On November 12, 2019, Jenna Ward and Justine Reisler attended the Global Competition Review’s 3rd Annual Women in Antitrust Conference in Washington, D.C. with over 100 female delegates from around the world. During this conference, female thought leaders discussed a variety of topics, including (i) big tech; (ii) killer acquisitions; (iii) information sharing; and (iv) the potential impact of elections on antitrust.

Where are we Today with Enforcement against Big Tech?

The panelists explored concerns about market power in digital markets as discussed in numerous reports commissioned by antitrust agencies from around the world. The panelists also discussed calls for new ‘Digital Authorities’ in the reports coming from the United Kingdom, Australia and the United States.

The panelists emphasized that economists already have the tools needed to assess antitrust concerns in the context of big tech, but noted that the application of these tools may need to be re-thought in certain specific areas, such as when considering non-price effects. For example, large technology companies often offer free products to consumers on one platform and profit from selling different products on another complementary platform, which leads to winner-take-all markets where it appears difficult for new competitors to enter. That being said, panelists acknowledged that technology markets may be contestable – Facebook was a popular example.

Data, referred to as the new “oil”, was another key topic for the panelists. However, the panelists aptly noted that data has its limits as a competitive advantage, being non-rivalrous and often less valuable with age (i.e. data can become stale). The panelists expressed reservations about the promise of data portability to resolve the problem of winner-take-all markets in big tech. While it was acknowledged as a ‘nice to have’ for consumers, there are challenges to be addressed in terms of balancing data portability with privacy laws.

The panelists reminded attendees that the notion that existing antitrust laws are insufficient to handle the modern technology of our time is nothing new (i.e. oil and railroads). However, a key takeaway is that regulators and the international competition bar will need to be more creative in fashioning remedies to address competition concerns in this new era of big tech.

Killer Acquisitions

The panelists took the time to define “killer acquisitions”,  also known as “strategic acquisitions”, depending on your perspective, which are acquisitions by a large company of an innovative nascent company that may have no, or a very small, market share. The panel was quick to emphasize that such acquisitions represent only a handful of hundreds of thousands of transactions. It also cautioned against injecting hyperbolic language into antitrust policy discussions to invoke a sense of morality, as if a merger review decision was one of life and death. The panelists agreed that regardless of what we call such acquisitions, the analytical framework for evaluating them already exists. Moreover, enforcement agencies already analyze the rationale for a transaction and assess whether there is an anti-competitive purpose or effect.

The panelists acknowledged that many start-ups are created with the intent of ultimately being purchased by a larger market participant. In this regard, the panelists recognized the potential risk of chilling innovation in light of increased scrutiny of “killer” or “strategic” acquisitions in the tech space.

The highly speculative nature of post-closing discussions of what would have happened had a certain merger been blocked was emphasized by the panelists. Even with the benefit of hindsight, we will never know what would have happened if the merger review decision went the other way. Questions surrounding the probability of a new product developing into a viable alternative or whether a target could have survived without the acquisition are ones which are very difficult for regulators to assess. Furthermore, if a product survives in a killer acquisition, and continues to be available in a market but customers are not choosing it over the dominant product, does that mean the acquirer under-invested or is it because the product is inferior? The suggestion of re-opening merger decisions was not popular; panelists prefer to see stricter enforcement of existing abuse of dominance provisions.

When Conversation becomes Collusion

The panelists discussed the point at which the exchange of information becomes anticompetitive conduct – or worst of all, a cartel. All agreed that the line between lawful information exchanges and collusion is hard to pin down, in part because there is a lack of clarity both in the guidelines within jurisdictions and because of the differences between the guidelines provided by different jurisdictions. This makes information sharing particularly tricky for multinational corporations operating across jurisdictions. The panelists agreed that it would be useful to see more coordination between competition enforcement agencies in developing common guidelines on this topic.

The panelists noted that trade association meetings are particularly high risk. They recommended that companies have competition counsel present during these meetings in order to minimize the risk of competition concerns arising.

The following practical tips arose from this panel discussion:

  • Limit the information exchanged to historical – rather than future – information.
  • Disseminate aggregated – rather than disaggregated – information.
  • Prohibit sales and marketing personnel from receiving competitively sensitive information, if such information is shared at all.
  • Always seek advice from competition counsel.

For more practical advice about information sharing, see Mitigating the Risk of Pre-Closing Information Exchanges.

Elections

The conference closed with a lively and interactive discussion concerning the impact of the upcoming U.S. presidential and European parliamentary elections on competition law. The consensus seemed to be that politics matters less in antitrust than people may think because there is a bipartisan understanding that antitrust is about economics and that regulators need to pick cases they can win in court.

*****

Thank you to the conference chairs, moderators, panelists, sponsors and GCR for organizing an event that brings together women from the global antitrust community.

As previously reported in more detail in our recent blog Canadian National Security Review Ends in Divestiture , as one of a number of closing conditions to its acquisition of Genworth Financial, Inc. (Genworth), China Oceanwide Holdings Group Co., Ltd. (Oceanwide) was required to obtain Canadian regulatory approval of its indirect acquisition of control of Genworth’s Canadian subsidiary Genworth MI Canada Inc. (Genworth Canada).

In considering whether to grant that approval, the Office of the Superintendent of Financial Institutions (OSFI) was required to consider a number of factors including the potential impact of the transaction on Canada’s “national security”. At issue from a national security perspective was Canada’s concern about China-based Oceanwide obtaining access to sensitive personal data regarding Genworth Canada’s Canadian customers.

When the Canadian regulator failed to grant its approval in a timely fashion, at least from the parties’ perspective, Genworth, in the words of its CEO, found itself with “no choice” but to dispose of Genworth Canada in order to remove the need for the OFSI clearance. Canadian headquartered Brookfield Business Partners L.P. (Brookfield) then stepped in to purchase Genworth’s 57% stake in Genworth Canada thus removing the Canadian national security roadblock to the closing of the Oceanwide/Genworth merger. Or so it was thought.

It now seems that OSFI views the Genworth/Brookfield transaction as also raising a potential national security concern. As a result, the clearance process that one might have assumed would be a smooth sailing experience for Brookfield has encountered some headwinds slowing that clearance process down.

Genworth reported in an earnings call on October 30, 2019 that an agreement entered into with Genworth Canada when it went public in 2009 requires Genworth to provide transition services to Genworth Canada for a 12 to 18 month period immediately following Genworth selling its majority stake in Genworth Canada.

