In line with an international trend, Canadian regulators are becoming more assertive and interventionist, particularly in the competition and foreign investment realms. For mergers and acquisitions, lawyers say deals are taking longer, risk and uncertainty are building, and proponents must work proactively to show regulators that the transaction is aligned with their broader objectives.
Canadian competition law is undergoing its first major reforms in over a decade. On Dec. 15, Bill C-56, The Affordable Housing and Groceries Act, came into force.
The amendments repealed the efficiencies defence for mergers. Sean Stevens, co-leader of the capital markets and M&A group at Fasken Martineau DuMoulin LLP, says this defence was a unique aspect of Canadian antitrust law. It meant that a transaction that would otherwise be anticompetitive could be permitted if its participants could demonstrate that it would enhance economic efficiency and provide a net benefit to the economy.
“Now that specific criteria have been removed, it doesn’t mean that won’t be considered in the overall evaluation. But we’ve lost that as a defence.” Stevens adds that the defence was seldom successful, being a decisive factor in only a handful of cases in the last 15 years.
Bill C-56 gave the Competition Bureau new powers to conduct market studies, including compulsory information-gathering powers. A market study is an industry-wide investigation that examines competitive dynamics. There need not be a contravention or suspected contravention of the Act, and the bureau has long had the power to conduct these studies. In 2008, the bureau looked at the generic drug industry, and, since 2017, it has conducted market studies on financial services, broadband, digital healthcare services, and the retail grocery market.
The legislation makes two significant changes to the bureau’s power to conduct market studies, says Navin Joneja, co-chair of the competition, antitrust, and foreign investment group at Blake Cassels & Graydon LLP. First, prior to the new legislation, the bureau had to rely on voluntary cooperation from industry. Now, the bureau can apply for a court order to compel the production of records, testimony, and written responses.
“It feels much more like a mandatory compulsion to participate in the market study, as opposed to more of a collaborative or voluntary approach,” says Joneja. “The Competition Bureau is getting new powers to conduct market studies in a more formal and mandatory way than then they had before.”
Second, the bureau can either initiate a market study independently or the minister of innovation, science, and industry can direct the bureau to initiate one.
Bill C-56 also enacted a new framework for abuse of dominance and increased maximum monetary penalties for a violation.
The federal government has more Competition Act amendments in its fall economic statement implementation act, 2023, which is currently in second reading in the House of Commons. The proposed legislation would expand the rights of individuals and businesses to seek leave to bring private rights of action to the Competition Tribunal. Currently, these private rights of action are available only for criminal violations – exclusive dealing, tied selling, market restriction, and abuse of dominance. The proposed amendments would extend their use to deceptive marketing and civil competitor collaborations.
“In the West, competition regulators are getting more assertive,” says Michael Amm, co-head of the M&A practice at Torys LLP. “They are challenging more deals, and they’re getting more powers to do so, generally – whether that is in the US, the EU, or Canada.”
In addition to the series of amendments, the bureau also recently got attention with commissioner of competition Matthew Boswell’s comments on a common private equity strategy. In remarks at the Canadian Bar Association Competition Law Fall Conference, Boswell said, “On the emerging issues front, we see clearly what’s happening in terms of evolving business practices. We are wise to the risks of creeping acquisitions – including private equity roll-up strategies – and the harm they may pose to competition.”
In a roll-up, the company acquires and merges multiple smaller companies in the same industry to consolidate them into a more dominant player in the market.
In the US, the Federal Trade Commission and the Department of Justice have a reputation of hostility toward private equity and roll-up strategies, says Stevens. Boswell’s comments indicate that energy might be coming to Canada, which could put some private equity players at a competitive disadvantage relative to other market participants when making acquisitions, he says.
Lawyers note that the newfound regulatory assertiveness is palpable in foreign investment reviews as well. Amm says that jurisdictions across the world are focused on these reviews. This is partly the result of a global popular and political shift toward deglobalization and nearshoring. It is also related to the geopolitical dynamic with China, he says.
Bill C-34, an act to amend the Investment Canada Act, was introduced in November 2021. It has progressed through the House and Senate and is currently being considered by the Standing Senate Committee on Banking, Commerce, and the Economy.
The proposed amendments will broaden the review scope of international investment. The feds are proposing to create new filing requirements prior to investment implementation in prescribed sectors, impose stronger penalties for non-compliance, and give the minister authority to extend national security reviews, impose conditions during a national security review, and accept undertakings to mitigate national security risk.
Stevens says that it is still unclear how the new amendments will be interpreted and put in force, but they could put foreign investors in certain sensitive jurisdictions at a disadvantage against other potential purchasers. Those looking for a co-investor or to sell a company will need to do due diligence in detail to determine in what jurisdictions the other party operates, he says.
While mainly aimed at China-related transactions, Amm says it does take the foreign investment scrutiny to a broader array of parties. “Certainly, the bigger the deal, the greater attention that will be paid to it.” He says there will be more transactions reviewed, and they will take longer.
The more assertive regulatory environment extends to industry regulators, says Blair Keefe, co-head of Torys’ financial services, bank regulatory, and insurance regulatory practices.
He says the Consumer Protection Agency and the Financial Transactions and Reports Analysis Centre of Canada have become much more aggressive in recent years, and the Office of the Superintendent of Financial Institutions, which has been concerned with the housing market, raised capital requirements for the big six banks by 100 basis points. The Consumer Protection Agency used to monitor banks’ compliance with consumer provisions and hand out small fines for non-compliance and write a report, says Keefe, but now the penalties are much more significant, and the Agency is “naming and shaming” violators.
Amm says the Office of the Superintendent of Financial Institutions and the Canadian Radio-television and Telecommunications Commission are also flexing their powers, looking at transactions under their regulatory authority and being less afraid to intervene.
“You can’t say that it’s just one sector,” he says. “There are sectors that are more sensitive than others, but this applies everywhere. Regulatory assertiveness breeds risk, and it becomes more complicated, more costly, and more uncertain to complete deals.”
On Dec. 21, the Department of Finance launched a consultation on enhancing competition in the banking sector. Finance polled Canadians about how the current acquisition and merger process could be improved to support greater competition, including by smaller, innovative competitors. The consultation ended on March 1.
Amm says that pre-deal planning is important to get deals done in a more hostile environment. Parties must assess the risks and where the political winds are blowing, and consider whether the target is worth it.
“I’ve got to identify all the issues upfront. I’ve got to figure out a proactive way – and a creative way – to deal with them.”
He says this involves examining the government’s objectives and communicating commitments that will allay regulatory concerns.
“We often work with government relations and PR firms to try and better understand the political context and the regulatory context,” says Amm. “We focus a lot more on the narrative, the message of the deal. How do we talk about the deal in a way that advances government priorities rather than raising problems?”