Earlier this month, the South African Competition Tribunal found a firm guilty of abusing its dominance.  The firm was a small trader with a market share of 4.7%.  The illegal conduct comprised excessive pricing of face masks for a period of just over one month.  The investigation, prosecution and adjudication took less than three months.  The fine was R76 040 (around CAD $ 6000).

This case illustrates that we live in strange times.  COVID-19 has caused commercial enterprise to be reinvented overnight.  Competition regulation has been running to catch up, applying novel analysis to the novel environment.

But lifting our eyes from the present whirlwind, what does South African competition enforcement look like post-COVID for authorities, practitioners and firms?  This article speculates on what we might expect in the medium term from each major tenet of antitrust – mergers, restrictive agreements, abuse of dominance and market inquiries.


Many predict a surge in the number of mergers after the national lockdown.  First, small businesses without the financial reserves to tide them over the economic trough may surrender themselves to investment by larger, more resilient firms.  Second, large multi-product firms may divest non-core assets or poorly performing divisions.

Acquirers best placed to restore struggling start-ups and distressed assets to profitability will often be existing industry participants, including competitors.  This means the anticipated increase in the volume of merger notifications is likely to be accompanied by enhanced complexity in the competition assessment.  The authorities will need to grasp the trade-off between the survival of distressed businesses, which increases competitive vitality in the short term, against tilting the structure of markets towards increased concentration, which is generally consistent with reduced competition (and increased barriers to entry by small local firms) in the longer term.

In many instances, the acquirers will be foreign-based multinationals and, more than ever, merging parties will be focused on reducing costs and improving efficiency.  This may magnify a tension already inherent in the South African system – enable investment and ensure firm survival, but at the same time protect jobs and promote the spread of ownership by South Africans.

Loosening the protection of employment would risk undoing the authorities’ admirable work in this area over many years.  However, often, addressing public interest issues requires acquiring firms to make significant commitments, to invest, to retain headcount, and to procure locally.  In a recessionary climate, imposing restrictive conditions on much needed investment may be particularly damaging if the appetite for M&A activity is suppressed as a result.

To compound the difficulty the authorities may face, merger control is an inherently time-sensitive endeavor.  In the post-COVID world, where survival will often be at stake, the urgency for distressed businesses to implement transactions is likely to be acute.

These circumstances will require the merger investigators to work with increased rigour, speed and vigilance.  Prioritization will be key.  Reliable screening criteria will need to be put in place to ensure scarce resources are allocated to the most high-stakes, complex and time-sensitive cases.  Purpose-built analysis will be required to marshal the trade-offs mentioned – short term survival vs long term concentration, and short term public interest protection vs long term investment incentives.  Discipline will also be required to manage the scope for opportunistic third party objections which delay investigations and distort outcomes, while ensuring that the investigators have access to the material facts.

Firms and their advisors should be cognisant of these pressures and complexities.  Where possible, parties to complex transactions should consider providing information proactively that puts the Commission in the best position to conduct this challenging assessment effectively, rather than closing their eyes and hoping for a straightforward review.

To the extent possible, realistic timelines should be built into transaction schedules which recognize the complexity created by the economic environment and the unavoidable resource constraints within the authorities that are likely to arise.

Restrictive agreements

The post-COVID economy is likely to be highly conducive to coordination between competing firms for a number of reasons.  Many markets will face reduced demand and excess supply.  Firms may be increasingly tempted to coordinate in order to avoid potentially destructive price wars that these conditions invite.  In addition, increased merger activity combined with increased attrition amongst smaller firms is likely to result in more concentrated markets.  Fewer firms in a market generally makes collusion easier to achieve and maintain.

In past economic downturns, competition authorities have been unsympathetic to so-called “crisis cartels”.  The Competition Commission’s usual zero tolerance approach to cartels should therefore be expected.  Firms should not be under illusions that tough times present an excuse to coordinate.  Industries which have enjoyed temporary block exemption from certain provisions of the Competition Act during the lockdown, often under government supervision, should disband any cooperation immediately once those exemptions cease to operate.

Abuse of dominance

The enforcement of South Africa’s abuse of dominance laws is also likely to increase after the COVID-19 crisis subsides.  The reasons for this expectation are two-fold.

First, if the anticipated spate of mergers and insolvencies materializes, large firms will become even more powerful.  Many smaller firms which previously may not have been considered dominant may (perhaps unwittingly) find themselves with substantial market power.  Axiomatically, increases in the degree and incidence of dominance are likely to foster conditions for more frequent complaints of abuse of dominance.

