Feelings of dread can start to sink in when you read that your two key suppliers have announced a merger, or that your largest competitor is buying one of your most important customers. Claims of realizing "shareholder value" or "significant synergies" can be of little comfort in the face of potentially higher prices, the expected loss of key inputs or a sales channel, tougher contract negotiations and increased business risk generally.

All is not lost, however. Customers, suppliers and competitors have an opportunity to voice their concerns to the Canadian Competition Bureau. It is important to move quickly as the Bureau's initial review process goes fast, and decisions about whether to conduct an in-depth review of a merger often have to be made in less than 30 days.

The vast majority of mergers, in Canada and worldwide, cause no material market harm and may increase the efficiency of the economy. However, some mergers do raise concerns for consumers and for other marketplace participants.

In this bulletin, we outline the Bureau review process and some strategies for engaging with the Bureau to challenge a merger.

The Merger Review Process

The Bureau is the main government agency responsible for reviewing mergers in Canada with the goal of protecting and promoting competitive markets and enabling informed consumer choice. While other government agencies also have merger review powers in certain industries, the Bureau is responsible for handling the vast majority of merger clearance applications. The Bureau will typically challenge a merger if it believes the merger would likely prevent or lessen competition substantially.

Mergers that cross certain financial and control thresholds require mandatory notification to the Bureau before the merger can close. Merging parties involved in a "notifiable" transaction have to wait up to 30 days before they are legally permitted to close. For mergers that raise competition concerns, the Bureau can extend the review period by issuing a supplementary information request or a "SIR". The parties must respond to the SIR by turning over their documents and data before a second 30-day review period will start.

But even mergers falling below the notifiable thresholds can be challenged by the Bureau if they injure competition. For these non-notifiable transactions, the Bureau relies significantly on complaints from the marketplace. In these non-notifiable transactions, speed is even more of the essence.

The Bureau has been more active recently in reviewing mergers, including identifying and reviewing smaller mergers that are not "notifiable". During its most recent fiscal year, the Bureau opened 33% more merger files than the previous year - more than in any period over the last seven years.1 In the 2021 budget, the Government of Canada also committed to increasing the Bureau's financial resources by $96 million over the next five years to enhance the Bureau's enforcement capacity.2 This marks a substantial increase to the Bureau's $52.1 million operating budget for the 2020-21 fiscal year and should give the Bureau a greater ability to review and challenge mergers.

Marketplace Participation in the Merger Review Process

Although affected third parties cannot challenge mergers in Canada on their own, they do play an important role in persuading the Bureau to do so in addition to alerting the Bureau about mergers that are not "notifiable" but nevertheless raise concerns.

As part of its review process, the Bureau will generally engage with customers, suppliers and competitors to solicit their views about the merger, the marketplace and the changes they see coming in response to the merger.3 These engagements are important as they help shape the Bureau's assessment of the merger, but they can take time.

If you have a concern regarding a proposed merger, it is important to contact the Bureau as soon as you become aware of the merger because the Bureau may otherwise complete its review without your input. In the case of a non-notifiable transaction, speed is particularly of the essence, as once the transaction closes it is difficult to achieve a remedy. Recall also the Bureau case team can only extend the initial 30-day period by issuing a SIR.

Third-Party Participation in the Merger Review Process

Merging parties will typically put their best foot forward when they apply to the Bureau for clearance of their merger. They will seek to define the markets in which they compete in the most favourable terms, and they will argue that these markets will be competitive post-closing, often indicating that they face significant remaining competition, the threat of new entry, or the presence of customers with extensive buyer or bargaining power. They will argue that the merger is needed to protect or enhance the viability of the combined business, reach new customers or markets, develop new or superior products, or generate efficiencies.

Third parties may have a different view. As a customer of the merging party, you may be concerned about the loss of an independent supplier against which you can check that you are receiving a fair price. As a supplier, you may be worried about the merging parties' ability to squeeze your margins and make it more challenging to invest in productive capacity. As a competitor, you may be concerned that the merged firm will be able to offer a suite or bundle of products that will exclude you from competing for a large segment of the market or that you will lose access to a key input or sales channel. These concerns can support an argument that the merger is likely to prevent or lessen competition substantially and should be challenged or restructured.

Filing a complaint allows third parties to outline their specific competitive concerns with a proposed merger and enter into a dialogue with the Bureau around remedies that best foster competition and, in turn, the complainant's bottom line.

1. Identifying Anti-Competitive Concerns

At the initial stage, it is important for customers, suppliers and competitors to quickly assess how a merger could impact their business. Once you have considered the potential impact, the first step is typically to present the issues to the Bureau case team in a confidential call. Usually this is done by way of a presentation followed up by a written submission. The Bureau may ask you to produce evidence to support your concerns including ordinary course business documents, contracts, emails and data that substantiate the submissions you have made.

