Competition Chronicle

Competition Chronicle

Competition & Antitrust | Foreign Investment

Competition Bureau Challenges Thoma Bravo’s Acquisition of Oil and Gas Reserves Software Firm, Aucerna

On June 17, 2019 the Competition Bureau announced that it is challenging Thoma Bravo’s acquisition of Aucerna, a company that offers valuation and reporting software to Canadian oil and gas producers.

The fact that the Competition Bureau is challenging the transaction after it has been completed suggests that the transaction was not subject to pre-merger notification and that the Bureau learned about the transaction only after it closed, or at least too late to seek to enjoin its completion. Presumably, this will become clear when the Bureau’s application becomes available on the Competition Tribunal website.

It’s noteworthy that the Bureau only recently decided to place more focus on detecting potentially anticompetitive non-notifiable transactions. It may be that Thoma Bravo’s acquisition of Aucerna is an early success.

The Bureau’s action against the merger also falls within its focus on the digital economy.

In its press release, the Bureau asserts “that the transaction is a merger to monopoly in the supply of reserves software in Canada to medium and large producers”. In this regard, the Bureau will likely have to contend with significant issues pertaining to market definition and entry conditions. And of course we can anticipate the merging parties advancing the efficiencies defence.

The Bureau’s action serves as a reminder that in non-notifiable mergers that raise significant competition issues, parties must decide whether to voluntarily consult the Bureau or not. Many factors come into play in that decision including the likelihood of complaints, the parties’ appetite for risk and possible litigation, and the availability of defences (including the efficiencies defence). The parties must also turn their minds to appropriate contractual protections in their merger agreement. In this regard it’s noteworthy that the Bureau has a one-year limitation period following closing of a merger to challenge the merger.

VERTICAL AGREEMENTS IN SOUTH AFRICA: A NEW DAWN?

This article considers the potential for changes in the treatment of vertical agreements under South African competition law as a result of recent amendments to the Competition Act, as well as current policy views within the law-makers and regulators.

Section 5(1) of the South African Competition Act prohibits vertical agreements that substantially prevent or lessen competition, unless technological, efficiency or other pro-competitive gains arising from the agreement outweigh the anti-competitive effect. This provision is not dissimilar from corresponding prohibitions in competition laws elsewhere.

Since the advent of the Competition Act, contraventions of section 5(1) have been punishable with an administrative penalty only for a repeat offence. A first-time offender could be the subject of a behavioural order, most likely to revise the agreement in question to remove the restrictive restraints.

As a result, with a high economic onus for successful enforcement and without the carrot of an administrative penalty for proving a contravention, cases under section 5(1) have been few and far between. Section 5(1) has been a section tucked away deep beneath the higher profile anti-cartel and abuse of dominance prohibitions, with relatively little attention paid to its precise content.

But change may be on the horizon. Recent revision of the law will raise the consequences for a contravention of section 5(1), and one may also speculate that current policy within government and the Competition Commission points in the direction of increased enforcement under the section in the near future.

Legal Consequences – Fine for a First Offence

The Competition Amendment Act, which became law in February 2019 but is not yet in force, will soon enable the Competition Tribunal to impose an administrative penalty of up to 10% of a firm’s turnover for a contravention of section 5(1). Repeat offences will attract a fine of up to 25% of turnover.

With an increased ability to grab headlines and promote compliance culture within corporate South Africa, these weighty financial consequences may peek a renewed interest in section 5(1) within the corridors of the Commission. A cynic may also suggest that because successful cases under section 5(1) will soon result in revenue for the fiscus, stronger enforcement may curry favour with the executive actors who control the Commission’s purse strings, and therefore further incentivize more casework in this area.

What’s more, in a number of recent cases the Commission has sought to characterize supply relations between actual and potential competitors as “horizontal”, and capable of adjudication under the anti-cartel provisions of section 4(1)(b) of the Act. In defence, firms are quick to produce evidence that the true economic relationship between them is vertical, rather than horizontal, hoping not only to escape the per se confines of section 4(1)(b) which renders conduct illegal regardless of effects, but also in order to avoid the risk of a fine.