Because Genworth will likely, for some period of time, be providing transition services to Genworth Canada, including IT infrastructure and accounting-related support functions, after Oceanwide has acquired control of Genworth, OSFI is concerned about Oceanwide’s ability to access sensitive personal data about Genworth Canada’s Canadian customers during that transition period. OSFI has now asked Genworth, Brookfield and Genworth Canada to work together to develop a mitigation plan to ensure that appropriate data protections are in place during the portion of the transition period that continues to run after the closing of Oceanwide’s purchase of Genworth.

Other than the OSFI clearance, Genworth reported that Genworth and Brookfield have received all other required approvals to complete the sale of Genworth Canada and that the parties are still targeting closing the transaction by the end of 2019. One question that remains is whether the parties, which now include Brookfield, will find OSFI more responsive to providing the requested clearance than it was when only Oceanwide and Genworth were asking for a similar decision.

In August 2019, Genworth Financial, Inc. (Genworth) announced that it had agreed to sell its approximate 57% shareholding in Canadian subsidiary Genworth MI Canada Inc. (Genworth Canada) to Canadian headquartered Brookfield Business Partners L.P. (Brookfield) for approximately C$2.4 billion. Genworth Canada, through one of its subsidiaries, is Canada’s largest private-sector residential mortgage insurer. The deal is expected to close before the end of 2019.

One of the more interesting aspects of the announced deal is the reason that Genworth decided to divest of what its CEO had referred to as “one of [Genworth’s] top performing businesses”.

In October 2016, China Oceanwide Holdings Group Co., Ltd. (Oceanwide), a company incorporated in the People’s Republic of China, agreed to acquire Genworth. As a result, Oceanwide was required to obtain Canadian regulatory approval of its indirect acquisition of control of Genworth Canada and, in considering whether to grant that approval, the Canadian regulator was required to consider a number of factors including the potential impact of the transaction on Canada’s “national security”.

When the Canadian regulator failed to grant its approval in a timely fashion, at least from the parties’ perspective, Genworth, in the words of its CEO, found itself with “no choice” but to dispose of Genworth Canada in order to remove the need for such clearance. Brookfield then stepped in and agreed to purchase Genworth’s stake in Genworth Canada.

Why such a drastic action was required in order to avoid the need for a Canadian regulatory approval should be of interest to foreign investors considering making direct or indirect investments in Canada.

Background

The October 2016 merger agreement between Oceanwide and Genworth contemplated that the transaction would have to clear numerous regulatory hurdles in the United States, Canada, Australia, New Zealand and the People’s Republic of China before it could close – not unusual for a transaction involving multinational companies.

What probably was not expected was that the regulatory hurdles would turn the proposed takeover into a 3-year marathon transaction that still has not closed. That delay in closing appears, in large part, to have been caused by national security concerns raised in both the United States and Canada. Most recently, a 12th waiver and agreement extended the closing to December 31, 2019.

In the United States, the parties agreed to file a joint voluntary notice with the Committee on Foreign Investment in the United States (CFIUS). CFIUS has the power to undertake national security reviews in respect of transactions in which a non-American proposes to acquire control of a U.S. business.

The CFIUS review in this case proved initially problematic but, after protracted negotiations and re-filings, CFIUS concluded in June, 2018 that there were “no unresolved national security concerns with respect to the proposed transaction.”

It was reported that the CFIUS clearance had stalled because of concerns about China-based Oceanwide having access to sensitive U.S. personal data which Genworth obtained and retained in the ordinary course of its financial services business. In a press release, Genworth confirmed that Genworth and Oceanwide had, in order to obtain the CFIUS clearance, entered into a mitigation agreement with the U.S. government that, among other things, requires Genworth to use a U.S.-based, third-party service provider to manage and protect personal data related to Genworth’s U.S. policyholders.

Because of Genworth’s controlling interest in Genworth Canada, the proposed indirect acquisition of control of Genworth Canada by Oceanwide also required the filing of a notification under the Investment Canada Act and, because at least one of Genworth Canada’s subsidiaries is regulated under the Insurance Companies Act by the Office of the Superintendent of Financial Institutions Canada (OSFI), the prior approval from the Canadian Minister of Finance (MoF). Under both pieces of legislation, Canadian regulators are required to take into consideration potential Canadian national security concerns, and under the Insurance Companies Act, OSFI may also take into account “Canada’s international relations”.

Oceanwide submitted a notification under the Investment Canada Act on December 1, 2016 and received confirmation on December 6, 2016 that the proposed transaction would not be subject to that Act’s economic “net benefit” review and approval process.

The Investment Canada Act also expressly provides for a separate review process with respect to Canadian related investments by non-Canadians if the Minister of Innovation, Science & Economic Development (Innovation Minister) has reasonable grounds to believe that such an investment could be injurious to Canada’s national security. The December 6 confirmation did not rule out the possibility that such a national security review might still be conducted; however, that review process had to be initiated by notice issued within 45 days of Oceanwide’s December 1, 2016 notification and its does not appear that such a notice was issued by the Innovation Minister.

Oceanwide also filed its application for MoF approval with OSFI on December 8, 2016. As noted above, national security and Canada’s international relations are factors that may be considered under the Insurance Companies Act in deciding whether to grant that approval.

During an earnings conference call in early May, 2019, Genworth’s CEO reported that, although the Canadian filings had been made in December 2016, given the changes to the transaction and delays caused by the CFIUS clearance process, the parties had not started “significant discussions” with the Canadian regulator until January 2019. The CEO also confirmed that a mitigation approach similar to that agreed to with CFIUS had been presented to the Canadian regulator and that the parties had met with OSFI in person several times to answer OSFI’s questions and to provide additional information regarding the proposed mitigation plan. Further, during the last meeting in early February 2019, OSFI had informed the parties that OSFI had all of the information that it needed to complete its review. Since then, the Canadian regulator had been reviewing the matter but had not committed to a time frame for the completion of that review.

By the end of June 2019, the parties still had not received Canadian clearance and, as part of a further waiver and agreement to extend closing to November 30 2019, Oceanwide agreed that, in the absence of any substantive progress in discussions with OSFI, Genworth could solicit interest for a potential disposition of its controlling interest in Genworth Canada. Genworth’s CEO stated that “the lack of transparent feedback or guidance from Canadian regulators about their review left us no choice but to look at strategic alternatives for [Genworth Canada] that would eliminate the need for Canadian regulatory approval of the Oceanwide transaction.”