Second, South Africa has recently brought into effect a range of amendments to the Competition Act which (1) amplify the consequences of abuse of dominance (all abuses now carry a fine of up to 10% of turnover) and (2) introduce new prohibitions aimed at assisting small and medium businesses and firms owned or controlled by historically disadvantaged persons (“SME’s”) to participate in markets.  These new provisions comprise contraventions for dominant firms imposing unfair prices or trading terms on SME suppliers and discriminating in the price charged to SME customers (even if the differential is based on different purchase volumes). The aim of the amendments is to ensure that there is a level playing field for SME’s, and the Commission will stick to this narrative very closely.

Even without the COVID crisis, the recent amendments to the Competition Act set the stage for increased abuse of dominance enforcement.  In the aftermath of the pandemic, SME’s are likely to face the brunt of the economic headwinds.  Where dominant firms create additional hurdles for SME’s through their pricing and procurement terms, the reaction from the authorities is likely to be unforgiving.

Large firms would therefore be well advised to acquaint themselves with the abuse of dominance portions of the Competition Act, including the new provisions, and ensure that their relationships with SME suppliers and customers are managed to avoid the possibility of complaint and dispute.

Market inquiries

It is difficult to speculate on the role of market inquiries in the post-COVID world.  The likely fluctuations in most markets during the next period might militate against the use of inquisitorial and resource-intensive market inquiries, which may reach conclusions that are quickly outdated.

Until markets settle into some pattern of normality, it may be most prudent for the personnel of the authorities to be dedicated to the influx of complex mergers, and increased enforcement of the prohibited practice provisions.

Once the dust has settled, however, market inquiries will become one of the most useful tools available to the competition authorities. The recent amendments to the Competition Act allow the Competition Commission to impose binding conditions following the market investigation. The Competition Commission will, therefore, be well placed to investigate key markets which they believe may not be working efficiently and impose conditions to assist in remedying competition in those markets.


In light of Covid-19 and the likely economic recession to be experienced in South Africa and around the world, it will be interesting to see how competition authorities, practitioners and firms change their approach to interpreting and applying competition laws.  Competition authorities will, in particular, lead the charge on what approach is taken. This could be a decision to allow markets to self-correct, or a decision to increase intervention in markets to try and guide efficient outcomes. Either way, competition law enforcement will play an important role in determining how South African markets develop in the wake of the pandemic.

Competition Bureau’s Position on Advertising During COVID-19 Pandemic

In the context of COVID-19, the Competition Bureau (“Bureau”), in coordination with Health Canada, has indicated its intention to take action against companies that fail to comply with the Competition Act (the “Act”) and, in particular, its provisions relating to misleading advertising and performance claims. The Act includes a wide range of civil and criminal deceptive marketing practices provisions that apply to anyone who is promoting a product, service or business interest. Failing to comply with these provisions can have serious consequences, including financial penalties, restitution and reputational harm – and in some cases criminal fines and jail time.

On March 20, 2020 the Bureau issued a statement confirming its commitment to enforcing the Act against deceptive marking practices relating to COVID-19 and, in particular, false, misleading or unsubstantiated performance claims about a product’s ability to prevent, treat or cure the virus. Subsequently, the Bureau has actively solicited complaints from the public on its website and on social media. Even before the pandemic, the Bureau indicated in its 2019-20 Annual Plan that it intends to “[p]rioritize high-impact and consumer-focused enforcement cases” that “[f]ocus on key areas important to all Canadians including…health and bio-sciences” and that it intends to support Canadian health care by, among other things, “[pushing] for … [t]ruth in the advertising of health … products and services”. Continue Reading Regulators Crack Down on Misleading Advertising and Performance Claims Related to COVID-19

In an April 18, 2020 policy statement, the Government of Canada (“GOC”) announced that, in light of the COVID-19 pandemic, investments by non-Canadians “related to public health or involved in the supply of critical goods and services to Canadians or to the Government” would be subject to “enhanced scrutiny” under the Investment Canada Act (“ICA”).

In yet another pandemic-related initiative, the GOC on May 19, 2020, published for comment draft legislation, the Time Limits and other Periods Act (COVID-19) (the “TLPA”) that, if enacted in its current form, would create uncertainty with respect to, and may result in material extensions of, time periods for national security reviews under the ICA.

