The Competitor

Interim Commissioner emphasizes importance of trust and enhanced collaboration'

Stikeman Elliott LLP — Mon, 13 May 2013 07:39:22 -0500

Interim Commissioner of Competition John Pecman and Senior Deputy Commissioner of Mergers Kelley McKinnon recently attended a breakfast seminar at Stikeman Elliott, to speak to an overflow crowd of clients and to answer questions related to their visions for the future of the Competition Bureau.

Both Commissioner Pecman’s and Deputy Commissioner McKinnon’s remarks focused primarily on the importance of enhanced trust and collaboration between the Competition Bureau and its stakeholders, both domestic and international. Mr. Pecman emphasized that the Bureau must move to a “collaborative, horizontal approach” in engaging with the business and legal communities and with Canadian consumers. Ms. McKinnon noted the Bureau’s commitment to maintaining an open dialogue with businesses when it reviews proposed mergers, and giving parties clarity as to the issues it has raised, the concerns it has identified and the additional information it requires.

Interim Commissioner Pecman highlighted the importance of collaboration with domestic and international governments as a key tenet of the Bureau’s enhanced focus on trust and collaboration. He cited, for example, collaboration between the Bureau and various police and enforcement authorities related to enforcement of the conspiracy and bid-rigging provisions of the Act; collaboration on training and enforcement with Public Works and Government Services Canada (the main procurement arm of the Canadian government); joint efforts with Canada’s Anti-Fraud Centre; collaboration with the CRTC and Transport Canada regarding multi-agency merger reviews; and collaboration with international governments and organizations (including, most notably, the U.S. Department of Justice and Federal Trade Commission) on criminal, civil and merger matters.

A second focus of both Mr. Pecman’s and Ms. McKinnon’s remarks was the importance of transparency, certainty and predictability, with respect to how the Bureau reviews mergers, how it develops, communicates and applies its policies and how it enforces the Competition Act in general. To this end, Interim Commissioner Pecman noted that the Bureau was reviewing its Leniency and Immunity programs (part of the Bureau’s criminal enforcement arsenal) and the associated guidance documents, along with other issues related to investigative procedures and e-evidence.

Overall, the remarks from Canada’s top competition law enforcers were welcome news for Canadian businesses. When Competition Bureau approval is necessary for a contemplated merger, or where a desirable business practice raises potential concerns under the Competition Act, the disposition of the Competition Bureau can be a source of significant uncertainty for businesses, particularly in light of the lack of jurisprudence under many of the provisions of the Competition Act. The Bureau’s enhanced focus on trust, collaboration, transparency and predictability will help to reassure businesses that the Bureau is a positive and engaged participant in the Canadian business community, and should help to reduce transaction costs for merging parties and improve the efficiency of the Canadian economy.

Canada creates further uncertainty for investments by State-Owned Enterprises

Stikeman Elliott LLP — Tue, 07 May 2013 14:05:33 -0500

Lawson A.W. Hunter Q.C., Susan M. Hutton and Michael Kilby -

On April 29, 2013, the Government of Canada tabled its budget implementation bill, the Economic Action Plan 2013 Act, which includes proposed amendments to the Investment Canada Act (ICA), particularly in relation to state-owned enterprises (SOEs). Given that the amendments are contained in the budget bill, it again appears that there will be little or no opportunity to debate substantively the merits of the amendments or to revise them before they become law. This is not the first time amendments to the Investment Canada Act have been made within the budget bill. In 2009, extensive amendments were made to both the Investment Canada Act and the Competition Act in that year’s budget bill, and were passed without revision. The significance of both the Investment Canada Act and the Competition Act to the Canadian economy is such that the practice of amending these statutes without the opportunity for full consultation and reflection from all stakeholders increases the risk of unfortunate and unintended consequences.

The proposed amendments follow the Government’s December 7, 2012 announcements in relation to SOEs in the context of its approval of CNOOC/Nexen and Petronas/Progress. As outlined in detail in our previous blog post on the subject, the December 7 announcements set out several new concepts, including:

a special policy specific to the oil sands, pursuant to which acquisitions of control of oil sands businesses by SOEs will now only be found to be of “net benefit to Canada” on an exceptional basis;
the widening of the previous definition of an SOE to include entities that are merely influenced directly or indirectly, by a foreign government. The term “influenced” is not defined in the ICA, unlike the term “controlled”, which has a specific meaning under the ICA;
different review thresholds for SOEs vs. non-SOEs, with SOEs being subject to a lower threshold for review;
a clarification of the factors to be considered by the Government when reviewing an SOE-investment, which include the degree of control or influence of the foreign state over the SOE, the degree of control or influence of the SOE over the Canadian business, and the degree of control or influence of the SOE over the industry of the Canadian business operates

The effect of these changes has become the subject of considerable debate amongst foreign investment law specialists in Canada, with a key area of focus being whether they are likely to reduce or “chill” foreign investment by SOEs in Canada. On the one hand, they set the bar higher for SOEs (particularly in the oil sands, where it would appear future acquisitions of control are prima facie prohibited, barring undefined “exceptional circumstances”). On the other hand, the Government was careful to note that “investments to acquire minority interests proposed by foreign SOEs, including joint ventures, continue to be welcome in the development of Canada's economy.”
This debate is an important one given the capital-intensive nature of Canada’s resource industries, and the oil sands in particular. It is estimated that hundreds of billions of dollars will be needed to develop the oil sands and as such it is certainly arguable that a policy restricting foreign investment in the very area where it is most necessary is fundamentally misguided, particularly where there seems be no evidence at all that previous SOE investments in the oil sands have been unsuccessful.

The key changes to the Investment Canada Act contained in the budget bill are set out below. In summary, the overall thrust of the amendments is clear: the Government is seeking to maximize its discretion in dealing with SOEs. While this approach may be understandable from the Government’s perspective, it is not clear whether the Government fully appreciates the potential “chilling effect” of significantly changing the rules for SOEs twice in a matter of months. Stikeman Elliott’s firm view continues to be that Canada remains open for foreign investment, including large-scale foreign investment, and including large scale foreign investment with substantial SOE involvement, but the current draft bill risks undermining that message.