The introduction of an administrative penalty for a contravention of section 5(1) pulls the rug from beneath this defence somewhat. The fight will not end once characterization of the relationship has been concluded, as a section 5(1) dispute will carry more meaningful consequences for both enforcer and respondent.

The Prevailing Policy Winds

Since inception, the Competition Act has sought to achieve inclusive growth through strengthening competition, opening up markets to new entrants and with a leaning towards promotion of small and locally-owned businesses.

This desire to facilitate participation by small firms now seems stronger than ever. Under the Competition Amendment Act, new prohibitions have been introduced which are unfamiliar to competition law orthodoxy and in some cases expressly aimed at protecting the public interest, rather than “pure” competition concerns. These provisions place a heightened duty of care upon dominant firms when supplying or purchasing from small firms. A dominant seller is prohibited from discriminatory pricing if the effect is to impede the effective participation of small and medium businesses, and firms owned or controlled by historically disadvantaged persons. A dominant buyer is prohibited from imposing unfair pricing or trading terms on small and medium businesses, and firms owned or controlled by historically disadvantaged persons, if the effect is to impede such firms’ effective participation.

This is a strong show of intent by government, determined to ratchet up the application of competition law to tackle slow rates of transformation and high barriers to participation by small firms.

Simultaneously, through its merger control work, the Commission has often taken care to ensure that small and locally-owned firms are not precluded from supply on fair terms as a result of mergers.

When viewed through this policy lens, it is possible to envisage a move towards more aggressive enforcement against restrictive vertical agreements outside of the merger context, particularly in light of the possibility of a fine for a first offence of section 5(1). For example, where an agreement confers exclusivity or preferential terms on a large supplier or distributor, there may be policy reasons for thorough investigation of whether the effect is to raise barriers to participation by small and locally-owned firms, to the detriment of competition.

Potential Implications

Leaving aside speculation about potential policy incentives of the Commission to increase enforcement against vertical agreements, changes to the financial consequences of contravening section 5(1) in the Competition Amendment Act alone change the playing field in this area.

The competition law community will certainly need to engage with the economic substance of section 5(1) at a level of precision and thoroughness which has to date not been necessary. Identifying and quantifying anti-competitive effects, as well as countervailing efficiency gains, against the factual context of each specific agreement, is likely to become increasingly important, particularly where there is market power.

Under the Competition Amendment Act, the Minister of Economic Development is required to promulgate regulations on the application of section 5. This unusual inclusion in the amendments may signal an intention to reshape the scope of section 5(1) to give greater protection to small business. Alternatively, the regulations may simply articulate the applicable economic test in greater detail than set out in the Act. Either way, this area is likely to see growth and development in the next period which firms and their advisors would be well advised to follow closely.

Recent Comments Regarding Big Tech Companies and the Digital Economy

Over the past week, the Commissioner of Competition has made a number of comments relevant to big tech companies and the digital economy. These comments were made on a panel at the Data Forum Discussing Competition Policy in the Digital Era in Ottawa on May 30th, at a conference hosted by the Organisation for Economic Co-operation and Development in Paris on June 3rd and during an interview with CBC News. The key comments are summarized below.

Competition Bureau to Monitor Acquisitions by Big Tech Companies

As noted in our recent blog post titled “Competition Bureau Expands Merger Investigation Activities”, the Commissioner announced that the Competition Bureau has placed more focus on identifying non-notifiable mergers that could potentially raise competition law concerns. In fact, according to the Commissioner, the Bureau has already detected two potentially problematic non-notifiable transactions that it is now reviewing.

At the time this initiative was announced, the Commissioner did not identify which sectors of the economy the Merger Intelligence and Notification Unit would be focused on. However, the Commissioner recently stated that the Bureau would be more vigilant about monitoring the acquisition of small firms by big tech companies.

The Bureau’s focus on these types of transactions should come as no surprise, particularly given that such acquisitions touch on two priority areas for the Bureau – namely innovation and the digital economy. The policy rationale behind the increased scrutiny is understandable. For example, over the past 10 years, the five largest digital companies in the world have acquired over 400 firms globally. None of these acquisitions were blocked, and very few had conditions attached to approval or were reviewed by competition authorities at all (see Unlocking Digital Competition: Report of the Digital Competition Expert Panel). The Bureau’s focus on the digital economy is also consistent with recent actions by the U.S. antitrust agencies.