In a nutshell, the TLPA, which is meant to apply to a wide range of federal legislation, will, if enacted in its current form, have the effect of permitting the Minister under the ICA to issue orders extending by up to six months the time period within which the Minister may issue a notice that an order for a national security review may be made, and by a further period of up to six months the time period within which the Governor in Council may issue an order for a national security review. Extensions of up to six months for other aspects of the process also appear to be available. All of this is in addition to already generous time periods for national security reviews in the ICA that collectively amount to a period of up to 155 days, subject to Ministerial extensions or extensions on consent of the Minister and the investor.

The extension power proposed in the TLPA may be invoked up to September 30, 2020 and may have retroactive effect to March 13, 2020.  Retroactive effect creates material uncertainty and establishes a bad precedent – something that the Canadian Bar Association commented on in a recent submission to the Minister of Justice and Attorney General of Canada.

We think the GOC (or at least the Minister under the ICA) should reconsider the application of the TLPA to the ICA. Investors (and sellers) already have to deal with markets subjected to pandemic-related distress, and the challenges of securing financing and establishing valuations in the midst of the pandemic, not to mention the logistical challenges attached to negotiating and implementing transactions while working remotely.  Before adding the potential for uncertain and substantially lengthened national security review clearance time periods, the GOC (or at least the Minister) should assess whether the GOC can’t accomplish what needs to be accomplished within the already substantial clearance period. Also, the GOC ought to consider the national security investment review regimes of other jurisdictions with which Canada is in a competition for capital, to ensure Canada remains competitive.

In the meantime, those involved in transactions must take the TLPA into account when negotiating and implementing investments. Sellers may wish to reassess completion risk posed by a non-Canadian investor, and non-Canadian investors should reassess outside dates specified in merger agreements to ensure they allow for possible extensions under the TLPA.

On May 21, 2020, the Competition Bureau (the “Bureau”) released its Model Timing Agreement for Merger Reviews involving Efficiencies (the “Model Timing Agreement”), which includes guidance intended to inform businesses and their advisors of the Bureau’s approach to the analysis of efficiencies claims, the circumstances in which the Bureau will consider efficiencies claims and the timelines applicable to the Bureau’s review of efficiencies claims (the “Bulletin”). While the need for the Model Timing Agreement is debatable, the Bulletin does provide helpful guidance for the small subset of mergers in which the efficiencies defence is ultimately invoked.

This blog post discusses several key aspects of the Bulletin, including the efficiencies defence, the Model Timing Agreement and the types of information that merging parties will need to produce to substantiate their efficiencies claims. It also identifies and describes ten key takeaways for businesses going forward.

Efficiencies Defence

By way of background, the Competition Act (the “Act”) provides the Competition Tribunal (the “Tribunal”) with broad powers to remedy mergers that are likely to result in a substantial prevention or lessening of competition (an “SPLC”). Specifically, the Tribunal can, in the case of a completed merger, order dissolution of the merger or disposal of assets and shares, or, in the case of a proposed merger, order the parties not to proceed with the merger or part of the merger. In addition, the Tribunal can, with the consent of the Commissioner of Competition (the “Commissioner”) and the merging parties, order the parties to take any other action.

Section 96 of the Act, commonly known as the efficiencies defence, provides that the Tribunal cannot make a remedial order where it finds that the efficiencies likely to arise from a merger are greater than, and will offset, the anti-competitive effects of the merger. As noted in the Bulletin, “[t]his trade-off analysis involves a cost benefit analysis that assesses whether the alleged efficiency gains from the merger owing to the integration of resources outweigh the anti-competitive effects that result from the decrease in or elimination of competition that arises due to the merger”. The trade-off analysis is typically a complex process that involves the review of significant amounts of documents and data from the merging parties as well as detailed discussions among the Bureau, the merging parties, their counsel and their experts.

The Bureau has noted that, in its experience, merging parties have generally not provided efficiencies-related information or submissions at an early stage of a review. Instead, they “have waited for the Bureau to reach a definitive conclusion that the merger is likely to result in an SPLC before providing detailed information regarding efficiencies”, with the result that the analysis of efficiencies claims has been shifted late into the Bureau’s review of the transaction – a time “when the Bureau’s resources are focused on assessing the anti-competitive effects of a merger in order to make a determination of whether enforcement action is required”.

Model Timing Agreement

As noted in the Bureau’s News Release, the Model Timing Agreement “establishes timed stages for parties to engage with the Bureau, including the production of information and evidence regarding their efficiencies claims”. The timeframes contemplated by the Model Timing Agreement are set out below – although they can be amended by the parties on consent. However, the merging parties cannot close their transaction while the Bureau’s review is ongoing.