A press report stated that OSFI had confirmed that it was continuing its review of Genworth’s application in consultation with the Department of Finance and Public Safety Canada. Further, in an email OSFI stated that “while there is no specific time limit on the assessment of applications, OSFI endeavours to complete all application assessments as quickly as possible”. Obviously not quickly enough for the parties, given the announcement of the disposition of Genworth Canada to Brookfield about a month and half later and over six months after Genworth and Oceanwide reportedly had completed their substantive submissions to OSFI.

Canadian National Security Reviews Pursuant to the Insurance Companies Act and the Investment Canada Act

Little is publicly known about how OSFI conducts its national security assessments. However, given OSFI’s acknowledgement that Public Safety Canada was involved in the Genworth matter, it is likely appropriate to assume that the process is similar to that used by the Innovation Minister in conducting national security reviews under the Investment Canada Act.

As part of that review process, the Innovation Minister consults with the Minister of Public Safety and Emergency Preparedness, who, in providing advice, will take into account and often reflect the views of his or her own department as well as those of security agencies and relevant departments such as the Canadian Security Intelligence Service, Communications Security Establishment, National Defence and Royal Canadian Mounted Police, among others.

The Guidelines on the National Security Review of Investments issued under the Investment Canada Act provide a non-exhaustive list of factors that can be taken into consideration in connection with a national security review including factors such as the potential effect of the foreign investment on Canada’s defence capabilities and interests, the potential effects of the foreign investment on the transfer of sensitive technology or know-how outside of Canada, the potential impact of the investment on the security of Canada’s critical infrastructure, and perhaps of specific relevance to the Genworth transaction in light of the mitigation agreement that CFIUS required and Canada’s ongoing diplomatic issues with China, the potential of the investment to enable foreign surveillance or espionage, and the potential impact of the investment on Canada’s international interests, including foreign relationships.

Investments originating from China appear to have attracted particular interest from Canada’s national security apparatus. The Innovation Minister’s 2017/2018 Annual Report confirms that, during the period April 1, 2012 to March 31, 2018, 15 national security reviews were conducted under section 25.3 of the Investment Canada Act. Of those reviews, two thirds involved investments originating from China, with the result that 2 were blocked, 3 required divestitures, 4 were allowed with conditions and 1 was withdrawn.

The 10 reviewed Chinese investments involved a range of business activities including telecommunications, computer equipment and related services, electrical equipment, ship building, heavy and civil engineering construction and pharmaceutical businesses.

Given Canada’s interest in protecting its defence capabilities, sensitive technologies and know-how and infrastructure, it can be understood why such sectors attract special attention. A casual observer might however have been surprised that an indirect investment in a Canadian insurance company managed to set off national security alarm bells in Ottawa.

When the Investment Canada Act and a number of other federal laws were amended in 2009 to provide for national security assessments, the risk posed by allowing foreigners to obtain access to large volumes of the personal data of Canadians might not have been top of the mind with Parliamentarians. However, if this was ever the case in 2009, matters have clearly evolved as evidenced by a number of data-related transactions reviewed by CFIUS in the U.S. and now Canada’s review of the Genworth transaction.

CFIUS recently broadened its interest in foreign investments to include both acquisitions of controlling and non-controlling interests in what it refers to as “TID US businesses” – i.e., critical technology, critical infrastructure and sensitive personal data businesses. Canada’s review of the Oceanwide/Genworth transaction suggests that it is equally concerned in protecting sensitive Canadian personal data. In any event, it is safe to say that the industries or business activities that may attract the interest of Canada’s security agencies have broadened since what may have initially been expected in 2009.

Potentially complicating the decision-making process in the Genworth transaction was the strained diplomatic relation between the People’s Republic of China and Canada.  Factors such as the PRC’s ongoing detention of 2 Canadian citizens (allegedly in response to Canada’s detention at the request of the U.S. Department of Justice of Huawei senior executive Meng Wanzhou), trade actions taken against Canadian agricultural products and the then looming 2019 federal election in Canada all would very likely have impacted on the clearance process. Additionally, since the Investment Canada Act defines what may constitute a “state-owned enterprise” very broadly, it is also conceivable that the Canadian regulators may have been concerned with the extent of China’s ability to influence the operations of Oceanwide, further complicating an already complicated clearance process.

While one could easily conclude, based on the foregoing, that politics played a role in the clearance process, the secrecy surrounding the substantive aspects of national security reviews in Canada makes it difficult to know definitively why, after CFIUS had conditionally cleared the transaction in the US, Canada could not or was unwilling to move more quickly to come to a similar decision. However, given the uncertainties of timing and whether approval would ultimately be granted, Genworth’s decision to cut the Gordian knot represented by the ongoing Canadian review process and to simply divest its interest in Genworth Canada becomes more understandable.

Takeaways from Oceanwide’s experience include the reality that it is vital for a foreign investor to consider at an early stage in any merger or similar transaction that may have a Canadian aspect to it whether the transaction might raise national security concerns in Canada, and that such concerns may be considerably broader than might be conventionally considered a matter of national security. Canada’s relations with friends and foes alike – and even the domestic electoral calendar – could drive decision-making as easily as the hard assessments of traditional security agencies. In the final analysis, Oceanwide/Genworth also stands as a reminder that, while investors might hope that transactional reviews are limited to the strict confines of traditional security assessment, the express role of ministers and Cabinet in the two Acts means that politics must never be discounted in anticipating final outcomes.

Non-Canadian secured lenders should be aware that they may have a filing obligation under the Investment Canada Act (Act) if they acquire control of a Canadian business in connection with the realization on security granted for a loan or other financial assistance.

Until 2009, such transactions were entirely exempt from the Act. Specifically, paragraph 10(1)(c) of the Act classified a transaction involving “the acquisition of control of a Canadian business in connection with the realization of security granted for a loan or other financial assistance and not for any purpose related to the provisions of this Act” (Realization Exemption) as an exempt transaction to which no provision of the Act applied.

However, when the Act was amended in 2009 to add a separate review process for foreign investments potentially impacting on Canada’s national security, the Realization Exemption was amended to add the following condition: “if the acquisition is subject to approval under the Bank Act, the Cooperative Credit Associations Act, the Insurance Companies Act or the Trust and Loan Companies Act”.

