as "affiliates" - part of the same "family" of companies under the Competition Act. (This is not an issue for Canadian SOEs as there is a specific exemption for affiliates owned by the federal or provincial crown.) This has implications both for determining whether a transaction is notifiable (i.e., who is included as an affiliate of the acquiring SOE under the size of parties notification test) and the assessment of whether a transaction will lead to a substantial lessening or prevention of competition. As Chinese and other foreign SOEs continue to acquire Canadian companies, the Competition Bureau will need to clarify how it treats these issues over the coming year.

II. Foreign Investment Review

Post Potash Anxiety Lifts?

In the immediate aftermath of the Canadian Government's rejection of BHP Billiton's bid, foreign investors questioned whether there would be a sea-change in Canada's previous openness to foreign investment. While the failed bid by the LSE for the TMX removed the possibility of another potential rejection, foreign investors, including SOEs, have not been dissuaded from investing in Canada. Despite this, a run at Canadian icons such as RIM by a foreign suitor could again thrust questions of foreign ownership of "national champions" or "strategic" sectors into the public arena. Potential acquirors of such targets will need to develop strategies at an early stage to address government and public relations in order to pre-empt, or at least mitigate, any public backlash.

Review Threshold Increases Incrementally

It is expected that the threshold for review of investments by WTO investors will be a book value of the target company's assets of $330 million for 2012. The official threshold will be published in the Canada Gazette in early 2012. However, what may be of greater interest to foreign investors is whether the Canadian Government finally implements regulations bringing into force amendments made to the Investment Canada Act three years ago. These amendments would raise the review threshold to $600 million in the target's "enterprise value" for the two years following implementation, to $800 million in the two subsequent years and to $1 billion thereafter (indexed to GDP), thereby further reducing the number of investments subject to Investment Canada review.

Measured Undertakings

The US Steel case underscores both that the Canadian Government will enforce undertakings in appropriate circumstances (although variations are still possible) and that when formulating 3 to 5 year commitments in relation to an acquisition, foreign investors must carefully consider their ability to meet such undertakings in light of the vagaries of economic conditions. Investors should also learn from the US Steel experience to manage public and government relations proactively when compliance with undertakings proves difficult.

Footnotes

1. Press Release, Competition Bureau, Two Individuals Plead Guilty in Quebec Gasoline Price-Fixing Cartel (June 10, 2011), available at http://www.competitionbureau.gc.ca/eic/site/cb-bc.nsf/eng/03382.html.

2. Technically as the application by BHP Billiton for Potash Corp. was withdrawn following the Minister of Industry's initial rejection of the deal, there was no final formal rejection of the bid. Nevertheless, BHP Billiton had offered extensive undertakings and withdrew the application because it felt it could not reasonably satisfy the Canadian Government. Its press release states: "In view of the reasons underlying the Minister's interim decision of November 3, the company believes that the Minister of Industry would have required additional undertakings beyond those BHP Billiton had already offered which would have conflicted with BHP Billiton's business strategy and been counter to creating shareholder value". See http://www.bhpbilliton.com/home/investors/news/Pages/Articles/BHP%20Billiton%20Withdraws%20Its%20Offer%20To%20Acquire%20PotashCorp%20And%20Reactivates%20Its%20Buy-back%20Program.aspx

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