1. Background
On June 26, 2008, Canada's Competition Policy Review Panel (the "Panel") issued its Final Report entitled Compete to Win (the "Report") after almost 12 months of consultations and research. The Panel was initially established in June, 2007 by the federal Canadian Ministers of Industry and Finance, to review Canada's competition and foreign investment policies and make appropriate recommendations for making Canada more competitive.
The Report contains 65 legislative and public policy recommendations aimed at: (a) reducing barriers to the entry of foreign investment; (b) adjusting the Canadian competition/anti-trust regime to align with internationally accepted best practices; and (c) boosting Canadian competitiveness. The recommendations assume "raising Canada's overall economic performance through greater competition will provide Canadians with a higher standard of living."
The Panel's recommendations are, for the most part, a positive contribution to the public policy debate regarding key elements of federal government policy necessary and long overdue reforms.
The key noteworthy recommendations are in the first third of the Report. The key recommendations are highlighted below.
2. Financial Services
The most significant recommendations affecting the financial services industry address (a) the regulation of large financial institutions ownership, and (b) as the Panel describes it, the end of the de facto prohibition of mergers among large financial institutions
- Retaining the "Widely Held
Rule". The current ownership regime requires
Schedule I banks (Canadian domestic banks), with equity of
over $8 billion, to be widely held (i.e. 20 per cent of any
class of voting shares, and up to 30 per cent of any class of
non-voting shares). This rule is intended to reduce the risk
of lending transactions between a financial institution and
persons who are in positions of influence over the
institution, known as "self dealing". The financial
services industry has argued that liberalizing ownership
restrictions governing large financial institutions would
enhance competition and allow Canadian financial institutions
to compete abroad and allow small and medium-sized businesses
to broaden their credit options. The Panel disagreed
favouring instead allowing greater international competition,
and more competition between bank and non-bank lending
institutions. Accordingly, the Panel recommends that the
"widely held" rule should be retained.
- Removing De Facto Prohibition on
Mergers. The Panel's second recommendation
was that the Canadian Minister of Finance should remove the
de facto prohibition on mergers of large financial
institutions subject to regulatory safeguards. The Report
states there is a need for greater scale to compete
internationally, including efficiencies resulting from
domestic mergers and increased choices in the domestic
marketplace. As a result, the Panel recommends that the
Minister of Finance remove the prohibition on bank, insurance
and cross pillar mergers of large financial
institutions.
3. Amendments to the Investment Canada Act (ICA)
The Panel's recommendations can be viewed primarily as efforts to reduce barriers to entry to foreign investment focused on a few substantive and several procedural issues, while still addressing culturally-sensitive industries. The recommendations are not revolutionary and some have been under discussion for some time. They are, however, necessary and belated modernizations to respond to the perception (not supported by data) that Canada is one of the most restrictive developed countries for foreign investment.
- Raise the Review Threshold. The Panel
urges the Minister of Industry to: (a) raise the general
review threshold under the ICA from its current $295 million,
based on gross assets, to $1 billion, based on enterprise
value of the acquired business. This threshold would also
apply to the special sectors of transportation (including
pipelines), non-federally regulated financial services and
uranium mining, which are currently subject to a much lower
ICA review threshold of $5 million; and (b) remove the
current notice requirement under the ICA for investments
below the applicable review threshold as well as for the
establishment of new businesses. An increase in the
applicable thresholds would certainly serve to reduce the
current regulatory burden for much foreign investment,
although the shift from asset value to enterprise value would
likely increase uncertainty relating to the application of
the new threshold in specific instances. Perhaps more
importantly, the Panel did not address a continuing problem
relating to the scope of the ICA's current
application. In assessing whether an investment meets the
applicable threshold for review the total value of an
entity's assets must be considered, regardless of
where those assets may be located. As a result, many
investments in "Canadian" entities with few
operations in Canada, but with a significant international
presence, are subject to review, only because of the value of
the entities' operations in countries outside of
Canada. There appears to be no clear rationale for continuing
to subject such investments to review under the ICA,
regardless of a higher threshold for review. This is
particularly true in light of the fact that most acquisitions
of foreign corporations with Canadian subsidiaries (so-called
indirect acquisitions) are now completely exempt from ICA
review.
- Shift Onus Under Test. The Panel
recommends a shift in the burden of proof under the ICA from
the investor (who must currently demonstrate a "net
benefit to Canada") to the Government (which must allow
the investment unless it can be demonstrated that it would be
"contrary to Canada's national interest").