While it is recommended that parties to non-notifiable mergers always perform a pre-merger assessment of the potential anti-competitive impact of their proposed transaction, this is especially important where a big tech company is proposing to acquire a small start-up firm. Moreover, if the assessment identifies potential competition concerns, the parties should discuss the pros and cons of providing advance notice to the Bureau. This is a complex topic that involves the consideration of a number of factors, including the likelihood of complaints from market participants.

Commissioner Critical of Efficiencies Defence

The Commissioner stated that the efficiencies defence, which prevents the Competition Tribunal from making an order where it finds that the efficiencies likely to arise from a merger are greater than and offset its anti-competitive effects, is “particularly ill-suited to the digital economy”. Among other things, the Commissioner noted that (a) the defence “is poorly adapted to take into account dynamic competition”, which the Tribunal described as “the most important type of competition” in its decision in the Toronto Real Estate Board case; (b) the Commissioner’s burden of quantifying non-price effects (including those resulting from a reduction in dynamic competition) is much more difficult than the merging parties’ burden of “estimating cognisable efficiencies such as savings from cutting duplicative jobs”; and (c) “[c]ompetition in the data-driven economy in particular has many different characteristics from traditional types of markets for the export of goods.”

While the Commissioner has acknowledged that “the efficiencies defence is a reality in Canadian competition law”, his comments suggest that he may be skeptical of this defence in the case of transactions involving the digital economy – especially when the balancing exercise involves the consideration of non-price effects and dynamic competition. In these cases, it may be more difficult for the parties to establish to the satisfaction of the Commissioner that the defence has been met.

Other Points Relevant to the Digital Economy

The Commissioner has also made a number of other points applicable to the digital economy, including the following:

  • The Federal Government should increase penalties to more effectively deter anti-competitive behaviour and promote compliance by tech giants and other firms in the digital economy. According to the Commissioner, “[t]he maximum penalties for anti-competitive behaviour are, quite simply, not high enough in Canada” and “lack the teeth necessary to deter anticompetitive behaviour, particularly when you are talking about large, multinational tech firms”.
  • While Canada’s competition law is “generally up to the task” of dealing with big data, the Bureau needs new tools in the context of the digital economy. In particular, the Commissioner noted that there are “several gaps” in the competition regime “that simply don’t measure up to best practices”. For example, the Commissioner noted that the Bureau lacks the power to conduct market studies and to compel the production of information for purpose of such studies.
  • Countries have to work together to deal with the challenges of tech giants and the digital economy. In this regard, the Commissioner stated as follows: “The rapid rise of the borderless digital economy is a truly global phenomenon, which requires competition authorities to collaborate and cooperate on an almost daily basis. I believe that the best way to look at global conduct that may cause concern is by taking a globally-coordinated approach to enforcement.”

Competition Bureau Expands Merger Investigation Activities

In a recent speech given at the Canadian Bar Association’s Competition Law Spring Conference, Commissioner of Competition, Matthew Boswell, announced the Bureau’s decision to place more focus on identifying non-notifiable mergers which could potentially raise competition law concerns.

While the Competition Act (“the Act”) requires pre-merger notification of certain proposed mergers when prescribed monetary thresholds are exceeded, the Act has application to all mergers, both proposed and recently completed, where such mergers prevent or lessen, or are likely to prevent or lessen, competition substantially. In an effort to identify potentially problematic non-notifiable mergers, the role of the Bureau’s Merger Intelligence and Notification Unit has been expanded to include a broader focus on intelligence gathering with respect to non-notifiable merger transactions. Within two months of the implementation of this broader focus, the Bureau has already detected two potentially problematic non-notifiable transactions that it is now reviewing.

This increased focus by the Merger Intelligence and Notification Unit on identifying potentially problematic non-notifiable mergers should serve to reinforce the importance to parties proposing non-notifiable mergers to perform a pre-merger assessment of the potential anti-competitive impact of their proposed transaction. Parties who fail to do so may find themselves involved in an unexpected Bureau review of their proposed or completed merger. Should the Commissioner conclude that their merger is problematic from a competition law perspective, the Commissioner has the right, under section 92 of the Act, to make an application to the Competition Tribunal to, among other things, have the Tribunal order a proposed merger not to proceed and a completed merger to be dissolved.