SOE Definition. An SOE will be defined very broadly to include an entity that is controlled or influenced, directly or indirectly, by a foreign government or government agency, and also individuals who are acting under the direction or direct or indirect influence of such a government or agency. This potentially captures companies with tenuous connections to foreign governments, certainly falling well short of control. Given calls for reciprocity, are Canadian banks, for example, to be considered to be SOEs (albeit Canadian SOEs) simply because the Minister of Finance calls asking them to rein-in consumer lending? Is there not a risk that defining SOEs so broadly will cause foreign governments to react by treating less favourably various Canadian firms, including an array of Canadian pension plans seeking to diversify their portfolios internationally?
SOE Deeming – Canadian Status. An entity that satisfies the Canadian status rules set out in the Investment Canada Act can nonetheless be deemed by the Minister to be non-Canadian if the Minister determines that it is controlled-in-fact by an SOE. Indeed, the Minister can deem any entity to be controlled-in-fact by an SOE if he so determines.
SOE Deeming – Acquisition of Control. An investment by an SOE that falls underneath the acquisition of control threshold can nonetheless be deemed by the Minister to amount to an acquisition of control-in-fact by the SOE if the Minister so determines. This amendment may turn out to be highly significant because it deprives investors of the certainty of the long-standing “acquisition of control” rules that currently govern the Investment Canada Act (which, for example, clearly establish that an acquisition of less than one-third of the voting shares of a corporation is not an acquisition of control) and imports an uncertain control-in-fact test for some types of investors. This proposed amendment (unintentionally, we hope) calls into question the Government’s previous assertion that minority interests and joint ventures will in fact be welcome, as they may instead be subject to review. Although similar control-in-fact tests exist in various contexts, including the Telecommunications Act and the Canada Transportation Act, they are certainly not without controversy (see, for example,the Wind/Globalive saga described elsewhere on this blog, in which various branches of the federal government issued fundamentally contradictory “control in fact” decisions) and can lead to highly uncertain results. While we note that the Government concluded that it would not review the Encana / Petrochina Duvernay joint venture (50.1% / 49.9%) announced in mid-December 2012, following the approval of the CNOOC / Nexen and Petronas/ Progress transactions, and also that the Government has in fact yet to block an SOE transaction, inclusion of this “control in fact” test for SOE acquisitions may potentially chill foreign direct investment by SOEs in Canada, even by way of minority positions in joint ventures.
Thresholds. The bill re-iterates proposed changes previously announced in March 2009 to the manner in which the threshold for review is calculated for WTO investors. The threshold will be altered from a “book value” test (currently set at C$344 million for transactions closing in 2013, indexed to inflation) to an “enterprise value” test (starting at C$600 million and then moving to C$1 billion over 4 years, and indexed to inflation thereafter). These changes cannot take effect, however, until regulations containing the specific details of the calculations are implemented. Although several draft regulations have previously been issued, they were flawed in that they would have introduced considerable ambiguities and complexities into the calculation of the threshold value (which is currently a very simple matter). The most recent draft was issued almost a year ago, and it is unclear whether it will be passed in its current form or amended to address these concerns. Moreover, the proposal announced in late 2012 to make the new threshold inapplicable to SOEs necessitated legislative amendments to define SOEs and make them subject to different thresholds – previous rules regarding SOEs had not been legislated but merely adopted as a policy matter. In terms of the impact of the different threshold on SOEs, the existing “book value” threshold will be reserved for SOEs, with the result that the determination of whether an entity is indirectly influenced by a foreign state could mean the difference between a review being required or not. Moreover, the difference between “book value” and “enterprise value” is such that it is not at all clear that C$344 million in “book value” is necessarily less than C$600 million in “enterprise value”, with the result that in some cases an SOE might in fact benefit from a more favourable threshold depending on the financial health of the target.
National Security. The national security provisions of the ICA (themselves introduced without debate in the 2009 budget bill) set out various timeframes within which certain processes are to be completed where a transaction raises potential national security concerns (e.g., the time period for ordering a review, the time period for referring a review to the Governor-in-Counsel, the time period for the Governor-in-Council to make a decision). The 2013 budget bill would extend several 5 day periods to 30 day periods and also provide that certain periods can be extended on agreement between the Minister and the foreign investor. Given that only one transaction, to our knowledge, has ever been subject to a national security notice (and it collapsed within a few days of a national security notice being issued), the practical implications of these extensions are likely not great. The overwhelming majority of foreign investments will not be impacted, and the national security review process is already highly discretionary. For those rare cases where a national security notice is issued, however, the latest amendments make it clear that the process will likely be protracted, and essentially indefinite.
Ministerial Opinions. The ICA currently requires the Minister to provide an opinion regarding whether an entity is Canadian under the ICA, if requested by that entity, and if complete information is provided. The bill would limit this requirement to transactions involving cultural business, only. In all other contexts, the Minister may choose to give the opinion, but is not required to do so. In practice, the route of seeking a Ministerial opinion was little-used but it did afford an entity the opportunity to attain a degree of certainty as to whether the ICA would apply to it. This route is apparently not necessarily going to be available to non-cultural SOE minority investments, even as the proposed amendments make them subject to considerable ambiguity and uncertainty in the absence of such advice.

In summary, the overall thrust of the changes is unquestionably that the Government is reserving for itself a great deal of discretion in how it will handle future investments by SOEs. The manner in which the Government will exercise that discretion is not yet known. While we continue to believe the doors to foreign investment in Canada – even by SOEs - are open, Bill C-60 risks sending the message that they are in fact closed – or closing – for significant new sources of global capital investment.

View Stikeman Elliott’s Investment Canada Act FAQ summary.

Call me maybe? ONCA says standing offers could be contract bids under Bid-Rigging Offence

Stikeman Elliott LLP — Tue, 23 Apr 2013 15:44:13 -0500

Susan M. Hutton and Solène Murphy -

April 3, 2013 the Ontario Court of Appeal released its reasons for decision in R v. Dowdall, affirming the Superior Court’s earlier decision to commit 17 defendants to stand trial on charges of bid-rigging under s.47 of the Competition Act. The defendants had argued that tenders submitted to pre-qualify as approved suppliers, or to create a standing order, if and when such services were required, was not a “bid or tender” and thus fell outside the ambit of the prohibition against bid-rigging.

Both the Superior Court and Court of Appeal agreed that the preliminary inquiry judge reasonably concluded that there was some evidence that the process of obtaining a Standing Offer Agreement was contractual and could be considered a “request for bids or tenders” under the bid-rigging offence.

This case stands in stark contrast to the recently-decided Quebec Court case R v. Al Nashar et al. whereby similar charges of bid-rigging were dismissed once the court determined that a request for quotes from subcontractors did not amount to a “call or request for bids or tenders” since the person requesting the bids was under no obligation to accept the bids.

Bid-Rigging

Bid-rigging is a criminal offence which deals specifically with collaborations between independent, third party competitors with respect to responses to calls for bids or tenders. Section 47 of the Competition Act sets out the elements of the offence, which the Crown must prove beyond a reasonable doubt:

a call or request for bids or tenders;
two or more bidders enter into an agreement related to the submission, withdrawal or decision not to submit a bid or tender;
bids were submitted, withdrawn or not made pursuant to that agreement; and
the person who called for the tenders was not made aware of the agreement or arrangement, at or before the time the bids were submitted (or due).

Both the Dowdall and the Nashar decisions were issued pursuant to a preliminary inquiry to determine whether the Crown had enough evidence to make out all the elements of the offense. Both cases ultimately centred on whether the “call or request for bids” from contractors satisfied the first element of section 47.

Most bid-rigging cases centre on the second element - whether there is an agreement - however, as whistle-blowers and Competition Bureau investigations become more common, the body of jurisprudence is growing with respect to other elements as well.

Dowdall

In early 2005, the Competition Bureau investigated the bidding processes for 10 IT services contracts worth $67 million. These services were with various government departments: Canada Border Services Agency, Public Works and Government Services Canada, and Transport Canada. The case and subsequent appeals dealt with the Transport Canada contracts.

According to the Bureau, evidence indicated that the bidders’ objective was to collectively win and divide the contracts awarded, while blocking competitors who were not a part of the conspiracy.

In Dowdall, the RFPs in question were for the purpose of creating a standing order for the potential provision of I.T. services – essentially pre-qualifying certain potential suppliers. A standing offer is an offer from a potential supplier to provide goods and/or services at pre-arranged prices, under set terms and conditions, when and if required. If the government issues a “call-up” against the standing offer then those who have pre-qualified will have a chance to bid for the services. The government is under no actual obligation to purchase until that time, and the applicants are under no obligation to respond to the call-up.

The applicants argued that these arrangements could not be considered requests for bids, since they did not result in a contract for services. The fundamental nature or goal of the procurement process was merely to create a list of potential qualified suppliers with no specific or clearly identified project or commitment to engage any services at all.

The preliminary hearing judge found that there was sufficient evidence to infer that the process of obtaining a Standing Offer Agreement was contractual and would therefore constitute a bid, and committed the appellants to stand trial for bid rigging under s. 47 of the Competition Act and conspiracy to commit bid rigging contrary to s. 465(1) of the Criminal Code.

The accused applied to the Superior Court of Justice in Ontario for certiorari of the preliminary decision and appealed that decision to the Ontario Court of Appeal. Each court in turn dismissed the application, affirming the preliminary inquiry judge’s decision.

In the end the Superior Court agreed with the preliminary inquiry judge and found that there was value in obtaining the Standing Offer Agreement and these agreements could give rise to enforceable rights and obligations on both parties. As such, there was some evidence from which a jury could infer that the process was contractual.

The Court of Appeal affirmed the lower court’s decision with the caveat that they did not agree with any statement made by the superior court judge which could be interpreted as saying that there was no actual contract in this situation. The Dowdall case will now proceed to trial, and could set an important precedent for the scope of processes subject to the law. It stands, however, in stark contrast to a Quebec case, R v. Al Neshar et al., that went the other way.

Nashar

In early February 2013 the Quebec court held a preliminary inquiry into five potential counts of bid-rigging and levied against nine defendants, all of whom were subcontractors in the business of installing ventilation systems in buildings under construction.

For three of the counts, the same general contractor would prepare a list of potential subcontractors and send each of them a detailed request for tenders. Once the bids were in, he would often enter into negotiations with several of the lowest bidders and eventually make a recommendation to the ultimate client. He was under no obligation to accept the lowest bid or, indeed, any of the bids submitted. The situation was similar with the two other counts; the general contractor was under no obligation to accept the lowest bid and for one count the bid was cancelled altogether.

