Gearing Up For Change: A New Look Merger-control Regime

This bulletin is the second in our subject-matter specific series explained in the article: " A New Playing Field: Summarizing Sweeping Reforms to the Canadian Competition Act", which summarizes key changes to Canada's Competition Act (the "Act"). Over the last two years, the Act has been substantially reformed through three separate rounds of amendments, most recently on June 20, 2024, by Bill C-59, known as The Fall Economic Statement Implementation Act¹.

The amendments to the merger control section will substantively and procedurally change certain aspects of the merger review process for most businesses. This bulletin will explain those changes and provide important takeaways to help your business conduct transaction planning.

I. EXPANDED PRE-MERGER NOTIFICATION THRESHOLDS

The Canadian competition regulator, the Competition Bureau ("Bureau") has the authority to review and challenge any "merger" under the Act. However, only when a proposed transaction meets two statutory thresholds must the parties file mandatory pre-merger notifications. These thresholds are as follows:

1. Size-of-Parties Threshold: The combined aggregate book value of assets in Canada or combined annual gross revenues from sales in, from, and into Canada by the parties and their affiliates must exceed $C400 million .
2. Size-of-Transaction Threshold: The target must have a book value of assets in Canada or annual gross revenues from sales in and from Canada currently exceeding C$93 million². For equity transactions, the purchaser must also acquire more than 20% of the voting shares of a public corporation or more than 35% of a private corporation's voting shares (or more than 50% if it already owns between 20% and 35%).

As a result of the amendments, the Act now accounts for a wider range of Canadian revenues, which will likely result in an increased number of pre-merger notification filings to the Bureau. Specifically, the Size-of-Transaction threshold now accounts for the following:

• Inclusion of Import Sales: Sales into Canada now count towards the revenue calculation of the threshold, where previously only sales in and from Canada were accounted for. This change is expected to increase the number of required filings as it broadens the scope of transactions that meet this notification threshold. Businesses with transactions closing after July 19, 2024 must consider this change and assess if their transactions are now notifiable due to additional "into Canada" revenues.
• Aggregation of Asset and Share Acquisitions: Previously, the Size-of-Transaction threshold was assessed separately for share and asset acquisitions, even if they form part of the same transaction. Under the new regime, the assets and revenues from both must be aggregated, which is also expected to increase the number of notifiable transactions.

These new financial threshold calculations are more consistent with how competition regulators from other antitrust jurisdictions assess their mandatory pre-merger filing thresholds.

II. NEW FACTORS IN ASSESSING COMPETITION & REPEAL OF EFFICIENCIES DEFENCE

Once the Bureau has reviewed the competitive effects of a proposed or completed merger transaction, it may challenge the transaction before the Competition Tribunal ("Tribunal"). As a result of the amendments, the Tribunal now has new factors that it can use in assessing whether or not a merger will result in a substantial lessening or prevention of competition ("SLPC").

• Structural Presumption: There is now a structural presumption that a significant increase in market concentration will automatically lead to an SLPC. These changes, which rely on the Herfindahl-Hirschman Index, allow for a more comprehensive evaluation of the competitive effects of mergers, particularly in the digital economy and other rapidly evolving sectors, and align with the US 2023 Merger Guidelines.
• Remedial Standard: The Act also now sets a new remedial standard for mergers, empowering the Tribunal to issue orders mandating that parties restore competition to its pre-merger level. This represents a stricter requirement than the previous standard, where the Tribunal's orders only needed to ensure that competition was not "substantially less" than before the merger.
• Labour Considerations: In addition to a structural presumption, the Tribunal is also now expressly directed to consider if an SLPC could occur in labour markets (e.g., a reduction in wages, salaries or other impact on employment terms and conditions), or if a proposed merger would result in excess or tacit coordination between competitors in the same market. ( 93 of the Act).
• Repeal of Efficiencies Defence: Further, in the face of a finding of an SLPC, transacting parties can no longer rely on s. 96 of the Act (the "efficiencies defence"), which was repealed as part of the December 2023 amendments. Although efficiencies can no longer justify an anti-competitive merger, they may still be factored into the analysis of its anti-competitive effects.

III. CHANGES TO PROCEDURAL TIMELINES

Your business teams should be aware and plan accordingly for changes made to the review process both for notifiable and non-notifiable merger transactions:

• For non-notifiable transactions (i.e., no pre-merger notification is required), the Bureau can review and bring a challenge to these mergers for a period of three years after closing (previously this period was one year).
• In addition, the June 2022 amendments to the Act from Bill C-19 included an anti-avoidance provision which now restricts the ability of parties and their counsel to structure transactions in a way that is intended to avoid a pre-merger notification filing.
• Separately, as it pertains to transactions where pre-merger notification is required, the parties are now automatically prohibited from closing their transaction until the Tribunal has heard and disposed of an application for injunction by the Bureau. Before the amendments, parties were allowed to close their transactions once the statutory waiting periods had expired, unless the Bureau obtained an injunction.

IV. IMPORTANT TAKEAWAYS TO SAFEGUARD YOUR BUSINESS:

The cumulative effect of the merger-related amendments to the Act will bring about significant changes that will impact businesses across all industries and sectors. Businesses can alleviate the potential risk by working with counsel in the early stages of transaction planning to safeguard against the new risks brought about by the amendments. The following are important takeaways that should be top of mind:

• Businesses should always review carefully with counsel whether or not their transaction is notifiable and necessitates a pre-merger notification to the Bureau. The new anti-avoidance provisions now prevent parties from arranging transactions in a way that avoids notification (e.g., parties can no longer split a merger into several smaller, independent transactions to avoid notification).
• To achieve certainty, for certain non-notifiable transactions, parties to a transaction may need to consider filing voluntary notifications to the Bureau to avoid the new three-year limitation period.
• The new structural presumptions and factors for consideration in reviewing mergers make it easier for the Bureau to challenge transactions that will result in higher combined market shares or concentration in a given market. Businesses should be aware of this risk and also try to ascertain the impacts a proposed merger will have on labour markets.
• The automatic waiting period during which the Tribunal considers and disposes of an injunction application by the Bureau, will prevent parties from closing and could create issues with deal timing if not properly accounted for at the outset.

Footnotes

1 Bill C-59, An Act to Implement Certain Provisions of the Fall Economic Statement, 1st Sess, 44th Parl, 2024, cl 236(1) (Assented to 20 June 2024).

2 This amount is reviewed annually and is subject to change based on GDP-linked threshold adjustments (though it has not changed in three years]

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.