This recommendation is made on the premise that "foreign
investment is, except in unique circumstances, beneficial to
Canada." The Panel concludes that this shift would mean
that investments that might not now meet the "net
benefit" test could proceed without ministerial
intervention unless there is an overriding "national
interest" concern. However, in such cases, an investor
would be faced with the broad, amorphous and undefined
threshold of "national interest" that, unless
clearly defined, would still result in business uncertainty
and would continue to contribute to Canada's
restrictive foreign investment reputation. How such a reverse
onus actually improves upon the existing, perhaps equally
amorphous, "net benefit" test is not entirely
clear.
- Increase Transparency, Predictability and
Timeliness. In order for the recommendations to have
teeth, the Panel's procedural proposals relating to
transparency (reporting on disallowances with reasons,
reporting annually about administrative guidance and type of
activities addressed), predictability (including increased
use of published guidelines, advisory materials, and binding
opinions) and timeliness would also need to be implemented.
These are helpful and largely uncontroversial suggestions,
many of which can be implemented immediately, without the
need for legislative change.
- Cultural Businesses. The Panel
recommends that the Minister of Heritage: (a) establish a
de minimus cultural business activities exemption
based on the lesser of $10 million or 10% of gross revenues
when measuring the cultural activities against the entire
business. This would be aimed at business acquisitions that
include an ancillary (not stand-alone) cultural business
aspect not subject to Department of Canadian Heritage review;
and (b) establish a five-year review of cultural industry
policies, including foreign investment restrictions. The
current $5 million ICA review threshold for stand-alone
cultural businesses would remain in the interim.
- "National Security" Issues. The introduction of
a new national-security-related review of proposed foreign
investments has been under active consideration by the
Federal Government for some time. Consequently, that issue
was not considered to be part of the Panel's mandate.
However, the Panel still chose to include an indirect
recommendation that any such security review process should
be based on the process now utilized in the United States,
which would also be generally in line with similar processes
currently utilized in the UK, China, Japan and Germany. This
is a helpful suggestion, but careful evaluation of the manner
in which these other countries operate their security review
processes, the scope of application and the definition of
"national security" is clearly required. In this
regard the Federal Government will need to tread a fine line
between protecting the nation's security and
introducing a highly uncertain and potentially political
process that will frighten off legitimate and beneficial
foreign investment.
4. Sector-Specific Amendments to Air Transport, Uranium Mining, Telecommunications and Broadcasting Ownership Restrictions
The Panel's recommendations also target long-standing sector-specific legislation containing foreign ownership restrictions in order to increase Canadian competitiveness and other public policy goals. The Panel's recommendations in these areas are:
- Air Transport. Increasing the foreign
ownership limit from 25% to 49% of voting equity on a
reciprocal basis; completing the Open Skies negotiations with
the EU as soon as possible; and establishing a policy (within
18 months) on foreign establishment of Canadian incorporated
domestic air carriers.
- Uranium Mining. Liberalizing
non-resident ownership on uranium mining, subject to new
national security legislation; and securing market access
benefits for Canadian participation in uranium resource
development outside of Canada, or access to processing
technology.
- Telecommunications/ Broadcasting.
Implementing a two-phased approach to foreign participation
in the telecommunications and broadcasting market, reflecting
the significant convergence of these sectors. It would begin
with allowing foreign companies to establish a new business
or acquire a business with up to 10% of the
telecommunications market in Canada, followed by a review of
broadcasting and cultural policies to liberalize foreign
investment restrictions in a "competitively
neutral" manner.
- Procedural Changes to All Sectors.
Implementing a periodic five-year review of all
sector-specific regulatory regimes to assess ownership
restrictions against competitive impediments, in light of
then relevant public policy considerations.
5. Amendments to the Competition Act
The Panel considers its recommendations for amendments to the Competition Act to be "fine-tuning" and not a "major overhaul" since Canada's regime is "recognized internationally as both modern and flexible." The finetuning is aimed at ensuring that the Competition Act is focused on anti-competitive conduct and outcomes rather than industry concentration, which the Panel considers inevitable given the reality of Canada's small open economy. As is the case with the Panel's recommendations relating to investment, many of its proposed recommendations in the competition area have also been under discussion for some time.
The Panel recommends:
- Adjusting Current Thresholds for Pre-Merger
Notification. The Minister of Industry should
examine the current financial thresholds which trigger
pre-merger notification under the Competition Act
with a view to increasing those thresholds. In particular,
the "size of the parties" threshold has remained at
$400 million since it was initially established over 20 years
ago. The net result of any such threshold increases would be
to subject fewer transactions to pre-merger notification. The
Commission of Competition would retain her ability to
challenge any transaction, whether notified or not. In
addition, the Minister should also consider whether
additional classes of transactions which are unlikely to
result in any competitive harm can be excluded from the
review process entirely. Unfortunately, the Panel remained
silent on the current notification filing fee of $50,000. For
example, it might have proposed, as an alternative, that if
nonproblematic transactions cannot be excluded from the
review process entirely, the applicable fees might be
adjusted to better reflect their non-problematic
nature.