Effectively, the amendment changed the law to require a non-Canadian lender to provide notice under the Act when the realization of security granted for a loan or other financial assistance results in the direct or indirect acquisition of control of a Canadian business. Transactions involving approvals under the Bank Act, the Cooperative Credit Associations Act, the Insurance Companies Act or the Trust and Loan Companies Act remain exempt from this requirement because such approvals take national security into consideration as a part of the approval processes that take place under those other acts.

Presumably the reason that notifications under the Act are required in connection with realizations by non-Canadians is to permit Canada’s security services to consider whether the non-Canadian lender’s acquisition of control of the Canadian business raises any potential national security issues. Under the Act, the Minister of Innovation, Science, and Economic Development (Minister) has 45 days, unless extended, from the date that a notification is certified as complete to initiate a national security review in respect of a transaction. If a notification is not filed, the 45-day period commences on the date that the transaction first comes to the Minister’s attention.

Should the Minister have reasonable grounds to believe that the realization of security could be injurious to Canada’s national security, he can issue a notice commencing a formal national security review process pending the conclusion of which the transaction, if it has not already taken place, may not be implemented.

While the Act does not provide for a penalty for the failure to provide a notification, should a realization ultimately be determined by the Governor in Council to require action to protect Canada’s national security, the Governor in Council may make any order that it considers advisable to protect Canada’s national security, including prohibiting the realization or, if the realization has occurred, requiring a divestiture of the Canadian business.

Filing a notification under the Act will not prevent a national security review where the realization could be injurious to national security. But filing a notification in advance of realizing on the security may still be advantageous as it would open a dialogue with the Minister at an earlier stage and demonstrate a willingness to comply with the Act. Note that investors are given the opportunity to make representations to the Minister in a national security review. Such pre-acquisition dialogue may allow for more flexibility in negotiations toward less burdensome or costly measures to address the national security concern(s).

It is generally accepted that agreements between competitors to fix prices, allocate markets and collude on tenders almost always have harmful effects on competition. Competition laws in various jurisdictions have, therefore, been drafted to address this and, in turn, agreements or understandings between competitors which provide for price fixing, allocating of markets and / or colluding on tenders are, in most instances, per se prohibited.

Therefore, insofar as any such agreement or understanding is established, the impugned firms will be found to have contravened competition law and no effects analysis will be available to the firms to defend or justify their conduct. In other words, the conduct is irrebuttably presumed to have an anticompetitive effect on competition. It could then be said that these agreements or understandings are restricted by object rather than by effect, and this corresponds broadly with the conduct prohibited in section 4(1)(b) of the South African Competition Act[1].

There are however instances where a firm’s conduct will, on the face of it, fall within the ambit of section 4(1)(b), but the firm’s conduct will not be found to fall within the object of the section 4(1)(b) and no contravention will be established. This is known as characterisation, and this article discusses the development of the principle of characterisation in South African competition law.

American Natural Soda Ash Corporation

The Supreme Court of Appeal (‘SCA’) in American Natural Soda Ash Corporation v the Competition Commission and Others[2] first introduced the principle of characterisation to South African competition law.

Prior to being heard by the SCA, the matter was heard by the Competition Tribunal (‘Tribunal’) and the Competition Appeal Court (‘CAC’) where it was alleged by the Competition Commission (‘Commission’) that the American Natural Soda Ash Corporation, or ANSAC, had engaged in price fixing and allocation of markets.

During the Tribunal hearing, ANSAC sought to lead evidence to justify and defend its conduct. In response to this, the Tribunal held that, once the conduct complained of is found to fall within the scope of the prohibition, this would be the end of the enquiry. In turn, the Tribunal held that no evidence could be lead to justify or defend the conduct of ANSAC. On appeal, the CAC, for all intents and purposes, held the same.

On subsequent appeal to the SCA, the SCA held that the Tribunal had in fact misdirected its enquiry, in that ANSAC was not attempting to lead evidence to defend or justify its conduct, but rather to lead evidence regarding the character of its conduct, and whether its conduct fell outside the object of section 4(1)(b).

In disagreeing with the Tribunal and the CAC, the SCA introduced the principle of characterisation, where it stated,

It is to establish whether the character of the conduct complained of coincides with the character of the prohibited conduct: and this process necessarily embodies two elements. One is the scope of the prohibition: a matter of statutory construction. The other is the nature of the conduct complained of: this is a factual enquiry. In ordinary language this can be termed ‘characterising’ the conduct – the term used in the United States, which ANSAC has adopted.

Following this, the SCA warned that not every agreement between competitors would fall within the object of section 4(1)(b), and that it would be easy to envisage an instance where, for example, competitors could enter into a bona fide joint venture for a legitimate purpose, through the vehicle of a separate entity, in which prices for goods that it supplies would be set (which prices would emanate from the competitors) merely in pursuance of the joint venture.

The SCA therefore set aside the decisions of the Tribunal and the CAC, and remitted the matter back to the Tribunal to determine the scope of section 4(1)(b) and the admissibility of evidence lead by ANSAC.[3]

South African Breweries

A number of years later, the CAC had occasion to deal with the principle of characterisation in the Competition Commission v South African Breweries and Others[4].

In this matter, the Commission had initiated a complaint against South African Breweries, or SAB, alleging, inter alia, that its exclusive territory agreements with ‘appointed distributors’ amounted to market allocation under section 4(1)(b)(ii) of the Competition Act.

Whilst it was acknowledged that there was a vertical relationship between SAB and the appointed distributors, it was argued that there was also a horizontal relationship as SAB participated at the distributor level.

Referring to the SCA’s ANSAC decision, the CAC noted that the principle of characterisation had been introduced into South African competition law. Drawing on jurisprudence and case law developed from the United States – on which the SCA sought to rely in ANSAC – the CAC noted that –

the ‘characterisation’ that is required under our legislation is to determine (i) whether the parties are in a horizontal relationship, and if so (ii) whether the case involves direct or indirect fixing of a purchase or selling price, the division of markets or collusive tendering within the meaning of s 4(1)(b). However, since characterisation in this sense involves statutory interpretation, the bodies entrusted with interpreting and applying the Act (principally the Tribunal and this court) must inevitably shape the scope of the prohibition, drawing on their legal and economic expertise and on the experience and wisdom of other legal systems which have grappled with similar issues for longer than we have.