In the absence of the parties entering into a timing agreement that the Bureau deems acceptable, the Commissioner has indicated that he will not be willing to exercise his discretion to consider the efficiencies defence as part of the merger review process.

Information Required to Test Efficiencies Claim

Although the evidence and information required to assess merging parties’ efficiencies claims will vary from case-to-case, the Bulletin indicates that the Bureau will generally require (a) information on the merging parties’ operations and assets; (b) plans for the merging parties’ businesses in the absence of the merger; (c) analysis and planning documents relating to the implementation of the merger; (d) analysis of merger efficiencies; and (e) information from past comparable integrations. The Bulletin notes that this “evidence and information … should be provided on a with prejudice basis and be sufficiently detailed to enable the Bureau to ascertain the nature, magnitude, likelihood and timeliness of the asserted gains, and to credit (or not) the basis on which the claims are being made”.

Following the review of the merging parties’ efficiencies claims and supporting information, the Bureau will likely have further questions for the merging parties. In order to ensure that accurate and complete responses to these questions are provided, the Model Timing Agreement provides for the examination of representatives of the merging parties under oath. In addition to engaging with the merging parties and their experts, the Bureau may also use its own outside experts, including industry, economic or accounting experts, to advise on potential efficiencies arising from the merger.

Key Takeaways

There are a number of key takeaways for businesses arising from the Model Timing Agreement, the Bulletin and the historic use of the efficiencies defence.

First, the efficiencies defence is invoked in only a small subset of the mergers reviewed by the Bureau. For example, based on publically available information, the Bureau has either decided not to challenge or to seek reduced remedies based on the efficiencies defence in respect of only five mergers since 2016, including Superior Plus Corp.’s proposed acquisition of Canexus Corporation (which was subsequently blocked by the U.S. regulators), Superior Plus LP’s acquisition of Canwest Propane, Chemtrade Logistics Income Fund’s acquisition of Canexus Corporation, Calm Air’s merger with First Air and, most recently, Canadian National Railway Company’s acquisition of H&R Transport Limited. As such, the Model Timing Agreement will likely have very limited application.

Second, if merging parties anticipate raising the efficiencies defence and would like the Commissioner to consider their efficiencies claims before making an enforcement decision, they will need to enter into a timing agreement. In the absence of a timing agreement acceptable to the Bureau, it seems that efficiencies and, in particular, whether the efficiencies likely to arise from a merger are greater than and offset its anti-competitive effects, will be analyzed for the first time by the Tribunal rather than by the Bureau in advance of any prospective litigation – an outcome that increases costs, uncertainty and timelines for the Bureau and the merging parties.

Third, because the Model Timing Agreement includes terms relating to compliance with supplementary information requests (“SIRs”), it is contemplated that merging parties would enter into a timing agreement prior to the beginning of the second statutory waiting period. In this regard, the Bulletin notes that “[e]ntering into a timing agreement would not be perceived as a concession that a merger will give rise to a SPLC, but rather as a recognition that a matter involves complex competition issues that will require detailed analysis, including the quantification of a range of anti-competitive effects by the Bureau”.

Fourth, while the Model Timing Agreement is intended to “establish a schedule for the expeditious resolution of [proposed transactions]”, it may actually increase the length of the Bureau’s review (at least in certain cases). This is because the Model Timing Agreement contemplates a linear review, in which the Bureau assesses and reaches a conclusion on the competitive impact of the proposed transaction before even considering the merging parties’ efficiencies claims. In fact, the Model Timing Agreement contemplates that efficiencies submissions will generally be provided more than a month after full compliance with SIRs and that the “analysis of efficiencies and the resulting trade-off [will] occur after the end of the second waiting period”. This is in stark contrast to the position taken in the Bureau’s draft Practical Guide to Efficiencies Analysis in Merger Reviews (the “Draft Efficiencies Guide”), which encourages merging parties to provide their initial efficiencies submissions at an early stage in order to “allow the Bureau sufficient opportunity to analyze potential effects and efficiencies concurrently”. This suggests that the Bureau will no longer be willing to consider potential effects and efficiencies simultaneously – even if parties choose to provide an efficiencies submission at an earlier stage.

Fifth, the Model Timing Agreement requires that merging parties provide a significant amount of information to the Bureau to support their efficiencies claims, including making representatives available for examinations under oath – something that was recently done as part of the Bureau’s review of the CN/H&R merger. Preparing for oral examinations will impose a tremendous burden on company representatives, who will need to be prepared to discuss a wide range of issues “on any matter relevant to the claimed efficiencies”.