For all five tenders, the competitors had formed agreements to determine who would submit the lowest bid. Once determined, the other competitors would bid higher than the chosen “winner”.

Although on the face of it the general contractor’s detailed submission looked like a call for bids, the Court stated that it had to dig further to determine the true intention of the parties.

The testimonial evidence of the contractors showed that they did not consider that they were under any obligation to accept any of the bids; furthermore, clauses in the RFPs specifically stated that one or all of the submitted bids could be rejected without cause.

This was enough for the court to determine that the general contractors did not believe that they would have to accept any of the bids. As such, the court found that the general contractor’s submission to the sub-contractors did not amount to a “call or request for bids or tenders” within the meaning of section 47 and the accused were discharged.

Conclusion

Dowdall and Nashar agree that the intention of the parties to create contractual obligations is at the heart of whether a request for proposals falls within the words “bid or tender” as used in s. 47 of the Competition Act. The Ontario Court of Appeal in Dowdall, however, came to a sharply different finding based on very similar facts – in part by taking a more purposive approach to interpretation of Canada’s prohibition against bid-rigging.

For more information concerning bid-rigging, and what you should do to ensure your company is not caught unawares, please contact your usual contact at Stikeman Elliott LLP, or the authors.

Competition Tribunal dismisses Competition Bureau's Abuse of Dominance Application against the Toronto Real Estate Board

Stikeman Elliott LLP — Wed, 17 Apr 2013 07:51:12 -0500

Sultana L. Bennett -

On April 15, 2013, the Competition Tribunal dismissed the Competition Bureau’s application (the Application) against Canada’s largest real estate board, the Toronto Real Estate Board (TREB). The Tribunal found that the abuse of dominance provision under section 79 of the Competition Act (the Act) did not apply to the facts of the case, which pertained to TREB’s membership rules governing the use of its Multiple Listing Service (MLS) data.

The Bureau’s May 27, 2011 application requested that TREB eliminate rules allegedly denying its real estate agent members the ability to introduce Internet-based real estate brokerage services by limiting the use the members could make of the MLS listings and related data.

The Tribunal, stating that the determinative issue was the fundamental question of whether the Application met the requirements of section 79, disposed of the matter on that basis and did not address the other issues raised in the Application. The Tribunal’s primary holding pertained to the fact that TREB did not compete with its members in the market - a fact undisputed by TREB, the Commissioner and the Canadian Real Estate Association (CREA) (CREA sought and was granted intervenor standing at the Tribunal proceeding). As set out in the Federal Court of Appeal’s Canada Pipe decision, for anti-competitive conduct to be caught by section 79, the conduct must have had a negative effect on a competitor that is predatory, exclusionary or disciplinary.

The Tribunal did not accept the Bureau’s proposition that based on the language of section 78, which sets out a non-exhaustive enumerated list of anti-competitive acts, section 79 could cover abusive conduct by entities other than competitors. In the Tribunal’s view, section 78 was a “powerful indicator” that the rule in Canada Pipe was the correct approach, given the “strong theme” present in the examples of anti-competitive acts set out therein.

This decision may also have consequences for the Bureau’s recently amended Abuse of Dominance Guidelines (the Guidelines), which, while acknowledging the application of Canada Pipe, state that “certain acts not specifically directed at competitors could still be considered to have an anti-competitive purpose.” The Tribunal observed as “interesting” that the Commissioner in the Guidelines did not “clearly state that the dominant party need not compete in the market”; accordingly, the Application sought not only to extend the reach of section 79 beyond Canada Pipe, but also beyond the Guidelines.

For the reasons set out above, the Tribunal dismissed the Application. However, the Tribunal observed (without intending to suggest such an application would necessarily succeed) that section 90.1 of the Act might provide a means for the Commissioner to re-apply to the Tribunal, in which application the Commissioner could potentially seek an order prohibiting the members of TREB’s board of directors – who are competitors in the market – from enforcing the challenged TREB rules.

The Bureau stated in an announcement that it was disappointed by the Tribunal’s dismissal of its Application, and would be reviewing the decision to determine next steps.

Federal Court of Appeal Upholds Competition Tribunal's Decision in the Tervita (CCS) Merger

Stikeman Elliott LLP — Fri, 05 Apr 2013 07:33:19 -0500

Susan M. Hutton, Paul Beaudry and Solene Murphy -

On February 25, 2013, the Federal Court of Appeal (FCA) released its decision upholding the Competition Tribunal’s Order requiring that Tervita Corporation (formerly known as CCS Corporation) divest the Babkirk hazardous waste landfill site in northeastern British Columbia following its acquisition of Complete Environmental Inc. The decision provides guidelines for determining a reasonable period of time for likely market entry in a “prevent” case, as well as clearer guidance on what is “in” and what is “out” for a section 96 efficiencies defense. It also marks a rare challenge to a closed, and non-notifiable transaction.

Background

In February 2010, Complete received regulatory approval to open the Babkirk landfill. Construction had not yet commenced when Tervita acquired the site from Complete. At the time of the transaction, Tervita operated the only two operational secure landfills for hazardous waste in British Columbia. The Commissioner of Competition therefore alleged that the transaction substantially prevented competition in hazardous waste landfill in northeastern B.C.

The $6 million acquisition closed in January 2011. Both the assets and the revenues of the target were well below the pre-merger notification thresholds in the Competition Act; however, in Canada the Commissioner has jurisdiction to challenge even non-notifiable transactions within one year of closing. On January 4, 2011, the Commissioner applied to the Tribunal for an order either to dissolve (i.e., unwind) the transaction between Tervita and Complete’s shareholders, or for Tervita to divest itself of Complete or Complete’s wholly–owned subsidiary, Babkirk Land Services on the grounds that it had substantially prevented competition.

Tervita argued that Complete had originally intended to run the site as a bioremediation business for neighbouring oil and gas companies, and not as a hazardous waste landfill, such that the required likely competition with Tervita was not made out. It also argued that expected efficiencies would be greater than and would offset any likely anti-competitive effects.

On May 29, 2012, the Tribunal ruled in favour of the Commissioner, finding that Tervita’s acquisition of Complete had likely substantially prevented competition in the market for the supply of landfill services for solid hazardous oil and gas waste in northeastern British Columbia.

To make this determination, the Tribunal questioned the viability of Complete’s bioremediation business, finding it likely that, within one year, the business would have failed and Complete would have either sold the site to a Tervita competitor or continued to operate it as a hazardous waste landfill site - in competition with Tervita. Either outcome would have resulted in direct competition with Tervita. As such, the Tribunal held that the merger had prevented the likely entry of a competitor. The Tribunal ordered that Tervita divest the shares or assets of Complete or of its subsidiary that held the landfill permits, Babkirk.

As noted in our previous blog post, CCS, Complete, and Babkirk filed a notice of appeal at the FCA on June 26, 2012.

They argued that the Tribunal had erred by looking beyond the date of the merger in its assessment of likely entry, and that it had speculated as to future events. They also argued that the Tribunal had erred in its analysis of the section 96 efficiencies defense.

Decision

Reasonable time period for market entry

The FCA affirmed that the likelihood of entry should be determined within a reasonable period of time following the merger. Entry need not necessarily have been poised to occur as of the date of the merger. The FCA held that the reasonable time period for assessing the likelihood of entry will vary from case to case and will depend on the nature of the business under consideration, but provided the following guidelines:

there must be a clear and discernible timeframe for market entry; and
market entry should normally occur within the temporal dimension of barriers to entry for that business.

The FCA also affirmed that the burden of proving that the target was a poised entrant, such that its acquisition substantially prevented competition, rested solely with the Commissioner.

“Efficiencies” defense clarified

Section 96 of the Act provides that where a merger otherwise results in a prevention or lessening of competition, the Tribunal may not make an order if the respondents can establish that the gains in efficiency resulting from the merger are greater than and offset its anti-competitive effects.

The FCA agreed with the Tribunal that section 96 of the Act requires a balancing of both quantitative and qualitative gains in efficiency against both quantitative and qualitative effects of any prevention or lessening of competition resulting or likely to result from a merger. However, it clarified that when quantifying efficiency gains and anti-competitive effects of a merger, the analysis must be as “objective as is reasonably possible, and where an objective determination cannot be made, it must be reasonable.” An objective analysis entails that a quantification of both gains in efficiency and anti-competitive effects must be carried out whenever it is reasonably possible to do so.