Moving to the analysis of the facts, the CAC stated that the ultimate question was whether, in the circumstances of the case, SAB’s and its appointed distributors’ conduct was to be characterised as dividing markets within the meaning of section 4(1)(b)(ii).

The CAC thought not. Whilst the CAC noted that SAB had its own distribution network, it held that the core of the relationship between SAB and the appointed distributors was vertical of nature.

Reiterating the purpose of the characterisation principle, the CAC noted that the per se prohibitions contained in section 4(1)(b) are the most serious legislative prohibitions against a defendant. The CAC further stated that the idea of the characterisation principle is to ensure that only those economic activities to which no defence should be tolerated are held within the scope of the prohibition in section 4(1)(b). This, the CAC held, is informed both by common sense and competition economics.

The CAC accordingly dismissed the section 4(1)(b)(ii) complaint as against SAB.

Dawn Consolidated Holdings

In 2018, the CAC again had occasion to develop the principle of characterisation in Dawn Consolidated Holdings and Others v the Competition Commission.[5]

In this matter, the Commission had initiated a complaint with respect to a clause contained in a shareholders agreement between Dawn Consolidated Holdings (‘Dawn’) and Warplas Share Trust (‘WST’) in respect Sangio Pipes (‘Sangio’).

The clause in question restrained Dawn and its subsidiaries from manufacturing HDPE piping in South Africa, and applied for as long as Dawn or its associates held shares in Sangio. It was alleged by the Commission that this clause amounted to market allocation in terms of section 4(1)(b)(ii) of the Competition Act, as Dawn and WST were, at the very least, potential competitors.

Assuming that Dawn and WST were potential competitors, the CAC moved on to decide whether the principle of characterisation could be applied in this instance.

In this regard, the CAC stated that the character of a non-compete clause should not be assessed as if it stood on its own, but rather in the context of the transaction as a whole and in the circumstances in which the parties concluded the agreement. Following this, the CAC set out a three-step test to determine, objectively, whether the restraint was reasonably required for the implementation of the transaction:

  1. Is the main agreement, minus the impugned restraint, unobjectionable from a competition law perspective?
  2. If so, is the restraint reasonably required for the conclusion and implementation of the main agreement?
  3. If so, is the restraint reasonably proportionate to the requirement served?

As regards to the first step, it was accepted by the Commission that the agreement, minus the clause in dispute, was unobjectionable. The CAC therefore moved onto the second and third steps of the inquiry.

Having heard evidence and having referred to case law regarding enforceable restraints, the CAC held that this type of restraint was enforceable and reasonably required for the conclusion and implementation of the transaction between Dawn and WST. This was because Dawn – who had no experience or expertise in producing HDPE piping – as a potential competitor, could acquire the necessary knowledge and insight through Sangio in order to compete with WTS and, in turn, WTS required the restraint to cure these concerns.

Regarding the proportionality of the restraint, the CAC noted that the restraint would only exist for as long as Dawn or any of affiliates were shareholders of Sangio, and that no legitimate objection could be raised in this regard.

Overall, the CAC found that the restraint in the shareholders agreement between Dawn and WST was justified in the circumstances of the transaction. Applying the characterisation argument, the CAC held that this restraint would not fall foul of section 4(1)(b)(ii) and accordingly the CAC upheld the appeal of Dawn and WTS.

A’Africa Pest Prevention

Earlier this year, the CAC once again dealt with the principle of characterisation – this time in the case A’Africa Pest Prevention CC and Others v the Competition Commission.[6]

Here, the Commission initiated a complaint against two firms – A’Africa Pest Prevention CC (‘A’Africa’) and Mosebetsi Mmoho Professional Services CC (‘Mosebetsi’) – for alleged collusive tendering. The relevant facts can be summarized as follows:

  • A’Africa was owned by Aletta Labuschagne and Albertus Smith (Mr. Smith’s wife also owned a portion of A’Africa at one stage).
  • Labuschagne and Mr. Smith incorporated a new close corporation, Mosebetsi.
  • Mosebetsi lay dormant for many years, until Ms. Labuschagne and Mr. Smith appointed one of their employees, Modise Mohelo, as a member of Mosebetsi. This appointment was registered at the Companies and Intellectual Property Commission in South Africa.
  • At the stage that Mr. Mohelo was a member of, and running, Mosebetsi, both Mosebetsi and A’Africa were involved in pest control. Mosebetsi and A’Africa were run together, sharing equipment, staff and strategies.
  • Mohelo later resigned from Mosebetsi (although he was not deregistered at the Companies and Intellectual Property Commission), and Ms. Labuschagne continued to run Mosebetsi.
  • The Department of Public works issued a tender, and both Mosebetsi and A’Africa were invited to participate. Ms. Labuschagne filed tender bids for both Mosebetsi and A’Africa. The tender bids submitted were almost identical, save for the quote provided by Mosebetsi, which excluded value added tax.

The Tribunal agreed with the Commission that Mosebetsi and A’Africa had collusively tendered in contravention of section 4(1)(b)(iii) of the Competition Act. Mosebetsi and A’Africa appealed.

Part of the grounds of appeal included the Tribunal’s findings in relation to the argument of characterisation. The CAC held that the Tribunal had not fully taken into account the principles laid down in the ANSAC, SAB and Dawn cases. The CAC found that –

Although on paper, by virtue of being separate entities, firms may be capable of colluding, ultimately, the actual role players behind those firms are natural persons.  The question in this case, is who was Labuschagne colluding with? Could she collude with herself, or engineer collusion between the two firms she completed the forms on behalf of, and what would the effect of that be?  In my view, those are the questions that the Tribunal ought to have asked, because more and more they highlight the reason why the conduct ought to have been characterised.  This on its own lacks the hallmarks of collusion, which necessarily would involve individuals behind the firms conducting prohibited practices. Labuschagne had no colluding partner, so I find it hard to find that she could collude with herself in submitting the two tenders on behalf of the appellants.

Accordingly, the CAC dismissed the section 4(1)(b)(iii) complaint as against Mosebetsi and A’Africa.

Conclusion

As can be seen from the cases discussed above, the principle of characterisation is firmly entrenched in South African competition law. It is however interesting to note the different, yet interrelated approaches that have been taken in respect of characterisation: in ANSAC and Dawn, the conduct of the firms was ‘characterised’ by the courts; in SAB, the economic relationship between the firms was ‘characterised’ by the CAC and, in A’Africa, the actual management and control of the firms (as well as the conduct) was ‘characterised’ by the CAC.