Brave New Digital World – Canadian Government Announces Digital Charter

The Federal Government has announced the creation of a 10-point Digital Charter, which will involve, among other things, updating the Privacy Act. The Digital Charter will outline what Canadians can expect from both the government and the private sector as it relates to the digital landscape. This initiative is geared towards providing greater transparency in the ways that technology companies use personal data that they collect from Canadians. According to Innovation, Science and Economic Development Minister Navdeep Bains, this new development will build greater trust in the digital world by protecting citizens’ privacy and providing control of their data. This update will be implemented via a review of the Canada’s privacy laws, the Statistics Act, and the enforcement tools of the Competition Bureau, in conjunction with the development of a new Data Governance Standardization Collaborative to improve data governance standards.

In furtherance of the Digital Charter initiative, Minister Bains wrote to the new Commissioner of Competition outlining the Minister’s views on the Competition Bureau’s role in implementing this initiative. The Minister stresses the necessity to review the risks of data abuse and data monopolies given the increasing reliance on technological data by companies in order to establish a competitive advantage. Further, he outlines that it is crucial to also consider the potential for market distortions and disruptions that arise as a result of the collection, processing and use of data. He suggests that the Bureau work with the policy leads in the Strategy and Innovation Policy Sector to explore issues such as “the impact of digital transformation on competition, the emerging issues in data communication, transparency and control, the effectiveness of current competition policy tools and market frameworks, and the effectiveness of current investigative and judicial processes.” Consideration of these factors by the Bureau will be a significant input to the broader data and digital strategy underway and will foster greater trust in the digital marketplace.

It is noteworthy that the Minister is asking the Bureau, through a mandate letter, to co-lead this significant competition policy project despite the fact that the competition policy function  has not been with the Bureau  for some time. It remains to be seen whether this will mean an increase in resources for the Bureau from the government.

 

Commissioner Points to More Active Enforcement, Greater Transparency and Refined Approach to Efficiencies Defence

During his keynote speech at the Canadian Bar Association’s Competition Law Spring Conference on May 7, 2019, the Commissioner of Competition discussed several important topics, including more active enforcement, a refined approach to the efficiencies defence and greater transparency with merging parties. Each of these developments has significant implications for the merger review process, particularly in the context of complex transactions.

More Active Enforcement

First, the Commissioner stated that “active enforcement will be an area of primary focus” and that “the [Competition] Bureau will not hesitate to take appropriate action to safeguard Canadians against anticompetitive conduct”. This includes the use of all tools at the Bureau’s disposal, including increased and more frequent consideration of injunctions to prevent the closing of  mergers pending a full hearing before the Competition Tribunal.

The Commissioner also stated that the Bureau will bring forward principled cases when it cannot reach a reasonable and appropriate consensual resolution with the parties. While the Commissioner acknowledged that this could result in difficult cases being litigated, he recognized that these cases will provide valuable jurisprudence and help clarify the law – regardless of “[w]hether we win or lose”.

Approach to Efficiencies Defence

Second, the Commissioner acknowledged that “the efficiencies defence is a reality in Canadian competition law”. However, he also noted that, as result of recent experience, the Bureau has changed its procedural approach to this defence. Specifically, the Commissioner emphasized that the “refined procedural approach” will call for the provision of detailed evidence supporting the efficiencies claimed; the ability to test the evidence underlying those claims; and adequate time, set out in a timing agreement, to conduct a meaningful assessment of the efficiencies claimed.

The Bureau intends to release a model form of timing agreement for consultation that will include timed stages for production of information and evidence and engagement with the Bureau during a review that involves efficiencies claims. Part of this model timing agreement will also include a commitment that the Commissioner will not file an application with the Tribunal while this process is ongoing, provided that parties also commit to not take steps towards closing the proposed transaction. In the absence of the parties agreeing to such a timing agreement, it appears that the Commissioner will not be willing to exercise his discretion to consider efficiencies claims as part of the merger review process. Rather, it will likely be left up to the Tribunal to determine, in the context of a contested application, whether the efficiencies likely to arise from a merger are greater than and offset its anti-competitive effects.