Sixth, the Bulletin indicates that the Bureau will consider both quantitative and qualitative efficiencies as part of its analysis. However, as reflected in the Tribunal’s decision in CCS Corporation and the Bureau’s Draft Efficiencies Guide, efficiencies will be included in the trade-off analysis only where they (a) result in productive, dynamic or allocative benefits; (b) are likely to be brought about by the merger; (c) do not arise only as a result of a redistribution of income between two or more persons; (d) accrue to Canada or Canadians; and (e) would be lost in the event of the order being sought by the Bureau (referred to as “order specific”) (collectively, the “Five Screens”). Given the complexity of assessing potential efficiencies against the Five Screens and the timelines imposed by the Model Timing Agreement, parties that intend to make efficiencies claims should consider retaining experts at an early stage – including both an accounting expert to quantify the efficiencies likely to arise from the transaction and an economist to quantify the anti-competitive effects against which the efficiencies will be balanced.

Seventh, it appears that the Model Timing Agreement, the associated timeframes and the shift to a linear review are premised on an interpretation that section 96 of the Act involves a market-by-market trade-off analysis. However, this market-by-market approach is inconsistent with the statutory language and governing jurisprudence. For example, in its decision in Superior Propane, the Tribunal stated that “section 96 of the Act applies to the transaction in its entirety” and that “[t]here is no requirement that gains in efficiency in one market or area exceed and offset the effects in that market or area”. This market-by-market approach will likely be challenged in the next efficiencies case that proceeds to the Tribunal.

Eighth, given the timelines contemplated by the Model Timing Agreement, merging parties that intend to raise efficiencies claims will need to ensure that sufficient time is built into transaction timelines. In this regard, it is worth noting that the Bureau took about four months to review the parties’ efficiencies claims in the CN/H&R merger, consistent with the timelines in the then draft model timing agreement.

Ninth, the lengthy timeframes in Model Timing Agreement are not necessarily conducive to encouraging constructive dialogue and cooperation. Rather, the lengthy timeframes may have the opposite result, as merging parties may choose to close their transactions immediately following the expiry of the second 30-day statutory waiting period in order to begin realizing efficiencies as soon as possible instead of agreeing to the Model Timing Agreement.

Finally, the Bulletin notes that “[the Bureau] will continually reassess its process for analyzing efficiencies in merger reviews for whether there is a more effective manner to undertake this analysis” and that “[it] remains open to receiving feedback in relation to the Model Timing Agreement, and will update this guidance as the process continues to evolve”. It will be interesting to follow developments in this regard – particularly if merging parties push back on the lengthy timelines with a view to implementing efficiency-enhancing mergers more quickly.

If you have questions regarding the merger review process, including the potential application of the Model Timing Agreement or the efficiencies defence, you can reach to any member of Fasken’s Antitrust/Competition Marketing group. Our group has significant experience advising clients on all aspects of Canadian competition law.

The information and guidance provided in this blog post does not constitute legal advice and should not be relied on as such. If legal advice is required, please contact a member Fasken’s Antitrust/Competition Marketing group.


As previously discussed in our Refresher on the Failing Firm Defence, many companies will be facing insolvency or bankruptcy in the aftermath of COVID-19. This could lead to a situation in which financially stronger companies want to purchase struggling competitors. In this context, it is likely that the Competition Bureau will be asked to approve otherwise “problematic” mergers on the basis of what is commonly known at the “failing firm” defence.

On April 29, 2020, the Bureau issued a Position Statement providing additional guidance on the failing firm defence and, in particular, the types of information that are most relevant for a timely and efficient analysis of a failing firm. The key aspects of this guidance are summarized in this blog post.

Continue Reading Competition Bureau Provides Guidance on Failing Firm Analysis

“There’s nothing like a global pandemic to give globalism a bad name.”

Susan Delacourt, National Columnist, The Star

With Canada’s largest trading partner taking an “America first” approach to trade even prior to the COVID-19 crisis, can “Canada first” thinking be far behind, especially in light of Canada’s and other nations’ COVID-19 experiences? PPE product hijackings, foreign government threatened restrictions on the export of emergency health supplies, medicine shortages and international border closures, all serve to highlight possible weaknesses in not having domestic sources of supply of critical goods and services.

Canada’s recent announcement regarding enhanced scrutiny of certain foreign investments under the Investment Canada Act (see our previous posts of April 22 and April 20, 2020) suggests that the movement away from globalism is already taking place.