In conclusion, characterisation is important as it allows for instances where conduct may fall foul of section 4(1)(b) to be assessed in light of the actual intention of the section. That is, whether the conduct is so egregious that no defence should be entertained. This, in turn, ensures that competition law does not unnecessarily hamper or obstruct pro-competitive and genuine commercial transactions from occurring, and allows courts to avoid false positives.

[1] 89 of 1998. In summary, section 4(1)(b) prohibits price fixing, market allocation and collusive tendering between competing firms.

[2] [2005] 3 All SA 1 (SCA).

[3] The matter was settled before being heard by the Tribunal.

[4] 129/CAC/Apr14.

[5] 155/CAC/Oct2017.

[6] 168/CAC/Oct18.

Recent Legal News

On September 12, 2019, the Supreme Court of Canada denied Sobeys Incorporated’s (“Sobeys”) and Metro Incorporated’s (“Metro”) leave to appeal from a judgement of the Ontario Superior Court of Justice (“ONSC”) – (“Sobeys v. Commissioner”) – dismissing their applications for disclosure of the identities of witnesses in the Competition Bureau’s Immunity Program. Their request arose in the context of an ongoing inquiry by the Competition Bureau (the “Bureau”) into an alleged conspiracy to fix the prices of fresh commercial bread in Canada contrary to section 45 of the Competition Act (the “Bread Conspiracy”), in which both Sobeys and Metro have been implicated, among other grocers and bread producers.

In Re Application by Immunity Applicant Witnesses at First Stage Hearing, 2018 ONSC 6301 (the “First Stage Hearing Decision”), a related decision, the ONSC declared the witnesses in the Bread Conspiracy to be confidential informants entitled to the protection of informer privilege. This decision did not dismiss Sobeys’ and Metro’s application for the disclosure of the identities of these witnesses. However, in Sobeys v. Commissioner, Sobeys and Metro accepted that the First Stage Hearing Decision had, for all practical purposes, determined their own application for the identities of the witnesses in the Bread Conspiracy. The only issue in dispute was the form of order in which to effect the dismissal of Sobeys’ and Metro’s application for the identities of witnesses in the Bread Conspiracy, which was expedited and did not include submissions as to the impact of the First Stage Hearing Decision. The ONSC agreed with Sobeys and Metro and expedited the dismissal of their applications in the interests of efficiency.

The Full Story

The Bureau has an Immunity Program which exists to help detect unlawful conduct contrary to the Competition Act. The Immunity Program involves a grant of immunity from prosecution to the first party to disclose to the Bureau an offence previously undetected. To qualify, the immunity applicant must cooperate with the Bureau’s investigation and any subsequent prosecution by the Public Prosecution Service of Canada (“PPSC”). The Bureau, in response to the First Stage Hearing, now clearly stipulates in its technical guidance documents that applicants for immunity are not confidential informers and that the identity of an immunity applicant and any information that might tend to identify them are not subject to informer privilege.

Informer privilege serves protects the identity of informants by overriding the Crown’s obligation of disclosure to an accused. Once informer privilege is found to exist, no exception or balancing of interests is made except when a trial judge finds disclosure necessary to demonstrate an accused’s innocence. It is a near absolute bar on disclosure of identity.

It has been the Bureau’s practice to treat the identity of an immunity applicant as confidential until charges are laid against the other participants to the offence, at which point the Crown will be required to disclose the applicant’s identity. But sometimes, the Bureau will disclose an immunity applicant’s identity sooner, if the Bureau relies on their evidence to obtain judicial authorization for an investigative measure, such as a search warrant or a wiretap. To obtain judicial authorization, the Commissioner of Competition (the “Commissioner”) must provide the court with information that satisfies the test for the particular judicial authorization sought, such as reasonable grounds to believe that an offence has been, or will be, committed. In doing so, the Commissioner will rely on the information provided by the immunity applicant to establish these grounds, including the immunity applicant’s identity, where necessary.

Unsurprisingly, the Commissioner opposed an application by the immunity applicant witnesses in the Bread Conspiracy for a declaration that they are confidential informers entitled to informer privilege in the First Stage Hearing Decision. The Commissioner submitted that the application of informer privilege would compromise the operation of the Immunity Program and anti-cartel enforcement in Canada. Nevertheless, the ONSC found that informer privilege applies to immunity applicants in the Bureau’s Immunity Program at the outset of their participation in the program, but that if the case goes to trial, they have waived the privilege by agreeing to testify, at a later date, by virtue of their participation in the program. Note that the ONSC found that there is a temporal element to this waiver.

There are differing views on the impact of the First Stage Hearing Decision. The ONSC took the view that the conferral of informer privilege to immunity applicants will strengthen the program by encouraging parties involved in criminal offences contrary to the Competition Act to come forward knowing that their identities will be held strictly confidential and not revealed until a trial date in the distant future, if ever, because many of these cases settle. Others are concerned that the effectiveness of the Immunity Program will be negatively impacted in cases where informer privilege compromises the Bureau’s ability to condition immunity on cooperation in judicial proceedings other than a trial, to the extent that such cooperation involves revealing the identity of the immunity applicant. Even where it is possible for the Commissioner to seek a sealing order to protect the identity of an immunity applicant, the obligation to do so would be burdensome for the Bureau.

However, in obiter, the ONSC commented that

“the nature of ‘judicial proceedings’ in paragraph 5 of the Bureau’s Form of Immunity Agreement is not defined or limited, and a waiver by the agreement to testify can, in other cases, potentially apply to a variety of judicial proceedings.”

The comment in obiter suggests that in some cases signing an Immunity Agreement could constitute a waiver of informer privilege applicable to testifying in judicial proceedings other than a trial. However, even in a case where the Form of Immunity Agreement could be interpreted as an effective waiver of informer privilege, prior to signing the agreement, informer privilege will protect the identity of witnesses.