Greater Transparency

Finally, the Commissioner noted that the Bureau will work hard to continuously improve the timeliness, effectiveness and efficiency of its enforcement work. This will be realized through a number of initiatives, including empowering officers to be as transparent as possible with merging parties and their counsel, on a without-prejudice basis, earlier in the merger review process. While the Commissioner cautioned that the Bureau’s analysis and views may evolve as the review progresses, he indicated that such changes would be communicated to the parties as part of “an ongoing dialogue with our teams”.

Implications

As noted above, each these developments has significant implications for the merger review process, particularly in the context of complex transactions. For example, more active enforcement will likely require merging parties to carefully consider issues relating antitrust risk, including the need to build remedies or a hell-or-high-water clause into the transaction documents. Similarly, the refined procedural approach to the efficiencies defence will likely require merging parties to raise efficiencies claims earlier in the process in order to allow the Bureau sufficient time to test these claims. At the same time, increased transparency with merging parties earlier in the process should allow for more timely merger reviews by the Bureau.

 

Cartels and Joint Ventures

Joint ventures are generally only of interest to competition authorities when they trigger merger notification obligations, or are otherwise used as a platform for collusive or anticompetitive behavior.

Recently, the South African competition authorities’ interest has been peeked in joint ventures that have purportedly been used as a platform for cartel activity, and a number of decisions were handed down in 2018. This post answers a number of questions in light of these decisions, and highlights the implications of these decisions on future conduct by competitors looking to establish, or operate in, a joint venture.

Are joint ventures between competitors illegal under South African competition law?

No, joint ventures between competitors are not illegal in South Africa, and the Competition Commission does not automatically view joint ventures between competitors as cartel activity.

In the recent Wasteman Holdings[1] case, the Commission recognized that the joint venture created a new investment that the competitors might not have invested in on their own or in competition with one another. What the Commission sought to impugn were the downstream activities of the competitors, which were coordinated through the joint venture.

Should joint ventures between competitors be formalized for purposes of competition law compliance?

Whilst not strictly required, formalization of joint venture agreements is encouraged. In Geometry Global[2] the Competition Tribunal warned that “to those claiming to operate as a joint venture, we would caution that whispered agreements at side meetings are poor substitutes for formalized memorandums of understanding or joint venture agreements”.

When incorporating a joint venture with a competitor, may a non-compete clause be imposed?

In Dawn Consolidated Holdings, the Competition Appeal Court set out a three-step test to determine, objectively, whether a restraint (such as a non-compete clause) could be ‘characterized’ as falling outside of the scope of section 4(1)(b). These steps were:

  • Is the main agreement (in this instance, the shareholders agreement or joint venture agreement) unobjectionable from a competition law perspective?
  • If so, is a restraint of the kind in question (i.e. a non-compete clause) reasonably required for the conclusion and implementation of the main agreement?
  • If so, is the particular restraint reasonably proportionate to the requirement served?

If a firm can answer all three steps in the affirmative, the restraint may be imposed in the joint venture agreement without contravening section 4(1)(b).

When might activities in joint venture contravene the cartel provisions in section 4(1)(b) of the South African Competition Act?

In the recent Wasteman Holdings[3] decision, the Competition Tribunal found that competitors could not hide behind the notion of a separate legal entity to protect themselves from competition law contravention – even where a separate legal entity is involved, the true economic relationship will have to be considered for purposes of a section 4 complaint.  The Competition Tribunal held that “It is not difficult to imagine how liability for collusion could be avoided if competitors could sanitize what would otherwise be a collusive arrangement by changing hats…. The real economic relationship remains one of two competitors reaching an agreement”.