Other governments such as Spain and Australia have previously announced changes to their own foreign investment policies.

For public order, public health and public security reasons, Spain recently introduced a new screening mechanism for certain investments made by non-EU and non-EFTA residents. Foreign direct investments in the following business sectors are now subject to the new screening mechanism:

a) critical infrastructure, both physical and virtual, including health, energy, transport, communications, aerospace, defence, water, and electoral and financial infrastructure, as well as real estate crucial for the use of such infrastructure

b) critical technologies including semiconductors, aerospace, artificial intelligence, robotics, defence, cybersecurity, energy storage, quantum and nuclear technologies as well as nanotechnologies and biotechnologies

c) supply of critical inputs as well as food security

d) sectors with access to sensitive information, including personal data

e) media

Additionally, foreign direct investments by investors directly or indirectly controlled by non-EU/EFTA governments are subject to Spain’s new screening mechanism, regardless of the business of the target.

Australia reduced the threshold amounts which apply in determining whether particular foreign investments are subject to Australia’s foreign investment framework to $0 and the decision period for investment reviews involving significant transactions has been extended by up to 6 months. The additional government oversight apparently is directed at ensuring investments are not contrary to the national interest (including Australia’s economic and national security) given the increased opportunities to invest in distressed assets.  The changes impact all foreign investors, regardless of their country of origin.

NATO Secretary General Jens Stoltenberg recently warned that “[s]ome may seek to use the economic downturn as an opening to invest in our critical industries and infrastructure, which in turn may affect our long-term security and our ability to deal with the next crisis when it comes”.

Canada’s recently announced foreign investment review policy change suggests that Canada has, like a number of other Western nations, taken these concerns to heart and that we will see a further strategic shift away from globalism when it comes to foreign investments in Canada’s critical infrastructure.

Public Safety Minister, Bill Blair in a recent news release identified ten critical infrastructure sectors which are considered essential to the health, safety, security and economic well-being of Canadians and the effective functioning of government.

Not surprisingly given recent events, the Health Sector is listed as one of those critical infrastructure sectors and, within that sector, manufacturers and distributors of, among other things, medical equipment, medical devices, personal protective equipment (PPE), medical gases, medical isotopes, pharmaceuticals and other health products, blood and blood products, vaccines, testing materials, laboratory supplies, cleaning, sanitizing, disinfecting or sterilization supplies, tissue and paper towel products, and safety gear/clothing were specifically mentioned as being of importance to Canadian security.

Future foreign investment reviews and other governmental decisions will likely increasingly be viewed using a national security lens.  As such, non-Canadians, whether in connection with transaction planning or seeking government contracts, will need to anticipate and address at an early stage potential national security concerns that the Canadian government may have with those proposals.

In light of the current COVID-19 pandemic with declining demand and excess capacity in many sectors, companies will want to take advantage of opportunities to increase operational efficiencies, including through mergers and acquisitions. Where such mergers are efficiency motivated, there may be increased scope for merging parties to use the efficiencies defence in Canada – something that was successfully done by Canadian National Railway Company late last year in connection with its acquisition of H&R Transport Limited (the “Transaction”).

Competition Bureau Review

Following its review of the Transaction, the Competition Bureau concluded that the Transaction would likely result in a substantial lessening of competition for full truckload refrigerated intermodal services in eight relevant markets in Canada. In particular, the Bureau found that CN would be able to charge higher prices and provide lower quality service to customers in those markets. However, as discussed in more detail in its New Release and Position Statement issued last week, the Bureau ultimately decided to discontinue its investigation and allow the Transaction to proceed after concluding that the efficiencies defence had been satisfied. Continue Reading The Efficiencies Defence – Here We Go Again!

As discussed in our previous post, on April 18, 2020, the Minister of Innovation, Science and Industry released a policy statement announcing that, in light of the evolving COVID-19 pandemic, certain foreign investments into Canada will be subject to enhanced scrutiny under the Investment Canada Act (the “Act”).

Continue Reading Enhanced Scrutiny of Foreign State-Owned Investors / Critical Infrastructure at the Heart of Canadian National Security Concerns

The COVID-19 pandemic has impacted just about every aspect of our personal and professional lives. From where we work and shop to how we stay in touch with family, friends and colleagues – nothing is the same as it was even just a couple of months ago!

M&A practices are also changing as businesses and their counsel carefully consider the impact of COVID-19 on, among other things, material adverse change, purchase price adjustment, regulatory approval, indemnity and force majeure provisions. These considerations apply to agreements signed prior to the pandemic, to agreements currently being negotiated and to agreements that will be negotiated in at least the near future.

