TerraLex Cross-Border Guide to Pre-Merger Notification Guide

Yes.

Yes, even if a merger falls below the notification threshold the parties may seek a review of the proposed transaction (see item 14, below), in order to reduce or eliminate the risk of a post-closing challenge.

The following types of transactions are caught: acquisitions of shares, acquisitions of assets, combinations, acquisitions of interests in combinations, and amalgamations.

For the purposes of simplicity in illustrating the merger pre-notification thresholds we assume a share purchase transaction. However, the pre-notification regime applies, with appropriate modifications, to asset acquisitions, amalgamations, non-corporate combinations and acquisitions of interests in non-corporate combinations as well as to share acquisitions.

The pre-notification regime also provides for a number of exemptions, the principal such exceptions being transactions amongst affiliates, asset securitizations, acquisitions through testamentary gift, certain acquisitions through bankruptcy or insolvency, and transactions established pursuant to defined types of joint ventures.

To take the example of a share transaction, in order for a transaction to be pre-notifiable, the parties to the transaction (being the person or persons who propose to acquire the shares, and the corporation the shared of which are to be acquired), together with their affiliates (being all firms with a 50%+ voting share linkage up or down the chain) must have:

Aggregate: (i.e. both sides and all affiliates) gross assets in Canada that exceed $400 million (Cdn.) in value, as shown on their audited financial statements for the most recently completed fiscal year (which year must have been completed within 15 months of the notification);

or

Aggregate (same definition) gross revenues from sales in , from or into Canada, that exceed $400 million (Cdn.), for the most recently completed fiscal year as reflected on the same financial statements;

and

The Corporation being acquired must have gross assets in Canada, or gross revenues from sales in or from Canada, exceeding $96 million (Cdn.) (as of 2019 – adjusted annually for GDP changes) on the said financial statements.

For a share transaction, the acquisition of shares enjoying up to 20% of the votes cast to elect the board of directors in a publicly traded company, or the acquisition of shares enjoying up to 35% of the votes in a private corporation, will not be subject to pre-notification regardless of the size thresholds. When the 20% or 35% threshold is exceeded, and again when the 50% threshold is exceeded, pre-notification is required.

Transactions which are notifiable are those which exceed the prescribed size thresholds and are of the type defined in the Act, being acquisitions of shares, acquisitions of assets, amalgamations of corporations, combinations not using a corporate vehicle, and acquisition of interests in combination which carries a business not using a corporate vehicle. If joint ventures fall within those categories they are caught by the notification rules, subject to the exemption noted below. There is no distinction between full function and non-full function joint ventures. If the combination is one of those prescribed types, and exceeds the threshold, notification is required.

There is a specific exemption from notification for non-corporate joint venture combinations where:

• all the parties to the joint venture are parties to an agreement in writing (or to be put in writing) which requires (at least) one of them to contribute assets, and governs the continuing relationship between the parties;
• no change in control occurs with respect to any party to the combination; and
• the agreement restricts the range of activity that the joint venture will carry out, and provides for its orderly termination.

As noted at item 4, the specified asset and sales revenue levels in or relevant to Canada must be met. As well, the firm being acquired must have, or control a firm which has, an “operating business”, defined as a business undertaking in Canada to which employees employed in connection with the undertaking regularly report for work. Note, however, that employees of an independent contractor which provides services may meet this requirement.

A substantial amount of information is required to prepare a filing. In a typical case, with counsel working diligently with client personnel, it takes 7- 14 days to compile the information required for a filing. Typically, the most difficult information to collect is a list of customers and suppliers for each product. As well, documents roughly equivalent to US HSR “4C” documents must be provided.

Yes, it is possible to provide the Canadian Competition Bureau with information demonstrating that, typically due to a lack of overlap between the parties, certain information should not be required because it is not relevant to assessing the transaction. Typically, the Competition Bureau will not require information relevant to products in respect of which both parties are not active.

Yes, there is a filing fee of C$73,584.

A filing must be completed, at the latest, 30 days before closing. A filing may be made even before there is a binding transaction, but there should be a high likelihood that the transaction will proceed.

Yes, unless the waiting periods are abridged by the Competition Bureau there are statutory waiting periods, during which it is unlawful to close the transaction.