The FCA’s approach to quantification is in contrast to the Tribunal’s “subjective balancing” methodology, rejected by the FCA, which allowed for quantitative effects that had not been quantified to be given qualitative weight in certain circumstances.

Having disagreed with the Tribunal’s efficiency analysis, the FCA then conducted its own analysis using the evidence presented at trial. Although the FCA was unable to objectively weigh the quantifiable efficiency gains against anti-competitive effects because the Commissioner had not quantified such anti-competitive effects, it found that the gains in efficiencies resulting from the merger were “marginal to the point of being negligible” and could not reasonably have been considered to outweigh its anti-competitive effects. The FCA therefore dismissed the appeal and upheld the Tribunal’s Order.

Conclusion

The Tervita case is significant, as it demonstrates that the Commissioner is willing to challenge small, non-notifiable transactions when necessary. Furthermore, the FCA’s decision provides guidance regarding the analysis of “prevent” cases under Canadian law, and underscores the importance of properly assessing both the anti-competitive effects and the efficiency gains in contested merger cases.

The Competition Bureau clears Leon's/The Brick Furniture merger

Stikeman Elliott LLP — Thu, 21 Mar 2013 10:40:53 -0500

Marisa Berswick -

Parties considering retail mergers should take note of the approach that the Canadian Competition Bureau took in analyzing the proposed acquisition of The Brick Ltd. and its subsidiaries (The Brick) by Leon’s Furniture Limited (Leon’s). Stikeman Elliott LLP has experience acting as competition counsel in a number of retail mergers, including the recent acquisition by Canadian Tire of Forzani, in which the Bureau took a similar approach. Both retail merger reviews highlighted the key role of econometrics in the Bureau’s assessment of whether the merged entity will have the ability to increase prices.

On March 19, 2013, the Bureau released a position statement in respect of the merger of the two national retailers of furniture, mattresses, appliances and electronics. The Commissioner of Competition issued a “no action letter” to Leon’s and The Brick on March 11, 2013, meaning the merger will not be challenged. The Bureau’s review focused on the potential competitive effects in the retailing of furniture and mattresses. Leon’s and The Brick were viewed as particularly close competitors in respect of furniture and mattresses, with a high degree of differentiation from other competitors.

The Bureau went on to consider the potential loss in competition that might be expected to arise from the merger. The Bureau collected transaction level sales data to assess the degree of direct competition. The Bureau used a cross-sectional economic analysis to compare the parties’ prices in areas where they compete with prices in areas where they do not. The Bureau determined that the price effects were not material.

The Bureau’s assessment of whether the transaction would result in a substantial prevention or lessening of competition (an SPLC) also considered various factors identified in the Merger Enforcement Guidelines as having a constraining influence on price following a merger. In particular, the Bureau considered the extent to which barriers to entry existed, in addition to the presence of effective remaining competition in the retailing of furniture and/or mattresses:

On barriers to entry, the Bureau noted certain barriers, such as scale, which provides a larger retailer with cost advantages over small retailers. Another barrier identified by third party market contacts consulted by the Bureau was the ability to secure viable real estate.
However, the Bureau also determined that a number of national and regional retailers had overcome such barriers to entry, and that there would be sufficient effective competition to the merged entity in each of the local markets in which the parties compete. The Bureau thus concluded that the merger was unlikely to lead to an SPLC.

Consistent with the guidance provided in the position statement on the acquisition of Forzani by Canadian Tire, this position statement provides insight into how the Bureau approaches retail mergers. This position statement suggests that one of the Bureau’s principal concerns is the effectiveness of remaining competitors to constrain an exercise of market power. The review undertaken by the Bureau also highlights the potential requirement for parties to produce a large amount of data and internal documents in the course of a retail merger. The buyer will need to be active in retaining an economist and conducting an analysis of the data.

For more information concerning retail mergers, and the special considerations that should be taken into account, please get in touch with a member of the Competition and Foreign Investment Group at Stikeman Elliott.

Canada sharpens its teeth to take a bite out of bribery

Stikeman Elliott LLP — Mon, 11 Feb 2013 08:59:06 -0500

Susan Hutton -

On February 5, 2013 the federal government tabled amendments to the Corruption of Foreign Public Officials Act (CFPOA) which, if passed, would give Canada a much broader reach and pose a more serious threat to Canadians and Canadian businesses who attempt to gain a business advantage through bribery. These amendments are evidence of the Government’s tougher approach to enforcement of the CFPOA in recent years, as witnessed already by prosecutions of Niko Resources in 2011 and more recently of Griffiths Energy, both of which pled guilty to offences under the Act (see below for more details). In some ways, the CFPOA will now be tougher than its US counterpart.

Generally speaking, the CFPOA prohibits giving or offering to give a benefit of any kind to a foreign public official, or any other person for the benefit of the foreign public official, where the ultimate purpose is to obtain or retain a business advantage.

The amendments propose to make changes which would:

Entrench the nationality principle as the basis of jurisdiction for offenses
Broaden the definition of a “business” to which the Act applies
Eventually eliminate the facilitation payments exception
Create a books and records offense (similar to that contained in the U.S. Foreign Corrupt Practices Act)
Provide exclusive authority to the RCMP to lay informations in respect of charges
Increase the maximum individual penalty from 5 to 14 years imprisonment

Broader Scope of Canada’s Corruption Laws

As mentioned in our August 9, 2011 blog post, in 2009, the Minister of Justice introduced legislation (Bill C-31) that would have added provisions to the CFPOA based on the nationality principle; however, it died on the order paper with the prorogation of Parliament in December 2009 and the idea has only now been revived.

The legislation, as it now stands, applies to activities with a “real and substantial” connection to Canada, but the entrenchment of the nationality principle will mean that the CFPOA will cover activities by Canadian nationals and Canadian-based businesses regardless of where the activity took place. Furthermore by removing the words "for profit" from the definition of “business”, the amendments ensure that the Act applies to business activities, whether profitable or pursued as a loss-leader.

More Offenses

The amendments also stand to increase the number of activities that fall within the scope of the Act, by eliminating an exception and creating a new offense:

An exception for facilitation payments will eventually be eliminated. Facilitation payments are made to expedite or secure acts of a routine nature by foreign public officials (e.g., payments to a customs official to clear goods more quickly) and the elimination will come into effect at a later date to be set by Cabinet.
A new books and records offense similar to that contained in the U.S. Foreign Corrupt Practices Act was introduced. The new offence will capture activities that falsify or hide records and payments related to the bribery of foreign public officials. A key difference, however, is that the new offence will be a criminal offence subject to the “beyond a reasonable doubt” evidentiary threshold. The comparable U.S. provision is enforced civilly and falls under a less onerous civil “balance of probabilities” but does not attract criminal liability for the book-keeping offense.

Charges and Penalties

Currently, charges under the CFPOA may be recommended by any police force in Canada, but the amendments will give exclusive authority to lay an information to the RCMP. According to the Government announcement, in 2008, the RCMP established an International Anti-Corruption Unit, which is dedicated to raising awareness about and enforcing the CFPOA. Giving unique responsibility for enforcement to the RCMP Unit should lead to greater consistency in the enforcement of the law and to a more efficient use of resources.

The amendments will also increase the penalty for individual offenders. The maximum penalty will go from a maximum of five years’ imprisonment to a 14 year jail term for individuals. The unlimited fines for individuals and corporations, subject to the discretion of the judge, remains.

Conclusion

Until recently, the CFPOA had been sitting, mostly silent, on the books, but since the formation of the dedicated RCMP unit in 2008 the Government has been stepping up enforcement and has pursued a number of high profile cases.

The Government’s announcement issued February 5 mentions that, to date, three companies have been convicted under the Act, two cases are pending and there are 35 ongoing investigations under the CFPOA.

Most recently, on January 22, 2013, Griffiths Energy International Inc. pleaded guilty to a charge under the CFPOA. Griffiths acknowledged making a $2 million cash payment to the wife of the Ambassador from the Republic of Chad, as a consulting fee. Griffiths total penalty under the CFPOA was $10.35 million.

See our previous blog post for details of the Niko Resources case, Canada’s second conviction. Niko’s sentence included a $9.5 million fine and a three-year probation order that required the company to implement a detailed compliance program subject to review by an independent auditor.