Both the identity of a complainant and the information provided by that complainant are kept confidential. The Competition Act includes an express provision that guarantees confidentiality to third parties that are engaging with the Bureau during a merger review. If the Bureau decides to challenge a merger, it may disclose certain information but will do so typically under very strict confidentiality protocols, including limiting access to a merging parties' outside lawyers and consultants only. The identity of a complainant typically remains confidential unless the complainant is subpoenaed as a witness in a proceeding before the Competition Tribunal.

2. Creating an Ongoing Dialogue

Complainants need to plan for continued engagement and dialogue with the Bureau case team in order to see results. As the merger review proceeds, the merging parties will have made submissions to the Bureau to dispel or respond to the concerns that have been raised by market participants. The Bureau is an independent government agency often without in-house market expertise in the relevant industry, and it may not have the experience or the factual basis to understand the market dynamics or to respond to the merging parties' arguments that the merger will not harm competition. Information provided by complainants and other third parties will often be necessary to assist the Bureau to understand market dynamics and to advance a case. It can often take multiple submissions, including economic or industry expert evidence, to support the Bureau in a review or a challenge to a merger.

3. Pressing for a Remedy

The Competition Tribunal may order a remedy if it concludes that a merger is likely to prevent or lessen competition substantially. Remedies may include, among other things, a full block of a merger or the divestiture of assets or shares.

Third parties may have reasons not to seek a full block of a merger, but instead pursue a more focused remedy such as the divestiture of certain assets or a business line. Over the last two years, the Bureau and merging parties have agreed to six settlements that led to divestitures as a condition to allow closing of the merger.4

As part of the engagement with the Bureau, complainants can position themselves as the natural buyer for the asset to be divested, i.e., the complainant's acquisition of certain assets will help preserve competition, notwithstanding closing of the merger. Moreover, if the Bureau seeks a divestiture as a condition of obtaining clearance, the merging parties may be forced to sell the asset at a steep discount, especially as the merging parties generally wish to close the merger quickly and the remedy agreement - also called a "Consent Agreement" - will typically impose a short three to six month window for the merging parties to complete the divestiture.

While merging parties may not be willing to negotiate for the sale of assets to a complainant, that complainant (even a strategic player in the market) may have positioned itself with the Bureau as an ideal potential purchaser of such assets in the event of a remedy requiring divestiture, i.e., the acquisition by the complainant will preserve competition in an affected market.

The Benefits of Disruption

As noted, the vast majority of merger transactions cause no concern. For the few that do, however, those affected can make their voices heard. In light of the increased focus on merger enforcement coupled with greater Bureau resources, third parties affected by a merger can be effective in bringing the concerns to light, which may have the effect of preserving competition, benefitting all market participants, including in particular, the complainant (and its shareholders) and also customers.

A complainant that strategically engages with the Bureau can position itself as the ideal candidate to acquire key assets from the merging parties, ultimately benefiting from the merger. In addition, complainants can demonstrate to their customers and their shareholders they are committed to fostering competitive markets by actively engaging with the Bureau.

Key Takeaways

  • The Bureau has an increased budget for merger enforcement and has made taking enforcement action a priority for the upcoming year.
  • Customers, suppliers and competitors can play an active role in disrupting anti-competitive mergers by supporting the Bureau in its review.
  • A complainant is often best positioned to acquire key assets from the merging parties if a remedy is required to restore competition.
  • Regardless of the enforcement outcome, complainants may have responsibilities to their shareholders and customers to work with the Bureau to preserve competitive markets.

Footnotes

1. Competition Bureau Performance Measurement & Statistics Report 2021-22 [PMSR], (March 2022) Table 3.0.1, online: https://www.competitionbureau.gc.ca/eic/site/cb-bc.nsf/eng/04612.html.

2. Government of Canada, Budget 2021: A Recovery Plan for Jobs, Growth, and Resilience, Chapter 4, 4.1 online: https://www.budget.gc.ca/2021/report-rapport/p2-en.html#chap4.

3. Merging parties for "notifiable" transactions are required to provide to the Bureau contact information for their top 20 customers and suppliers by product category and may be asked to give additional contact information by sub-category as well. The Bureau will then contact those suppliers and customers as part of its review process.

4. Competition Bureau Performance Measurement & Statistics Report 2021-22 [PMSR], (March 2022) Table 3.2.1, online: https://www.competitionbureau.gc.ca/eic/site/cb-bc.nsf/eng/04612.html.

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2021