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Avoiding legal and regulatory pitfalls in digital transformation projects
This article first appeared in the September 2024 issue of Financier Worldwide.
Canada | Publication | June 2024
Since 2022, the Government of Canada has introduced three waves of amendments to the Competition Act (Act), making substantive changes to Canada’s competition laws, with the most recent amendments receiving royal assent on June 20, 2024. Our publication on all the amendments can be found here. This update is part of a series designed to help businesses understand and comply with their new obligations under the Act.
With the passage of Bill C-59, mergers involving Canadian companies will face new challenges because of significant amendments to the Act’s merger review provisions. Businesses planning to enter into transactions that are mergers under the Act need to understand how their deals will be impacted and consider engaging competition counsel early on in the transaction process to ensure they assess potential competition law risks for their transaction so they can develop an effective merger review strategy.
Previously, a merger was legal under the Act unless the Commissioner of Competition (the Commissioner) proved it was likely to result in a substantial prevention or lessening of competition. The Act also prohibited the Competition Tribunal (the Tribunal) from finding that a merger would result in a substantial prevention or lessening of competition solely on the basis of an increase in concentration or market share alone.
Among Bill C-59's most significant changes are the introduction of structural presumptions that mergers exceeding prescribed market share and concentration thresholds are anti-competitive.1 Where the presumptions apply, the burden of proof is reversed and the onus is on the merging parties to rebut the presumption by establishing, on a balance of probabilities, that their transaction will not result in a substantial prevention or lessening of competition.
This will require considering factors such as the likely price and non-price competitive effects of the transaction, the extent and effectiveness of remaining competition, the availability of substitutes, barriers to entry and other such factors. While many of these sorts of considerations were features of Canadian merger review prior to C-59’s passage, the fact that merging parties are now required to prove a negative means merging parties should expect to provide more evidence to satisfy this test than was previously the case. It remains to be seen what level will be required to satisfy this burden.
The prescribed thresholds that trigger the structural presumptions are if, in a relevant market, (i) there will be a concentration index2 increase of more than 100, and (ii) either the concentration index is likely to be more than 1,800 or the parties are likely to have a combined market share of more than 30%.
Given the structural presumptions and the prescribed thresholds, it will be more important than ever to ensure relevant markets are appropriately defined and concentration indices and market shares are appropriately determined, particularly in complex cases. This is especially so given the Bureau’s history of taking aggressive positions on market definition that have not always prevailed.
In addition, the inclusion of a 30% combined market share in the prescribed thresholds in the Act throws into question, and departs from, the safe harbour threshold in the current Merger Enforcement Guidelines published by the Competition Bureau (the Bureau), which provides that the Commissioner generally will not challenge mergers where the merged firm's post-merger market share would be less than 35%.3
As a result, merger reviews for transactions that clearly or arguably exceed either of the prescribed thresholds will likely be lengthier, more complex, and subject to extensive documentary and data requests. Furthermore, while the Bureau’s approach to merger review generally given the structural presumptions will remain to be seen, merging parties may have to consider whether and under what circumstances they may be willing to close their transactions without comfort from the Bureau more often than has historically been the case.
A more stringent test for remedies has also been introduced. As a result of this change, if the Tribunal has concerns about a transaction, the remedies it orders must restore competition to the level that would have prevailed but for the merger. The Tribunal may also prohibit a person from doing any act or thing that the Tribunal determines to be necessary to ensure the merger does not prevent or lessen competition – the amendments have eliminated the previous requirement that such measures ensure the merger does not prevent or lessen competition substantially. The Tribunal can thus address any anti-competitive effects of a merger, regardless of whether they are substantial.
This is a fundamental change in Canadian competition law, which prior to the amendments required that merger remedies only needed to restore competition to the point at which it could no longer be said to be substantially less than it was before the merger.
In light of these changes, merging parties in transactions that could raise competition concerns must carefully consider what sorts of transaction risk and remedies, including divestments, they may be prepared to accept, whether on a negotiated basis or that the Tribunal could order. These considerations may impact the business rationale for transactions and the risk allocation provisions in transaction agreements.
Given that most merging parties seek to resolve the Bureau’s stated concerns without going to litigation, they may now need to be more willing to accept more significant remedies if they want to obtain merger clearance on a negotiated basis.
Some other key implications of the amendments to the Act’s merger review provisions include:
We anticipate the Bureau will release updated merger enforcement guidelines that will hopefully provide guidance on its approach to merger reviews going forward. It is hoped this will provide clarity and transparency to merging parties and their advisors. Given the extensive amendments, it will also be more important than ever for merging parties to undertake a competitive impact analysis of their transactions and develop an appropriate merger review strategy early on in the transaction process. Given the revised merger review regime, parties should also prepare for the possibility of merger reviews being more involved and more complicated from a process, timing and costs perspective.
Calculated as the sum of the squares of all competing firms’ market shares, also known as the “Herfindahl-Hirschman Index” or “HHI.”
There is no indication as of yet as to when the Bureau will be updating the Merger Enforcement Guidelines in light of the various amendments to the Act by Bill C-59 and earlier amendments in 2022 and 2023.
In Canada, merging parties can request an advance ruling certificate from the Commissioner and a waiver from having to file pre-merger notifications for their transaction.
Publication
This article first appeared in the September 2024 issue of Financier Worldwide.
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The Digital Markets, Competition and Consumers Act (DMCC Act) received Royal Assent on 24 May 2024 and is generally expected to come into force in autumn this year.
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On 26 July 2024, the People’s Bank of China (PBOC) and the State Administration of Foreign Exchange (SAFE) jointly released revised rules in respect of the investments into China’s financial market through the Qualified Foreign Institutional Investor and Renminbi Qualified Foreign Institutional Investor (collectively, QFII) regime (the New Rules).
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