Prior to Niko’s conviction, only one Canadian company had been convicted of foreign bribery under the CFPOA in the past decade. The $25,000 fine issued by the court in that case, known as R. v. Hydro Kleen Services Inc., was less than the bribe involved.
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For more information concerning the Corruption of Foreign Public Officials Act, and what you should do to ensure your company is not caught unawares, please get in touch with your usual contact at Stikeman Elliott, or with the author.

Canada's Commissioner of Competition toughens stance

Stikeman Elliott LLP — Fri, 01 Feb 2013 10:42:56 -0500

Susan M. Hutton and Robert Mysicka -

Recent remarks by Canada’s Interim Commissioner, John Pecman, reinforce the view that the Bureau is pursuing all avenues available to it under the Competition Act to fulfill its mandate of investigating and challenging civil and/or criminal anti-competitive practices. In this respect, the interim Commissioner noted three of the Bureau’s priorities going forward:

focused enforcement and strategic regulatory interventions designed to benefit Canadians;
applying Canada's competition laws in a transparent and predictable manner; and
developing trust through enhanced collaboration

In addition to these priorities, Mr. Pecman noted that the Bureau would assist in providing clarification on the Act’s price maintenance provisions, issues that have arisen in the context of electronic document production, the Bureau’s leniency program for those that cooperate in criminal investigations, and investigative procedures.

The Use of Section 11 Investigative Orders

In his speech, Mr. Pecman emphasized that the Bureau will use “all of the tools that Parliament has given to us in the Competition Act to deliver on our mandate”. In terms of investigations under formal inquiry, including non-merger, civil matters, the Commissioner indicated that the Bureau will not refrain from using the powers available to it through section 11 of the Act. This provision allows the Commissioner to compel attendance of a person who has, or is likely to have, information that is relevant to an inquiry, so that they may be examined on oath or solemn affirmation, or to compel production of records or a written return.

While the Bureau has the power to utilize section 11 in respect of both civil and criminal matters under inquiry the Commissioner noted that in some recent investigations it has opted to use Voluntary Information Requests (VIRs) in place of court orders. However, Mr. Pecman expressed concern that parties may be using the VIR process for strategic, uncooperative purposes, resulting in unnecessary delays in the Bureau’s investigations. In order to combat what the Bureau views as “inefficient, incomplete and untimely” responses associated with VIRs, Commissioner Pecman declared that, “going forward, the Bureau's first course of action in obtaining information from the target of a formal inquiry in non-merger cases will be, for all but exceptional cases, obtaining a legally binding section 11 order from the Court.”

The Commissioner clarified that the use of section 11 orders is not meant to be punitive, but rather is designed to aid investigations by providing a clear framework, timelines and set of rules that benefit both parties in the investigation.

Transparency

In addition to commenting on section 11 orders, the Commissioner expressed a commitment to transparency designed to provide the legal community, consumers and businesses with greater certainty in their dealings with the Bureau. Practically speaking, this means continued publication of guidance material, and, in respect of merger review, position statements for complex deals. Such statements will continue to be published where there is a high level of complexity and importance of the issues raised, a strong interest in the case, or where the review utilized new analytical tools, findings or outcomes. The online mergers register, which lists completed merger reviews updated on a monthly basis, will see its first year of operation this February.

Recent Enforcement Measures

The Commissioner commented on some of the Bureau’s recent enforcement measures, stating that he was particularly proud of the investigation into the retail gas sector in Quebec, which was one of the largest in the agency’s history. The investigation resulted in criminal price-fixing charges being laid against 39 individuals and 15 companies, with total fines exceeding CDN $3 million and terms of imprisonment totaling 54 months. The Commissioner also stated that he expects a decision from the Competition Tribunal soon on the civil case alleging anti-competitive price maintenance practices by Visa and Mastercard.

Partnerships

In terms of non-legislative enforcement measures, Commissioner Pecman highlighted the Bureau’s collaboration with its law enforcement partners in Quebec, specifically the Unité Permanente Anticorruption or UPAC. Collaboration between the Bureau and UPAC was integral to uncovering a complex collusion scheme involving contracts for infrastructure projects in the Saint-Jean-sur-Richelieu region in June, 2012. This joint operation resulted in 77 charges being laid against 11 individuals and 9 companies in the construction industry.

Canadian and foreign investment regulation outlook for 2013

Stikeman Elliott LLP — Thu, 10 Jan 2013 09:16:54 -0500

Michael Kilby -

Investment Canada – The Year of the State-Owned Enterprise

2012 proved to be a highly eventful year for foreign investment law in Canada. Although numerous foreign investments by SOEs in the Canadian energy sector had received foreign investment approvals in recent years1, the summer of 2012 saw the announcement of two multi-billion dollar energy transactions involving SOEs that collectively posed an unprecedented test for the Investment Canada Act and for Canadian policymakers. In June, Petronas (the Malaysian state-owned oil company) announced its $6 billion acquisition of Progress Energy. At the time, this was the largest-ever proposed acquisition of a Canadian company by a state-owned enterprise. But that record did not stand for long: just a month later, in July, CNOOC Limited (a majority Chinese state-owned oil company)announced its $15 billion acquisition of Nexen.

These proposed acquisitions became the subject of intense scrutiny in the national media throughout the summer and fall, and indeed attracted attention in the business press globally, particularly in Asia. With few exceptions, large-scale M&A activity in the Canadian oil patch ground to a halt in the fall of 2012 as market participants stood still and held their collective breath pending the outcome of the government reviews of these proposed foreign investments. Tension was only heightened in October when the Minister of Industry rejected the Petronas transaction on a preliminary basis, immediately recalling the rejection of BHP Billiton’s hostile bid for Potash Corporation of Saskatchewan less than two years earlier.

The review process concluded on December 7, 2012, when the federal government announced its approval of both the Progress and Nexen transactions. But at the same time it detailed a new approach and revised guidelines applicable to investments by stateowned enterprises, particularly in the oil sands. As a consequence, continued acquisitions by SOEs of controlling interests in the oil sands industry have been largely constrained and, going forward, will be found to pass the critical “net benefit to Canada” test only on an exceptional basis. However, the acquisition by SOEs of noncontrolling interests, including by means of joint ventures, will continue to be welcome (indeed, acquisitions of non-controlling interests are, generally speaking, not subject to the Investment Canada Act). While the “exceptional basis” test does not apply to sectors other than the oil sands, the government has noted that it will continue to monitor investment by SOEs throughout the Canadian economy, and in this regard has adopted a somewhat more measured tone in relation to investment by such entities, across all industries.

We further expect to see long-awaited regulations that would alter the primary review threshold under the Investment Canada Act from a C$330 million “book value” test (indexed to inflation) to a C$600 million “enterprise value” test implemented in 2013, which threshold will then be increased to C$1 billion over a four-year period. However, the government has stated that, for state-owned enterprises, the review threshold will remain C$330 million in book value (indexed to inflation).

Competition Act – The Changing of the Guard

With respect to competition matters, 2012 saw the departure of Canada’s Commissioner of Competition, who had established herself as an active and assertive competition law enforcer bringing cases against Air Canada (since settled),VISA/MasterCard (ongoing),the real estate brokerage industry (ongoing), Rogers (ongoing), Bell (settled) and the retail gasoline industry (numerous convictions obtained). The most prominent developments in 2012 were likely the clearance issued in respect of the Maple Group/ TMX transaction (following a very lengthy review), the settling of litigation in respect of certain cooperation arrangements between Air Canada and United Continental, and the Commissioner’s victory in successfully challenging a completed, non-notifiable transaction in the industrial waste industry, which serves as a cautionary reminder that the Commissioner has the jurisdiction to review and obtain divestitures in respect of closed transactions, even where such transactions fall below the mandatory reporting thresholds. Vigorous merger reviews are expected to continue under the new Acting Commissioner, John Pecman.

Telecom – Controversial Domestic Decision but Opening the Doors to Foreign Investment

In 2012, Canada’s federal communications regulator, the Canadian Radio-television and Telecommunications Commission (CRTC), surprised many when it rejected the $3.38 billion bid by BCE Inc. to acquire Astral Media Inc. amid concerns that impact a combined Bell Media-Astral would have on domestic competition and Canadian consumers. In doing so, it was alleged that the CRTC went against its own thresholds for approving mergers that had been previously set in a 2008 decision. The deal has subsequently been re-packaged in an effort to over-come regulatory opposition.