As the title suggests, this blog post considers the impact of COVID-19 on interim operating covenants and the potential antitrust concerns that could arise if a purchaser becomes too involved in competitively-sensitive aspects of a seller’s business prior to closing.

Interim Operating Covenants

M&A agreements typically include interim operating covenants, which require that the seller operate the acquired business in a certain way between the time the agreement is signed and the time of closing. The purpose of these covenants is to help ensure that the purchaser receives the business in substantially the same condition at closing as it was when the due diligence was conducted and the agreement was signed.

While the nature and scope of interim operating covenants vary from agreement-to-agreement, they generally require that the seller (a) operate the business in the ordinary course consistent with past practice and (b) maintain relationships with key stakeholders, such as employees, customers and suppliers – except as otherwise agreed to by the purchaser or required by applicable law. In addition to these general requirements, agreements typically include detailed covenants describing specific actions the seller must take, specific actions the seller must refrain from and specific actions the seller must refrain from without the purchaser’s prior consent.

It is often challenging for sellers to comply with these covenants in the best of times. However, it is now even more challenging in the midst of the global COVID-19 pandemic – particularly because most existing agreements do not include exceptions to address the impacts of COVID-19. For example, in order to survive, sellers may determine that it is necessary to incur additional debt, delay the payment of invoices, revise budgets, terminate employees, defer capital expenditures or shut down facilities – actions that in most cases are inconsistent with past practice and require the consent of the purchaser.

While antitrust agencies understand the need for interim operating covenants and other pre-merger coordination, they may become concerned in certain contexts, such as where the merging parties are competitors and they engage in conduct that impacts competition in the marketplace prior to closing. For example, William Blumenthal, the former General Counsel at the United States Federal Trade Commission, previously stated as follows:

… merging firms have a legitimate interest in engaging in certain forms of coordination that would not be expected except in the merger context. The most common forms are due diligence and transition planning, both of which necessarily will involve exchanges of information at levels of detail that would not normally occur among independent firms. In addition, merging firms sometimes enter into covenants or engage in practices that would not normally be seen among independent firms. These forms of premerger coordination will often be reasonable and even necessary to implement the legitimate objectives of the merger agreement. Where the merging firms are competitors or are otherwise in a relationship that affects competitive interactions in the marketplace, however, premerger coordination can present issues…

Gun Jumping

In the context of mergers, antitrust agencies, including the Competition Bureau (the “Bureau”), are particularly concerned with pre-closing information exchanges, coordination and integration that could allow the parties to coordinate future conduct so as to lessen competition – concerns that are amplified if the contemplated transaction does not materialize. This conduct, commonly known as “gun-jumping”, can result in investigations, fines or injunctive relief under the Competition Act (the “Act”). While the Bureau has not been as active as the U.S. antitrust agencies in the area of “gun jumping”, it has expressed interest in pursuing this conduct in appropriate cases.

In Canada, gun-jumping may raise issues under either the civil pre-merger notification provisions or the criminal conspiracy provision of the Act:

  • Transactions that are subject to pre-merger notification in Canada cannot be closed until the applicable waiting period has expired or been terminated or waived. Closing a  transaction early may result in significant consequences, including orders requiring the dissolution of the merger, the divestiture of assets or shares and/or the payment of administrative monetary penalties of up to $10,000 per day.
  • Where parties to a proposed transaction are actual or potential competitors, they may violate the criminal conspiracy provisions if, before the transaction closes, they agree to (a) fix, maintain, increase or control the price for the supply of a product; (b) allocate sales, territories, customers or markets for the production or supply of a product; or (c) fix, maintain, control, prevent, lessen or eliminate the production or supply of a product. The penalties for breaching this provision include fines of up to $25 million and/or imprisonment of up to 14 years.

In light of the above, merging parties must resist the considerable temptation to get on with integration and begin acting as one entity prior to closing. They must continue to compete against each other as they have in the past up to the date of closing. In other words, the proposed transaction must not influence the parties’ competitive behaviour in the marketplace – each party should strive to be as competitive as possible. Merging parties should also be mindful of the information and documents they share in the period prior to closing. For more information, including best practices, see “Mitigating the Risk of Pre-Closing Information Exchanges” and “Bad Documents – So What’s the Problem?”.