- Procedural Changes to Merger Review.
Amending the pre-merger notification process to better align
it with the process currently used in the United States.
Proposed changes encompass an initial 30-day review (and
clearing) period, and, at the Commissioner's
discretion, a "second stage" review that would end
30 days following full compliance with a "second
request" for information. These proposed procedural
changes recognize the fact that many transactions are subject
to merger review in both Canada and the United States, as
well as the need for timeliness in merger review. There are
both positive and negative aspects to these proposals. On the
negative side, the Competition Bureau currently completes its
review of most notified transactions within 14 days. The
proposed 30-day initial period may therefore result in
additional delays for most transactions. This appears
completely unnecessary. On the positive side, the Bureau
often takes several months to review very complex
transactions. A second mandatory 30-day period following
submission of information necessary to meet a "second
request" could therefore result in a significant
improvement to the current processing periods for the small
number of such very complex transactions. A formalized
"second request" process might also go some way to
address current concerns relating to the Competition
Bureau's information gathering processes.
- Reduction of Post-Merger Review Period.
Limiting the challenge period to one year (from the current
three years) after the substantial completion of a merger
during which the Commissioner may challenge a transaction
post-closing. While this change would decrease post-merger
uncertainty for businesses, it is also possible that it could
result in the Commissioner undertaking more thorough reviews
upfront and challenging more potentially problematic
transactions because her ability to take a "wait and
see" approach will be more limited.
- Amendment of Criminal Provisions. (a)
Repealing price discrimination, promotional allowances,
predatory pricing provisions; (b) de-criminalizing resale
price maintenance and implementing civil penalties; (c)
replacing current conspiracy provisions with a per
se criminal provision to target hardcore cartels and a
civil provision to address other agreements between
competitors that have an anti-competitive impact. Many of
these proposals are relatively uncontroversial, such as
repeal of the price discrimination provisions, and will bring
Canadian competition law up-to-date with current economic
thinking. Others, such as proposed amendment of the
conspiracy section, have been under discussion for many years
with no clear consensus as to how issues relating to the
current provision can or should be addressed. Concerns
generally relate to any such changes being over-inclusive and
potentially punishing legitimate procompetitive business
conduct. The Panel's proposals provide no guidance as
to how this current log-jam might be broken.
- Changes to Abuse of Dominant Position.
(a) Repealing the special air passenger service abuse of
dominant position provisions (the so-called "Air
Canada" amendments) and penalties; and (b) introducing
administrative monetary penalties of up to $5 million for
violations of abuse of dominant position provisions. The
introduction of financial penalties for abuse of dominant
position have been under discussion for some time and is
perhaps more contentious than changes to the conspiracy
section. The concern here relates to the fact that the abuse
offence, in part, judges behavior after the fact, based on
effect. Concerns over the potential imposition of significant
fines could therefore act to stifle legitimate procompetitive
behavior in many instances.
6. Other Public Policy Initiatives
The remaining two-thirds of the Report lists numerous public policy initiatives that should be undertaken in order to improve Canada's overall competitiveness. Broad areas covered include taxation, international trade, strengthening the workforce through education and immigration, directors' role in M&A transactions, innovation and IP, securities and general regulatory reforms and Canada-US economic relations. The Panel also singles out barriers to internal trade and notes that greater efforts need to be made to reduce these barriers and improve upon the existing Agreement on Internal Trade.
7. Timing and Next Steps
A task force has been struck within the Ministry of Industry to review the Report and consider options. Even if this task force recommends wide-scale implementation of the Panel's recommendations, those proposals requiring legislative amendments will compete for scarce parliamentary time, particularly in this minority Parliament. Therefore, we do not expect to see many proposals requiring statutory amendment to see the "light of day" prior to the next Canadian federal election, expected this fall. There simply is not enough time to push such changes through Parliament even if they were to receive wide-spread acceptance. The more controversial suggestions not requiring legislative changes, such as the removal of the opposition to bank mergers, for example, are also not likely to be brought forward in the current minority Parliament. The Government has yet to formally respond to the Report and recommendations, but does appear to be generally satisfied with the Report. Opposition criticism, thus far, has been muted. This perhaps may signal that there is wide-spread acceptance of the Report and that most of the Panel's recommendations may eventually find their way into changed policy or legislative amendment following the next federal election.
The Financial Services Regulatory Group at Borden Ladner Gervais LLP would be pleased to discuss with you these legislative developments and any other regulatory issues you may have.
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.