Key take away points

There are at least three points arising from the cases referred to above which, if taken aboard, help mitigate the competition law risks arising from joint ventures between competitors:

  •  Geometry Global – Joint venture agreements between competitors should be in writing and formalized.
  • Dawn Consolidated Holdings – Restraints in joint venture agreements between competitors should be assessed with regard to the Competition Appeal Court’s three step test, essentially requiring a reasonable relationship between any non-compete provision and the objective of the joint venture.
  • Wasteman Holdings – Even though acting as a separate entity, such as a joint venture, firms will likely continue to wear the hat of “competitors” unless it can be shown that the entity is sufficiently independent. Actions and conduct by the separate entity, or joint venture, may be imputed on the competitors, who are shareholders or partners. Further, competitors, when exchanging information in the joint venture, should identify in advance and record the limits of the required information and the reason for the exchange – this would help explain the purpose of the exchange if ever questioned by the competition authorities.

The South African competition authorities have taken a balanced approach between preserving the efficiency gains arising from joint ventures and intervening when competitors use joint ventures for anti-competitive purposes. These recent cases provide welcome clarity on a range of issues which often confront joint venture parties.

[1] 155/CAC/Oct2017.

[2] CR182Dec16.

[3] CR210Feb17.

Don’t Break-up Tech Giants Based on Populist Grandstanding

Antitrust exaggerated backlash against Big Tech is an attack on principles of free markets

“The nail that sticks out gets hammered down.” That Japanese proverb – typically used to teach conformity – seems to be the approach advocated by U.S. Senator and Democratic presidential hopeful Elizabeth Warren in her recent call to “break up our biggest tech companies,” including Google, Amazon, and Facebook.

There is little question that the Internet has been the foundation for a number of tremendously successful companies. Consumer demand for innovative products and services has allowed these “tech giants” to realize rapid growth and also market preeminence.

There’s been a recent populist backlash against the power of these data monopolies, concern over harmful online content or behavior, cybercrime, and political misinformation. But the approach advocated by Sen. Warren and others to break up large tech companies is flawed because it overstates the consequences of being “big,” politicizes the role of competition regulators and ultimately will hinder innovation and harm consumers.

Internationally, too, there is a growing call for government action to curb the strength of the tech giants. Most advanced economies are studying the adequacy of competition law over concerns about increasing market concentration in digital network sectors.

In the United States, the Federal Trade Commission has begun public hearings to examine the need for new antitrust approaches. The FTC recently launched a task force to monitor technology markets designed to investigate potential anti-competitive conduct in the digital sector.

The United Kingdom is also examining the role of competition in the digital economy, including two recent reports, first by an expert panel entitled “Unlocking digital competition” which recommended, among other things, a code of conduct for tech firms to include mandating interoperability and the second report by the House of Lords Committee on Communications recommending a public interest test for data mergers.

The European Commission began its study of competition in tech markets by releasing an expert report calling for stricter antitrust enforcement.

In Canada, there have calls for the modernization of Canada’s competition laws by the Senior Deputy Governor of the Bank of Canada, Carolyn Wilkins, and by the Commons Committee on Access to Information, Privacy and Ethics report following last year’s Facebook/Cambridge Analytica scandal. In response, the government notes that the current competition legislation provides important protections while it studies the results of its National Digital and Data Consultations.

In 2018, during my tenure as Canada’s Competition Commissioner, the Competition Bureau published an international, award-winning report entitled, “Big Data and Innovation: Key Themes for Competition Policy in Canada.” The study recognized that the emergence of companies that control and exploit data can raise new challenges for competition law enforcement but confirmed the sufficiency of the current antitrust framework in this space. The report clarified that the Competition Bureau will not condemn companies merely because they are “big” or possess valuable big data. A fundamental principle of antitrust is that business success ought not be condemned or punished, even if that leads to dominant firms and concentrated markets. To do otherwise would harm incentives to innovate and deprive markets of important efficiencies like economies of scale and scope. These insights also apply to big data, where efficiencies may relate to network effects.

Competition enforcement agencies need to apply an evidence-based approach and demonstrate actual economic harm before taking action. Big data holds considerable promise to increase economic efficiency and innovate business practices. It’s important for antitrust regulators to maintain a degree of humility and recognize that far-reaching, populist proposals are ill-advised.

Antitrust law has limits; it should not be expected to address all social problems. There are other laws and policies to address these. For instance, tax laws are better suited to correct wealth inequality, and privacy laws are better suited to safeguard personal data.