As previously mentioned, the Bureau has added new language to its technical guidance documents which now stipulate that “[c]ooperating parties are not confidential informers…the identity of a cooperating party and any information that might tend to identify them are not subject to informer privilege.” It is an open question what effect this language will have. It is possible this new language could serve to create a waiver of informer privilege at the outset of an immunity applicant’s participation in the program. But that possibility has not yet been judicially tested. The counter view is that informer privilege was created and is enforced as a matter of public interest rather than contract. It is owned by both the Crown and the informer. Neither can waive it unilaterally. The First Stage Hearing Decision makes clear that for a waiver to be effective, it needs to be clear, express and informed. Until there is case law on this question, it would be prudent for parties considering participation in the Immunity Program to expect the Bureau will maintain the confidentiality of their identity generally, but that the protection of their identity may not rise to the level of informer privilege.

Conclusion

As the Supreme Court of Canada has decided not to hear an appeal of the decision not to disclose the identities of the witnesses in the Bread Conspiracy, it is unclear whether witnesses in the Bureau’s Immunity Program will be protected by informer privilege. We will look forward to future decisions adding clarity to the cases in which signing an Immunity Agreement may serve to waive informer privilege and to test the new language in the Bureau’s technical guidance documents.

Under the Competition Act (the “Act”), any six persons who are resident in Canada, at least 18 years of age and of the opinion that (a) an offence has been or is about to be committed under the criminal provisions in the Act, (b) grounds exist for the making of an order under the civil provisions in the Act or (c) a person has contravened an order made by the Competition Tribunal or a court pursuant to the Act, may apply to the Commissioner of Competition (the “Commissioner”) for an inquiry into the matter. These types of applications are commonly referred to as “six resident applications”.

A six resident application must be accompanied by a statement that includes the following: (a) the names and addresses of the applicants; (b) the nature of the alleged contravention or offence under the Act; (c) the names of persons they believe to be concerned; and (d) a statement of the evidence supporting their opinion.

Upon receipt of a six resident application, the Commissioner is required to commence an inquiry into all such matters as the Commissioner considers necessary to inquire into with a view of determining the facts. Upon commencing an inquiry, the Commissioner has access to and may in his discretion use a wide range of formal information gathering tools, such as (a) orders requiring oral examinations under oath, the production of documents and/or the delivery of written information under oath; (b) search warrants; or (c) in certain cases, wiretaps.

Six resident applications are a relatively straightforward and cost-effective tool for Canadians looking to capture the attention of the Competition Bureau (the “Bureau”). There are many examples of six resident applications resulting in inquiries under the Act. In the past, six resident applications have generally been used to bring attention to consumer-protection issues. For example, Friends of the Earth Canada recently brought a six resident application with respect to alleged false or misleading marketing practices by certain manufacturers and distributors of single-use “flushable” wipes. This application has resulted in increased awareness for Canadians of the environmental impact of such wipes.

While six resident applicants are entitled to updates on the progress of an inquiry, they should be mindful that the Bureau is required by law to conducts its investigations in private and is bound by strict confidentiality provisions in the Act. If a prosecution or civil proceeding results from an inquiry, that fact will become a matter of public record and the Bureau will often make the public aware through announcements or position statements. However, where no prosecution or civil proceeding has been commenced, and despite that the Bureau strives to be as transparent as possible, parties can, at times, feel “in the dark” while the Bureau advances its inquiry. Should the Bureau commence an inquiry pursuant to a six resident application and discontinue its inquiry, the Commissioner is required to inform the six resident applicants of the reasons for doing so.

In recent years, competition/antitrust enforcers around the world, including Canada, have taken a marked interest in private equity deals.  As part of a broader global trend of tougher merger enforcement, private equity firms that have taken ownership positions (controlling or minority) in portfolio companies that are competitors have been subject to heightened scrutiny.  The litigation and subsequent settlement in involving Canada’s Competition Bureau and Thoma Bravo is the most recent example.

The Transaction

On May 13, 2019, Thoma Bravo (a private equity firm based in the United States) acquired Aucerna, a Calgary-based company that supplies reserves software, known as Val Nav, to oil and gas producers.

Before the acquisition, Thoma controlled several software companies, including a company known as Quorum. Quorum supplies reserves software, known as MOSAIC, to oil and gas producers.

The Bureau’s Challenge

32 days after the transaction closed, the Bureau sought to unwind the transaction, alleging a substantial lessening of competition in the market for reserves software for oil and gas producers in Canada. By bringing Aucerna and Quorum under common ownership and control, the Bureau alleged a merger to monopoly among the two largest Canadian suppliers of reserves software. The Bureau identified Aucerna’s Val Nav software and Quorum’s MOSAIC software as built and developed specifically for the Canadian market, and further alleged international competition from Schlumberger and Halliburton as insufficiently tailored for Canadian customers.

The Resolution

Approximately two months later, the litigation settled by way of a Registered Consent Agreement before Canada’s Competition Tribunal.  As part of the settlement, Thoma agreed to divest Quorum to a purchaser acceptable to the Bureau. The Bureau and Thoma agreed to the divestment of Quorum rather than any of the assets Thoma acquired from Aucerna through the transaction.

Lessons Learned

  • Great Scrutiny of Private Equity: The Thoma Bravo litigation demonstrates that Canada is no exception to the growing global scrutiny of private equity deals. Whether taking controlling or minority interests, private equity firms need to analyze the antitrust/competition implications of their prospective transactions, whether or not the transaction is subject to pre-merger notification before the Bureau.
  • Greater Scrutiny of Non-Notifiable Transactions: While not entirely clear, Thoma’s acquisition of Aucerna was likely not subject to pre-merger notification before the Bureau. The Bureau’s challenge of a non-notifiable transaction aligns with recent statements by the Bureau regarding its expanded Merger Intelligence and Notification Unit. The Bureau’s newly created Unit aims to identify non-notifiable transactions that may have competition concern. The Unit also aims to incentivize merging parties involved in competitively sensitive non-notifiable transactions to engage the Bureau pre-closing.
  • Post-Closing Unwinding of Transactions: Most merger challenges by the Bureau take place pre-closing, thereby preventing the intermingling of the merger parties’ businesses. The Bureau actions – seeking to unwind a transaction over a month post-closing – represents a rare exercise of discretion and a signal that no comfort should be taken from the lack of a pre-merger challenge by the Bureau.

Please contact any member of our Competition or Private Equity Group to discuss this development to ensure that appropriate consideration has been given to the heightened scrutiny from the Canadian competition regulators for private equity transactions.

The Competition authorities of the G7 countries (Canada, France, Germany, Italy, Japan, the U.K. and the U.S.) and the European Commission have reached a common agreement on the opportunities and challenges arising from the growing digital economy. The agreement was reached on June 5, and adopted by the Finance Ministers and the Bank of Governors of the G7 and the European Commission on July 18.