The merging parties may, however, engage in legitimate activities directed at completing the proposed transaction. For example, the parties may consider integration opportunities for non-competitively sensitive matters, such as the integration of computer systems, personnel and facilities. However, each initiative should generally be reviewed by counsel as the analysis of what is permissible is often very fact-specific.

Application to Interim Operating Covenants

As noted above, interim operating covenants requiring that a seller operate the business in the ordinary course consistent with past practice and maintain relationships with key stakeholders are unlikely to raise any meaningful antitrust risk. However, there is increased risk if the merging parties are actual or potential competitors and the purchaser’s consent is required in respect of matters that may fall within the scope of the criminal conspiracy provisions, such as decisions to set prices at particular levels, target certain customers, defer capital expenditures or shut down facilities. For example, if a purchaser consents to the seller’s request to shut down a manufacturing plant, this could potentially be viewed as an agreement between competitors to limit production capacity contrary to section 45 of the Act.

In contrast, concerns would not arise under the criminal conspiracy provisions if the seller unilaterally makes the decision to close the plant. In this regard, as noted by Mr. Blumenthal:

The spectrum of potential buyer control (from problematic to less so) runs from decisions (i) dictated by the buyer pursuant to powers under the merger covenants, to (ii) reached jointly by the merging firms during the planning process, to (iii) taken unilaterally by the seller after consultation with the buyer, to (iv) taken unilaterally by the seller entirely on its own initiative, although presumably with an eye towards the pendency of the merger.

To mitigate against these concerns, sellers could attempt, when negotiating the merger agreement, to include exceptions to the interim operating covenants requiring the acquired business to be conducted in the ordinary course to address the COVID-19 pandemic. For example, sellers could include a carve-out for any conduct required to comply with social distancing, closures, quarantine, “stay-at-home” or any other applicable law, order, recommendation or guideline by any governmental entity in connection with or in response to COVID-19. Sellers could also consider including an exception for actions or omissions taken in good faith to respond to any impact or probable impact on the acquired business due to the COVID-19 pandemic or measures taken to comply with directives from governmental authorities, including changes in relationships with key stakeholders.


It is important that merging parties operate independently and strive to be as competitive as possible prior to closing. Agreeing to fix prices, allocate markets or restrict output – even in the context of pre-existing interim operating covenants requiring that the purchaser consent to any and all conduct outside the ordinary course of business – could potentially raise serious issues under the criminal conspiracy provisions in the Act.

When in doubt, reach out to any member of Fasken’s Antitrust/Competition Marketing group. Our group has significant experience advising clients on all aspects of Canadian competition law.

The information and guidance provided in this blog post does not constitute legal advice and should not be relied on as such. If legal advice is required, please contact a member Fasken’s Antitrust/Competition Marketing group.

On April 18, 2020, the Minister of Innovation, Science and Industry released a policy statement announcing that certain foreign investments into Canada will be subject to enhanced scrutiny under the Investment Canada Act (the “Act”), in light of the evolving COVID-19 pandemic.In particular, the Government will scrutinize “foreign direct investment of any value, controlling or non-controlling, in Canadian businesses that are related to public health or involved in the supply or critical goods and services to Canadians or to the Government” [emphasis added].

In addition, the Government will also subject “all foreign investments by state-owned investors, regardless of their value, or private investors assessed as being closely tied to or subject to direction from foreign governments to enhanced scrutiny under the Act” [emphasis added.] Such enhanced measures may involve additional requests for information and extensions of timelines for reviews in order to ensure the Government can fully assess such investments.

The enhanced measures will continue to apply until “the economy recovers from the effects of the COVID-19 pandemic”, which at this stage, remains to be seen.

These updates are particularly significant for transactions – regardless of value – involving the acquisition of a Canadian business by a non-Canadian entity that is a state-owned investor or a private investor closely tied to or subject to direction from a foreign government. For such transactions, application of the Act should be an important consideration at the earliest stages of transaction planning and transaction agreements should account for longer delays with appropriate protections built in. In addition, where a transaction involves a Canadian business “related to public health or the supply of critical goods and services to Canadians or the Government”, parties should consider early engagement with the Investment Review Division of Innovation, Science and Economic Development Canada.

If you have questions about Canada’s foreign investment laws and regulations, please reach out to a member of Fasken’s Antitrust/Competition Marketing group. Our group has significant experience advising international and Canadian clients on all aspects of Canada’s foreign investment regime.

The information and guidance provided in this blog post does not constitute legal advice and should not be relief on as such. If legal advice is required, please contact a member of Fasken’s Antitrust/Competition Marketing group.