The proposal to dismantle large tech companies by unwinding already completed mergers and to prohibit platform owners from participating on their own platforms is flawed. A respect for property rights and the freedom of contract are fundamental tenets of a free-market economy, along with competition policy which enables long-term economic growth that benefits businesses and consumers alike.

Expropriating the property rights of a successful company is akin to the nuclear option in antitrust law, especially when less intrusive remedies exist. This dramatic approach would cause significant damage to the economy if it were to use antitrust law to break up large companies in an effort to remedy broad public-interest concerns.

Restricting successful companies reduces incentives to innovate, invest and compete. Competition enforcement agencies must be empowered to make evidence-based decisions using economic analysis to deal with antitrust issues. Theories and the quest for political wins should not drive policymakers to take hasty actions in the shaping of our markets. Let’s exercise care in wielding our regulatory hammers.

John Pecman is a Senior Business Advisor in the Antitrust/Competition & Marketing group at Canadian law firm Fasken. He formerly served as Commissioner of Competition of the Canadian Competition Bureau.

5 Takeaways from the 2019 ABA Antitrust Spring Meeting

The 67th Annual American Bar Association Spring Antitrust Meeting was held in Washington, D.C. from March 26-29, 2019. Over 3,300 competition and consumer protection professionals from more than 68 jurisdictions attended the Spring Meeting, including lawyers, economists, enforcers, academics and members of the judiciary. Seven members of Fasken’s  Antitrust/Competition & Marketing Group represented the firm at the Spring Meeting.

The Spring Meeting is an excellent opportunity for competition professionals from various jurisdictions to meet and share knowledge about competition and consumer protection law. For Canadian lawyers, it is especially important to remain current on developments in the U.S. antitrust space. When it comes to civil enforcement in the U.S., the following trends were discussed at the Fundamentals –Antitrust session of the Spring Meeting:

  1. Focus on pharma: There have been several case law developments in the U.S. in the area of pharmaceutical antitrust. For example, in 2018, the FTC ordered the largest online retailer of contact lenses in the U.S., to stop enforcing provisions of certain settlement agreements with rival online contact lens competitors. The purpose of the settlement agreements was to avoid litigation after the online retailer complained that its competitors purchased search terms that gave them advertising space whenever a potential customer searched it by name. The important takeaway is that pharmaceutical companies should expect competition enforcers to keep a close eye on settlement agreements for potential antitrust violations.
  1. Uncertainty surrounding remedies for vertical mergers: A horizontal merger is one between firms that could compete with one another whereas a vertical merger is one in which a company on one level of the supply chain buys a company on another level of the supply chain. In the U.S., there has been some uncertainty surrounding the type of remedies – structural (such as divestitures) vs. behavioural  –  that will be accepted by U.S. antitrust authorities to address vertical merger concerns. Historically, the FTC and the DOJ Antitrust division have preferred structural remedies to resolve competition concerns; however, in 2018, the FTC accepted behavioural remedies to address concerns stemming from the Northrop Grumman-Orbital ATK merger. Whether behavioural remedies will be accepted in the future remains to be seen.
  1. Enforcement of failures to file: Under the Hart-Scott-Rodino Antitrust Improvements Act, companies and individuals must notify the FTC of acquisitions that cause the value of their voting securities in a company to increase above certain dollar thresholds. Further, once a notification has been submitted, a waiting period must be observed prior to closing. Over the past two years, there are at least three examples of U.S. antitrust regulators pursuing individuals who failed to file and observe the requisite waiting period prior to closing the acquisition of shares. For more information, see the FTC’s press release here.
  1. Information exchanges may be subject to civil liability: Agreements among competitors to share information are not per se illegal in the U.S.; however, they may be subject to civil antitrust liability when they have, or are likely to have, an anti-competitive effect. In November 2018, the DOJ reached a settlement with six broadcast television companies to resolve a lawsuit alleging that the companies engaged in unlawful agreements to share non-public competitively-sensitive information with their broadcast television competitors. According to the DOJ, by “exchanging pacing information, the broadcasters were better able to anticipate whether their competitors were likely to raise, maintain, or lower spot advertising prices, which in turn helped inform the stations’ own pricing strategies and negotiations with advertisers.  As a result, the information exchanges harmed the competitive price–setting process.” What is of significance is that the DOJ’s review of the information exchanges arose from information produced in an unrelated review of a proposed merger between two of the six broadcast television companies. This case demonstrates how merger reviews can lead to other investigations with significant consequences.
  1. “No poach” agreements: Under U.S. antitrust laws, the same rules apply to employers competing for talent in labour markets as when they compete to sells goods and services. The DOJ has been active in investigating and challenging no-poach and wage-fixing agreements. For example, with respect to an alleged agreement between Duke University and the University of North Carolina not to poach each other’s medical school faculty, the DOJ filed a statement in February 2019, urging the court to apply the per se rule if it finds the parties entered into a no-poach agreement. For further information about this case, see the Statement of Interest. For best practices for human resources professionals to ensure compliance with U.S. antitrust laws, see the joint Guidance on behalf of the DOJ and FTC.