The competition authorities agreed on four primary principles:

  • Competitive markets are key to well-functioning economies.
  • Competition law is flexible and can and should adapt to the challenges posed by the digital economy without wholesale changes to its guiding principles and goals.
  • Governments should assess whether policies or regulations unnecessarily restrict competition in digital markets or between digital and non-digital players, and should consider procompetitive alternatives where possible.
  • Given the borderless nature of the digital economy, it is important to promote greater international cooperation and convergence in the application of competition laws.

The agreement notes that the digital economy has fundamentally changed the way that goods and services are produced and sold, and that the accumulation of data can aid in the improvement of existing products, or the formation of new ones. These benefits assist in evaluating how the digital economy has affected competition over time. The authorities noted that innovation facilitates economic growth and allows new entrants to enter the market and increase competition, while competition law enforcement has an important role to play in safeguarding consumer trust in the marketplace.

The authorities also noted the competition-related challenges that the growing digital economy presents, including factors that make market definition, market power assessment and competitive effects analysis more difficult, requiring closer analysis of non-price aspects of competition. They also discussed that an increased awareness for the identification of anti-competitive behaviour by dominant firms might be necessary as digital markets become more concentrated. The authorities agreed that these challenges are not outside of the reach of competition law, and that many features of digital markets are already being addressed by existing frameworks.

The agreement notes that in order to have effective enforcement, competition authorities need to be consistently improving their understanding of the competitive effects of new business models.

The agreement also highlights the importance of advocacy and of competition impact assessments of policies. The authorities agreed that governments should avoid using competition law enforcement to address non-competition objectives. They also noted that regulations can increase the cost of entry and entrench incumbents, and therefore have anti-competitive effects. They agreed that governments should monitor the competitive impact of prospective regulations and review the existing ones to ensure that they promote competition and maintain competitive markets.

Finally, the authorities confirmed their agreement on the importance of cooperation with their international counterparts.

Pre-merger exchanges of information can create competition risk. Companies considering mergers or acquisitions legitimately need access to detailed information about the other party’s business in order to negotiate the deal, engage in due diligence and implement the transaction. While non-competitively sensitive can (subject to any commercial concerns) be freely exchanged, care needs to be exercised when exchanging competitively sensitive information, such as current and future price information, strategic plans and costs. This is especially true if the companies are competitors or potential competitors.

Competition Law Concerns

In the context of mergers, the Competition Bureau is particularly concerned with pre-closing information exchanges of competitively sensitive information among actual or potential competitors. This is because the exchange of such information can facilitate coordination between the parties in the period prior to closing or for a much longer period of time if the transaction ultimately does not close. For example, the exchange of competitively sensitive information can reduce the uncertainty around a competitor’s current or future business, marketing or strategic plans.

If the exchange of competitively sensitive information is accompanied by accommodating actions, it could potentially constitute an unlawful agreement contrary to the criminal cartel provisions in the Competition Act. These provisions prohibit agreements between competitors to fix prices, allocate markets or restrict output, and provide for fines of up to $25 million and/or imprisonment of up to 14 years. As such, it is important that the parties continue to operate independently and compete against each other as they have in the past up to the date of closing, including preserving their competitively sensitive information.

Mitigating Risk

In light of the above, it is important that the parties to a merger have a plan in place to monitor and control the exchange of competitively sensitive information. For example, if competitively sensitive information must be exchanged for due diligence and integration planning purposes, parties should employ third-party consultants, clean teams and other safeguards that limit the dissemination and use of that information within the parties’ businesses. A helpful discussion of the various methods that can be employed to safeguard competitively sensitive information is contained in a short article published by the United States Federal Trade Commission titled “Avoiding Antitrust Pitfalls During Pre-Merger Negotiations and Due Diligence”.

Do’s and Don’ts

In addition to the protocols referred to above, set out below is a non-exhaustive list of do’s and don’ts in respect of pre-closing information exchanges:

“Do’s”

  • Comply with all obligations relating to the exchange of competitively sensitive information set out in any relevant agreements, including confidentiality, non-disclosure and clean team agreements.
  • Limit the exchange of competitively sensitive information to that which is necessary to complete regulatory filings, engage in legitimate pre-closing integration planning or otherwise proceed with the transaction.
  • Restrict access to competitively sensitive information to senior management, legal counsel or those who have a “need to know”.
  • Limit the information exchanged to the minimum necessary, and to historical information, rather than prospective information such as strategic plans, marketing plans, product development plans, forecasts, price initiatives or capital plans.
  • Include “PRIVILEGED & CONFIDENTIAL – JOINT DEFENCE MATERIALS” in the subject line when emailing competitively sensitive information. Include the same note in the header of documents.
  • Keep the information shared as aggregated as possible (i.e. information that does not disclose specific prices, costs, customers or markets), thereby reducing the competitive value and sensitivity of the information.
  • Maintain a record of each communication and the information provided and received and review such record regularly to ensure that the information provided has been appropriate.
  • Be cautious when information is provided orally so that the conversations do not stray to sensitive or prohibited subjects.
  • Seek advice from counsel if you are unsure whether information should be shared.

“Don’ts”

  • Share information with personnel other than senior management, legal counsel or those with a “need to know”. Sales or marketing personnel should not receive or gain access to any competitively sensitive information.
  • Share information relating to any businesses unrelated to the proposed transaction.
  • Agree on customer pricing, jointly negotiate purchases or otherwise act as a single entity. Both parties must strive to be as competitive as possible until the transaction closes.
  • When communicating, even internally, use negative phrases such as “eliminate competition” and “dominant player”. Every document created relating to the transaction should be written with the knowledge that such document may end up in the hands of the Bureau. Therefore, great care should be taken to avoid any implication that the purchaser has any intent, practice or policy to restrict competition. In respect of the transaction, it is preferable to focus on the positive efficiency-enhancing aspects, such as achieve economies of scale.

Conclusion

Having regard to the protocols described in the FTC’s article and the do’s and don’ts summarized above will minimize the risk of issues arising in the context of pre-closing information exchanges. In contrast, parties that choose to exchange competitively sensitive information in the absence of such protocols could find themselves subject to lengthy investigations, prosecution and significant penalties under the criminal cartel provisions in the Competition Act.