Another important development in 2012 were amendments to the Telecommunications Act that provide that foreign ownership rules will no longer apply to a telecommunications common carrier if the carrier and all its affiliates have total annual telecommunications revenues representing less than 10% of total Canadian telecommunications revenues, as determined by the CRTC. Based on total reported revenues for 2010, the threshold below which Canadian ownership rules no longer apply is approximately $4.2 billion, and likely growing. All but the largest wireline and wireless carriers will fall below this threshold, including new wireless entrants, non-dominant carriers, and even several incumbent carriers. It will therefore be interesting to see the extent to which major international telecom firms endeavour to enter into Canada by way of acquisition, an option not previously available to them. Indeed, the key foreign shareholder in Globalive/Wind Mobile (one of the new wireless entrants) has already increased its voting shareholding from a minority level to a majority level. Current rules limit foreign ownership in telecommunications carriers to an effective maximum of 46.7%, reflecting combined maximum allowable interests at the operating and holding company levels. These rules remain in place for larger carriers and similar rules also
continue to apply to broadcasting undertakings licensed under the Broadcasting Act.

¹ Previous state-owned enterprise transactions approved under the Investment Canada Act include Sinopec’s acquisition of Daylight Energy; Sinopec’s acquisition of an interest in Syncrude; CNOOC’s acquisition of OPTI Canada; Petrochina’s acquisition of oil sands assets from Athabasca Oil Sands Corporation; Korea National Oil Company’s acquisition of Harvest Energy; TAQA’s acquisitions of Primewest, Northrock Resources and Pioneer Natural Resources; Statoil’s acquisition of North America Oil Sands; and IPIC’s acquisition of Nova Chemicals.

This article appears in Stikeman Elliott’s Canadian M&A Outlook for 2013

Increased thresholds for Competition Act merger notification and Investment Canada Act review

Stikeman Elliott LLP — Wed, 09 Jan 2013 13:53:41 -0500

Marisa Berswick -

The thresholds for review of acquisitions involving Canadian businesses will soon increase under both the Competition Act and the Investment Canada Act.

The Competition Bureau announced on January 8, 2013 that the “transaction size” threshold for review of acquisitions under the Competition Act will increase from the 2012 threshold of CDN$77 million to CDN$80 million. The 2013 threshold is anticipated to come into effect on or about January 12, 2013.

The transaction-size threshold is based on the book value of assets in Canada of the target (or in the case of assets, of the assets in Canada being acquired), or the gross revenues from sales “in or from” Canada generated by those assets, calculated in accordance with the Notifiable Transactions Regulations under the Competition Act. The Competition Act threshold is indexed annually to account for inflation. The ”size of parties” threshold remains constant at CDN$400 million.

Once implemented, the Competition Bureau must generally be given advance notice of proposed transactions when the acquired assets in Canada or revenues generated in or from Canada exceed $80 million, and when the combined Canadian assets or revenues “in, from or into” Canada of the parties together with their respective affiliates exceed $400 million. Transactions involving Canadian subsidiaries, as well as the direct acquisition of Canadian businesses or assets, and shareholdings as little as 20% (for public companies) or 35% (private companies and interests in non-corporate business combinations) can trigger merger notifications in Canada.

The threshold for advance review and Ministerial approval of certain direct foreign acquisitions of control of Canadian businesses under the Investment Canada Act is typically increased in January of each year. According to Industry Canada, it is expected that the amount will increase from CDN$330 million to CDN$344 million dollars for 2013 for investments by WTO members. The official amount will be published in early 2013.

Direct acquisitions of control of Canadian businesses with cultural activities, and direct acquisitions of control of non-cultural Canadian businesses where neither the sellers nor purchasers are from WTO member states, are still subject to a review threshold of CDN$5 million. Indirect acquisitions of control of non-cultural Canadian businesses (pursuant to the acquisition of control of their non-Canadian parents) are not subject to review for WTO investors, regardless of the size of the assets of the Canadian business.

For more information please contact a member of the Stikeman Elliott LLP Competition and Foreign Investment Group.

Lights! Camera! No-action! Canada's Competition Bureau clears merger of Canadian film distributors

Stikeman Elliott LLP — Fri, 04 Jan 2013 11:39:06 -0500

Susan M. Hutton and Robert Mysicka -

On January 3, 2013 the Competition Bureau issued a No-Action Letter in respect of the acquisition by Canadian film distributor Entertainment One Ltd. (eOne) of its competitor, Alliance Films Holdings Inc. (Alliance), indicating that the Commissioner does not, at this time, intend to challenge the proposed acquisition pursuant to section 92 of the Competition Act.

In its statement concerning the proposed acquisition of Alliance by eOne, the Bureau indicated that the parties are significant competitors for film distribution in Canada but that the distribution of Canadian films constitutes a distinct product market due to various government cultural initiatives and funding programs. In particular, in order to qualify for government funding available for Canadian productions (a significant source of total funding), the producer must use a Canadian distributor, and government funding requirements limit the ability of the distributor to lower minimum guarantees or increase distribution fees. Notwithstanding the substantial share of the combined companies in that market, therefore, the Bureau concluded that the government policies in place would render a substantial lessening or prevention of competition unlikely and that in any event, there was effective remaining competition for the distribution of non-Canadian films.

The Bureau’s decision not to challenge the merger is all the more interesting in light of its finding that the Canadian films distributed by eOne and Alliance account for the vast majority of the revenues generated by Canadian films. With respect to high budget Canadian films, the Bureau found that eOne and Alliance faced limited competition as there are few competitors able to offer the minimum guarantee required to secure government funding for these films. Accordingly, the Bureau was initially concerned that the merged entity would be capable of implementing more restrictive distribution terms to producers by increasing distribution fees and/or reducing the minimum guarantee.

Following its review, however, the Bureau concluded that government funding programs would prevent the implementation of more restrictive terms on producers by the merged entity. In particular, in order to trigger funding, distributors are typically required to commit a minimum guarantee to the producer as evidence that they are committed to the film’s success. Furthermore, distribution fees tend to be standardized and capped by funding requirements.

Finally, in its review, the Bureau expressed concern that the merged entity might distribute fewer Canadian films. It concluded, however, that certain smaller Canadian distributors see the proposed acquisition as an opportunity to expand and distribute more films, and are poised to expand should the combined entity pull back. Furthermore, due to the very low volume of sales associated with some films, the Bureau concluded that the anti-competitive effects of the proposed transaction (if any) would likely be very small relative to the efficiency gains.

The Bureau’s conclusions in this case appear to indicate a willingness to recognize the practical implications for many businesses of a relatively thin and regulated Canadian market, and the efficiencies that can sometimes be gained from consolidation.

The Bureau withdraws charges related to waste company's breach of consent agreement

Stikeman Elliott LLP — Thu, 20 Dec 2012 08:35:27 -0500

Marisa Berswick -

On December 14, 2012, the Competition Bureau announced that it had withdrawn criminal charges related to the breach of a consent agreement in a waste-collection company merger due to the accidental leak of privileged information during the course of the Bureau’s investigation.

The Bureau said in its statement that on September 19, 2012, it “became aware of an unfortunate procedural error, where certain information subject to solicitor-client privilege had been inadvertently shared with investigators.” As previously covered on this blog, on September 11, 2012, the Bureau laid criminal charges against Progressive Waste Solutions Ltd. and its subsidiary BFI Canada Inc. (known together as Progressive). The Bureau alleged that Progressive had violated the terms of a consent agreement it had entered into with the Bureau in 2010. The Bureau concluded at the time that the merger would result in a substantial lessening or prevention of competition in the waste collection market in several Canadian cities.

Upon discovery of the inadvertent disclosure, Progressive’s counsel was immediately alerted. The Bureau concluded that it was no longer appropriate to continue court proceedings due to the leak of privileged information to Bureau investigators. As such, the Bureau withdrew the criminal charges against Progressive.

Breaching a consent agreement is a serious offence pursuant to section 66 of the Competition Act, with fines of up to $25,000 or imprisonment of up to one year. Due to the “unfortunate procedural error,” the Bureau was unable to continue its investigation of Progressive, but companies should take note that the Bureau remains active in monitoring compliance with consent agreements.