Competition Act and Investment Canada Act Thresholds Announced for 2019

The Competition Bureau announced the 2019 transaction-size pre-merger notification threshold under the Competition Act increased to C$96 million from C$92 million, effective February 2, 2019. Innovation, Science and Economic Development Canada also announced new foreign investment review thresholds under the Investment Canada Act, effective January 1, 2019.

Competition Act

In general terms, certain transactions that exceed prescribed thresholds under the Competition Act trigger a pre-merger notification filing requirement; such transactions cannot close until notice has been provided to the Commissioner of Competition and the statutory waiting period under the Competition Act has expired or has been terminated or waived by the Commissioner. Where both the “transaction-size” and “party-size” thresholds are exceeded, a transaction is considered “notifiable”.

Transaction-Size Threshold: the 2019 transaction-size threshold requires that the book value of assets in Canada of the target, (or in the case of an asset purchase, the book value of assets in Canada being acquired), or the gross revenues from sales in or from Canada generated by those assets exceeds C$96 million (up from C$92 million in 2018). Under the Competition Act, the “transaction-size” threshold is subject to annual adjustment.

Party-Size Threshold: the party-size threshold requires that the parties to a transaction, together with their affiliates (as defined in subsection 2(2) of the Competition Act), have assets in Canada or annual gross revenues from sales in, from or into Canada, exceeding C$400 million. The party-size threshold remains unchanged from 2018.

The Competition Bureau’s news release is found here.

It is important to note that regardless of whether a transaction is notifiable (i.e., the applicable thresholds discussed above are exceeded) the Commissioner can review and challenge all mergers prior to or within one year of closing.

Investment Canada Act

Under the Investment Canada Act (the “ICA”), the direct acquisition of control of a Canadian business by a non-Canadian is subject to a pre-closing review and approval process (an “ICA Review”) where a specified threshold is exceeded. The following thresholds for ICA Reviews have increased, effective January 1, 2019:

  • For a direct acquisition of control of a Canadian (non-cultural) business involving either a purchaser or a controlling vendor that qualifies as a World Trade Organization (WTO) member investor (“WTO Investor”), the threshold has increased from C$1 billion to C$1.045 billion in enterprise value, provided that the purchaser is not a foreign state-owned enterprise.
  • For a direct acquisition of control of a Canadian (non-cultural) business involving either a purchaser or a controlling vendor from Australia, Chile, Colombia, the European Union, Honduras, Japan, Mexico, New Zealand, Panama, Peru, Singapore, South Korea, the United States or Vietnam, the threshold has increased from C$1.5 billion to C$1.568 billion in enterprise value, provided that the purchaser is not a foreign state-owned enterprise.
  • For a direct acquisition of control of a Canadian (non-cultural) business involving a purchaser that is a foreign state-owned enterprise controlled by a WTO member state, the threshold has increased from C$398 million to C$416 million in asset book value.

If the applicable threshold for a pre-merger review under the ICA is not met or exceeded, the acquisition of control of any Canadian business by a non-Canadian entity is subject to a relatively straightforward notification. In most cases, indirect acquisitions of non-cultural businesses involving WTO Investors, including state-owned enterprises, are not reviewable but are subject to a notification that may be filed before or within 30 days of closing.

All transactions have the potential to be reviewed under the national security review provisions of the ICA.

Read more about the thresholds for review under the Investment Canada Act here.