For a transaction without any meaningful competitive overlap, the statutory time period for clearance is 30 days from the date of a completed filing. The Commissioner may – and typically does – waive the need to wait the full 30 days.

At the other end of the spectrum, in a very complex transaction where there is serious competitive overlap, there is a statutory waiting period of 30 days after a complete response to a Supplementary Information Request (SIR) (Similar to a US Second Request) before closing may occur.

In addition, the Competition Bureau may seek an injunction to prevent closing after the expiry of these waiting periods, but that requires an order from the Competition Tribunal.

Failure to notify, or closing prior to the expiry of the waiting period, is punishable by an administrative monetary penalty of $10,000/day. It is also a criminal offence, with a maximum fine of $50,000.

Yes, the government has up to one year, post-closing, to challenge a transaction where an Advance Ruling Certificate (see item 14) has not been granted. That said, if the transaction has been reviewed and not challenged prior to closing, a post-closing challenge is very unlikely.

Yes, an Advance Ruling Certificate (ARC) may be sought. If an ARC is granted the transaction is statutorily protected from challenge on the basis of the information on which the ARC was based. In addition, in circumstances in which the lack of competitive issues are not as clear, so that an ARC is not granted, a “no action” letter may still be available. Such letter will typically provide that the Government has no present intention to challenge the transaction. While a “no action” letter does not provide absolute statutory protection from subsequent challenge, as a practical matter it is a virtual guarantee that a transaction which has been the subject of a no action letter will not be subject to subsequent challenge.

Canada’s chief competition law enforcement official is the Commissioner of Competition. He oversees the Competition Bureau. The Commissioner/Bureau does not himself/itself block transactions. He/it can only seek, as a litigant, to obtain orders from Canada’s Competition Tribunal to enjoin a proposed transaction or break up a completed merger.

The initial filing is confidential, but the Competition Bureau has a “merger registry”, in which it posts the names of the parties to a proposed transaction once it has completed its review. As well, the Commissioner of Competition will contact marketplace participants to seek their views in respect of proposed transactions, so while the content of the filing is confidential it is not possible to guarantee that transactions will remain confidential. Further, if the transaction is challenged, confidential information may become public through the litigation process. As well, in some complex cases the Commissioner will issue a statement outlining the Bureau’s review considerations after the matter has been completed.

The Competition Bureau has released Merger Enforcement Guidelines. The Competition Bureau has released Merger Enforcement Guidelines. They are complex, but as a general rule if the merged firm would not enjoy a 35%+ market share post-closing, or the largest four firms in the market would not enjoy a combined market share of 65%+, the merger is unlikely to attract a challenge

Generally speaking, it is advisable to contact the Competition Bureau to discuss matters which are likely to pose competition issues at as early a stage as is possible.

The Investment Canada Act requires a review in certain cases of a non-Canadian acquiring control of a Canadian business. Except certain specific sectors (in particular “cultural industries”), with respect to purchases by state owned enterprises, or in respect of National Security concerns the thresholds for review are quite high (C$1.045 billion in Enterprise Value) for WTO country investors, and C$1.56 billion for investors from countries with which Canada has entered into Free Trade Agreements. Purchases by WTO countries’ State Owned Enterprises are subject to review if they exceed C$419 million in asset value.

The test on review, for those relatively few transactions subject to review, is whether the transaction is of “net benefit” to Canada. With the exception of transactions in sensitive sectors, such as cultural industries most transactions – are allowed, but the purchaser typically has to give undertakings with respect to employments levels and the like.

In addition to a “net benefit” review with respect to large transactions, all transactions are also subject to a potential national security review – to ensure that such transactions do not jeopardize Canada’s national security. The specific criteria used in determining whether there is a national security concern are not disclosed, so predictability is not as clear as might be desired. National Security reviews have been more common in recent years, particularly with respect to investors from countries which Canada regards as potential strategic rivals.

Finally, even where there is no requirement for review under the Investment Canada Act, acquirers of any Canadian business, and those who establish new Canadian businesses, must provide a notification to the government within 30 days post-closing. This notification has become somewhat more onerous, by way of the information required to be provided, in recent years.

In addition to Investment Canada Act review, certain sectors, such as airlines, telecommunications, broadcasting and publishing are subject to specific foreign ownership controls.