Vertical pork mergers pass mustard with Competition Bureau

Stikeman Elliott LLP — Wed, 19 Dec 2012 15:38:03 -0500

Michael Laskey -

On December 17, the Competition Bureau released a position statement summarizing the approach it had taken in analyzing two proposed vertical mergers (i.e., mergers between firms at different levels of a supply chain) in the pork industry. Both proposed mergers involve the acquisition of a large Western Canadian hog producer by a company that sells finished food products (pork cuts) to consumers: Olymel L.P. plans to acquire Big Sky Farms Inc. and Maple Leaf Foods Inc. plans to acquire Puratone Corporation. The Bureau decided not to challenge either merger.

The key concerns considered by the Bureau, and its conclusions about each, were:

that Olymel or Maple Leaf may have the ability and incentive to refuse to supply its hogs to other competing sellers of pork cuts, and thereby foreclose their access to a necessary input. The Bureau determined that this ability and incentive would indeed exist, but concluded that no substantial lessening or prevention of competition would result because sufficient effective competition would remain among suppliers of pork cuts (including competition between Olymel and Maple Leaf); and
that Olymel and/or Maple Leaf may harm other hog producers by foreclosing their access to a sufficient customer base. In particular, the Bureau was concerned that both Olymel and Maple Leaf would control a significant amount of slaughterhouse capacity in Western Canada, and may be able to harm other hog producers by refusing to purchase hogs from external suppliers, leaving the rival hog producers with no local slaughterhouse to which to sell their hogs. The Bureau concluded that each of Olymel and Maple Leaf would indeed have this ability, but that the costs of refusing to purchase hogs from external suppliers would outweigh any associated benefits, and they therefore lacked an incentive to do so.

The position statement provides insight into how the Bureau analyzes vertical mergers. Consistent with the guidance provided in the Merger Enforcement Guidelines, the position statement suggests that the Bureau’s principal concerns about such mergers will likely relate to input foreclosure (i.e., a refusal by the merged entity to supply an input to a downstream competitor) and customer foreclosure (i.e., a refusal by the merged entity to purchase inputs from upstream competitors). The statement also demonstrates that the Bureau will approach these issues carefully: although it concluded that both input foreclosure and customer foreclosure were possible in the case of these pork mergers, it also found that neither was likely to lead to a substantial lessening or prevention of competition.

John Godfrey Saxe (or, perhaps, Otto von Bismarck) once stated that “[l]aws, like sausages, cease to inspire respect in proportion as we know how they are made.” With respect to pork mergers, at least, the opposite appears to be true.

Charges laid in Montréal telemarketing case

Stikeman Elliott LLP — Mon, 17 Dec 2012 14:32:09 -0500

Robert Mysicka and Graeme Deuchars -

On December 7, 2012, the Competition Bureau announced that charges have been laid against five individuals for violations of the Criminal Code of Canada and of the Competition Act, in relation to tactics used in two Montréal-based telemarketing operations.

The charges arose out of a 2006 investigation by the Competition Bureau in partnership with the Centre of Operations Linked to Telemarketing Fraud (COLT), a joint forces operation between a number of Canadian and American law enforcement authorities. The investigation revealed two telemarketing operations in Montréal promoting the sale of office supplies and medical kits to Canadian and American businesses that allegedly utilized misleading or fraudulent tactics, including implying that the caller represented a business that had an existing relationship with the victim’s company, indicating that certain products or services were required under government rules, or implying that the call was being made on behalf of a government agency Five individuals were charged with defrauding the public in excess of $5,000 contrary to section 380(1) of the Criminal Code. In addition, four of these individuals were charged under the Competition Act with making false or misleading representations during telemarketing calls.

Section 52.1(3) of the Competition Act is a criminal provision that prohibits making materially false or misleading representations in promoting the supply or use of a product or business interest during interactive telephone communications (telemarketing). Contraventions of the Competition Act’s telemarketing provisions carry a maximum penalty on indictment of a fine in the discretion of the court, and/or up to 14 years imprisonment.

CNOOC/Nexen and the Future of SOE Acquisitions

Stikeman Elliott LLP — Sat, 08 Dec 2012 01:11:45 -0500

Canada's Prime Minister sent a clear message today that the country remains open to foreign investment, including investment on a significant scale by state-owned enterprises (SOEs) in certain circumstances. However, continued acquisitions by SOEs of controlling interests in the oil sands industry has been largely constrained and will be found to be of net benefit to Canada only on an exceptional basis going forward. The acquisition by SOEs of non-controlling interests, including joint ventures, will continue to be welcome.

The Prime Minister's address followed the announcement by the Minister of Industry, which was communicated by way of press release, of:

approval of both the proposed acquisition by China National Offshore Oil Company (CNOOC) of Nexen Inc. and the proposed acquisition by PETRONAS of Progress Energy Ltd., finding the transaction likely to be of "net benefit" to Canada in light of the existing provisions of the Investment Canada Act and the former SOE Guidelines;
updated SOE Guidelines, including expansion of the definition of an SOE to include not only those entities that are owned by a foreign state, but also entities that are influenced directly or indirectly by a foreign government. The updated SOE Guidelines require all SOE investors to demonstrate their commitment to transparent and commercial operations and the extent of influence by the foreign state; and
the imminent increase in the review threshold under the Investment Canada Act for direct acquisitions of control by WTO Investors will not apply to SOE investments: once regulations are finalized (expected in 2013), the review threshold for direct investments by WTO Investors will increase to $600 million based on the enterprise value of the Canadian business, increasing over four years to $1 billion. These increases will not apply to investments by SOEs, for which the current threshold of $330 million based on the book value of assets will continue to apply.

Stikeman Elliott LLP represents CNOOC in its acquisition of Nexen Inc., which was the impetus for the reconsideration of the framework for reviewing SOE investments in Canada. For more information please see Investment Canada Act: SOE Guidelines and CNOOC/Nexen, Foreign Investment by SOEs: Green Light/Red Light - Stikeman Elliott Business Law Update.

House arrest off the table for cartels and bid-rigging

Stikeman Elliott LLP — Tue, 04 Dec 2012 11:57:43 -0500

Mark Walli and Graeme Deuchars-

On November 20, 2012, amendments to the Criminal Code of Canada under the Safe Streets and Communities Act (the SCCA) came into force, restricting the availability of conditional sentences for individuals convicted of certain offences, including conspiracy to fix prices and bid-rigging under the Competition Act. Conditional sentences are non-custodial punishments, such as house arrest, that may only be assessed where the judge determines the offender is not a danger to the community. While these amendments were not specifically directed at Competition Act offences, the result of the legislative changes is to eliminate the discretion to allow for serving custodial sentences for serious Competition Act offences in the community.

The SCCA, introduced in 2011, included a slate of amendments to the Criminal Code and other legislation which the Department of Justice stated were intended to “combat crime and terrorism”. Among other things, the SCCA provides that conditional sentences are unavailable for all offences for which the law prescribes a maximum term of imprisonment of 14 years or more – this includes cartel agreements among competitors, bid-rigging and willful or deceitful misleading advertising under the Competition Act.

The sentencing changes now in effect under the SCCA follow upon sweeping amendments to the Competition Act in March 2009, which, among other changes, created a per se cartel offence (in effect since March 2010, which prohibits agreements among competitors to fix prices, allocate markets or limit production, whether or not such an agreement had an impact on competition in a relevant market) and increased the maximum punishment for offences such as price-fixing, bid-rigging and willful or deceitful false advertising from five to 14 years.

The new sentencing regime should also be considered in light of the dissatisfaction recently expressed by the Federal Court with joint sentencing recommendations for fines as part of agreements to plead guilty with respect to criminal offences under the Competition Act. In R. v Maxzone Auto Parts (Canada) Corp., a case involving a charge of criminal conspiracy under section 46 of the Competition Act (implementation of a foreign directed cartel), Chief Justice Crampton of the Federal Court observed that “… achieving effective general and specific deterrence requires that individuals face a very real prospect of serving time in prison if they are convicted for having engaged in such conduct”. Finding that past practice gave rise to “understandable expectations” regarding sentencing, the Chief Justice “reluctantly” imposed the jointly recommended sentence of a substantial fine in that case.

A move toward custodial sentences for criminal convictions under the Competition Act may have far-reaching implications for the Competition Bureau's enforcement regime, including participation in its Leniency Program, whereby an accused agrees to cooperate with an investigation in exchange for a prosecutorial recommendation of more lenient treatment. The removal of conditional sentences (and judicial discontent over fines instead of prison terms) may well discourage participation in the program, as accused persons weigh the risks of what "leniency" may entail. Indeed, if jail time is seen as the likely result of criminal conviction for competition offences, there may well be less cooperation, fewer guilty pleas and more contested trials on the horizon in Canada.

Competition Bureau disputes public statement by RBS Group

Stikeman Elliott LLP — Mon, 03 Dec 2012 10:38:15 -0500

Michael Laskey -

On November 14, the Competition Bureau published a news release disputing a statement made by the Royal Bank of Scotland Group (RBS) related to the Bureau’s ongoing investigation of alleged collusive conduct in the setting of the LIBOR benchmark rate. In its third-quarter Interim Management Statement, RBS stated that it was “co-operating fully” with investigations by the Bureau and other regulators. The Bureau’s news release argued that this statement was false, in light of the fact that RBS had not applied to its leniency or immunity programs and that RBS had challenged a court order obliging it to produce documents in connection with the Bureau’s investigation.

In its reply, RBS emphasized that it did want to cooperate with the Bureau, but that the production of documents requested by the Bureau would violate privacy laws in the United Kingdom. RBS stated that it had offered a number of alternative mechanisms, but that the Bureau had refused such offers.

This is not the first time the Bureau has intervened when it believed a public statement by a company was inaccurate. In September 2011, the Bureau required Beiersdorf Canada Inc. to correct an allegedly inaccurate public statement the company made in relation to a settlement it had reached with the Bureau. Businesses should take note that the Bureau is active in monitoring comments they make in the press and in public disclosure filings.

Public Works Canada Bans Convicted Bid-Riggers from Future Bids (even if they were leniency recipients)

Stikeman Elliott LLP — Mon, 26 Nov 2012 09:25:49 -0500

Jeffrey Brown and Edwin Mok -

A recent change in the integrity policy of the Department of Public Works and Government Services Canada (Public Works) has resulted in a prominent consulting firm being effectively banned from making future bids for services to the department.

On July 30, 2012, Corporate Research Group Ltd. (CRG) pleaded guilty to a criminal charge of bid-rigging for real estate advisory services contracts with the federal government. It was fined $125,000. According to the Competition Bureau news release at the time, CRG and Louis Facchini, who ran First Porter Consultancy, had submitted coordinated bids under an agreement not disclosed to Public Works.

Under a “leniency exemption,” Public Works had permitted firms operating under leniency programs, such as the Bureau’s Leniency Program, to continue to act as suppliers. That has now changed.

On November 9, 2012, Public Works implemented Policy Notification PN-107, which revised the integrity provisions of the department’s Supply Manual and its Standard Acquisition Clauses and Conditions Manual. Most notably, Public Works has removed the leniency exemption from its integrity policy. Now, Public Works “will not enter into a contract or real property transaction, or accept bids from companies convicted of listed offences unless they have received a pardon, or capacities restored by Governor-in-Council”. The change is intended to “strengthen the integrity of procurement and real property transaction processes”.

As a result of this change, Public Works will no longer accept bids from companies like CRG that have been convicted of a listed offence (which includes criminal offences under the Competition Act), even if they participated in the Bureau’s Leniency Program. In addition, existing contracts with such suppliers will be subject to “heightened scrutiny and oversight”, with “rigorous controls” put in place in order to “protect taxpayers’ interests”.

Competition Policy Council calls for clarification of Regulated Conduct Doctrine

Stikeman Elliott LLP — Thu, 22 Nov 2012 09:21:46 -0500

Robert Mysicka and Edwin Mok -

On November 20, 2012, the C.D. Howe Institute’s Competition Policy Council—a group comprised of top-ranked academics and practitioners active in competition policy—published a report calling for the Competition Bureau to clarify the scope of the Regulated Conduct Doctrine (“RCD”) and characterizing it as a “back door route to cartels”. The RCD is a legal doctrine enshrined in section 45(7) of the Competition Act which immunizes regulated entities from prosecution in circumstances where their conduct would otherwise be illegal under the Act. It was described by Grange J.A. in R. v. Independent Order of Foresters:

“The doctrine simply means that a person obeying a valid provincial statute may, in certain circumstances, be exempted from the provisions of a valid federal statute. But there can be no exemption unless there is a direction or at least an authorization to perform the prohibited act.”

The Council met on November 8, 2012 to discuss the soundness and policy implications of the RCD, with its roundtable discussions culminating in the November 20 report. The Council concluded that the Bureau’s published bulletin on the doctrine was vague, and recommended that the Bureau refine its view of Competition Act enforcement in regulated sectors.

The Council further voiced concern that, in the merger review context, firms pursuing pro-competitive mergers may be required to seek the approval of two regulatory agencies - first the regulator, and then the Bureau - adding costs and uncertainty to the entire process. Nevertheless, the Council recommended that the Bureau opine on the economic effects of mergers within regulated industries by explicitly identifying the economic costs and inefficiencies of anti-competitive behaviour that is protected by provincial and federal legislation.

Canada's new interim Commissioner of Competition emphasizes compliance programs

Stikeman Elliott LLP — Fri, 02 Nov 2012 15:13:13 -0500

Robert Mysicka and Marty McKendry -

In his first published remarks as Interim Commissioner of Competition, John Pecman discussed a number of competition-related issues, underscoring the importance of compliance programs, the competition risks associated with participation in trade associations, and the Bureau’s key enforcement priorities going forward.

Mr. Pecman, who was appointed Interim Commissioner on September 26, noted the increasing international prevalence and cooperative enforcement of competition law. He also emphasized the seriousness of cartel activity, referring to Chief Justice Crampton’s remarks in the case against Maxzone Auto Parts, where Mr. Justice Crampton likened cartel agreements to fraud and approved incarceration as an effective deterrent.

For much of his speech, the Interim Commissioner focused on the importance of effective corporate compliance programs. In his view, compliance programs reduce the risk of criminal or civil liability, increase awareness of competition issues amongst market participants, and aid transgressing parties in their dealings with the Bureau (especially with respect to the Bureau’s Leniency Program).

Mr. Pecman indicated that the mere existence of a compliance program on paper does little to ensure actual compliance with the Competition Act. Rather, in his view, “the issue is internal enforcement[.]” He explained that a credible and effective corporate compliance program includes five elements: (1) senior management’s involvement and support; (2) legally and commercially up-to-date compliance policies and procedures; (3) ongoing and meaningful employee education and training; (4) monitoring, auditing, and reporting mechanisms that maintain program integrity; and (5) consistent disciplinary procedures and incentive components (e.g. incentives for whistleblowers).

Of particular note was Mr. Pecman’s discussion of compliance concerns related to trade associations. Highlighting several of the Bureau’s recent investigations into trade association activities, Mr. Pecman observed that, by their very nature, these organizations face “unique compliance issues.” In his words, “[Trade associations] are naturally exposed to greater risks of anti-competitive behavior because they provide a forum that may encourage competitors to collaborate.”

Mr. Pecman identified three types of conduct by trade associations that are likely to raise concerns and attract the Bureau’s scrutiny. First, the Bureau is concerned with restrictions on professional service offerings (for example, the imposition of limits on office location or size) because such restrictions can deter or limit expansion by competitors. Second, a trade association should not limit the number or range of its members or inhibit their ability to compete (for example, by imposing fee schedules). Such rules prevent entry and restrict the emergence of alternate service models to the detriment of consumers. Third, the Bureau is concerned with conduct that reduces incentives to compete vigorously, such as agreements to share sensitive information. For those interested in more information regarding Competition Act compliance in respect of trade associations, counsel at Stikeman Elliott provides regular compliance seminars on the topic.

The new Interim Commissioner announced that the Bureau’s general priorities remain the same under his leadership: (1) achieving results for Canadians through active, targeted and principled enforcement; (2) applying Canadian competition law in a progressive and transparent way to keep pace with the dynamic marketplace; and (3) cultivating a strong and agile enforcement capacity. The Interim Commissioner also clarified that in deciding whether to pursue a case, the Bureau evaluates the harm to competition; the potential for deterrence; the Bureau’s resources and priorities; and whether the case raises issues that have an effect on average Canadians.