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Regulatory Clearance of Transactions in Difficult Economic Times

Regulatory Clearance of Transactions in Difficult Economic Times
April 1, 2020

COVID-19 is likely to reshape the competitive landscape for many industries, including triggering increased consolidation as companies address demand contraction and try to remain competitive. Both the Competition Act and the Investment Canada Act allow for clearances of transactions more expeditiously or with fewer obstacles when a party is experiencing financial difficulty.
 
KEY TAKEAWAYS

  • Acquisitions of failing or even “flailing” firms may not raise competition law concerns.

  • Even absent a failing firm, a transaction may proceed if the efficiencies resulting from the transaction outweigh and offset any anti-competitive effects.

  • Updated financial statements reflecting newly changed circumstances may result in pre-merger notification thresholds not being triggered under the Competition Act, thereby enabling parties to expedite closing. 

  • Competitor collaborations may be structured so as to expedite any required or desired merger approvals and minimize issues.

  • Investment Canada Act review may be streamlined if the Canadian target is facing financial difficulty.

ACQUISITIONS OF DISTRESSED FIRMS MAY NOT RAISE COMPETITION LAW CONCERNS

While the Competition Act still applies when a firm is failing, financial distress may ease merger clearance by the Competition Bureau. The Bureau will consider two key questions:

  1. Is the firm being acquired actually failing? The Bureau considers a firm to be “failing” if it is or is likely to become insolvent, initiate voluntary bankruptcy or be petitioned into bankruptcy.

  2. Are there any competitively preferable alternatives to the proposed merger? For the Bureau, this could include the acquisition by another purchaser that does not raise competition law concerns, restructuring that enables the failing firm to survive as a meaningful competitor or a liquidation process that creates increased competition (e.g., by facilitating entry or expansion).

Even if a firm is not “failing,” financial challenges may diminish its competitiveness going forward. Accordingly, its acquisition may not result in the substantial lessening of competition that would otherwise have occurred if the firm was financially sound as required by the Competition Act.

EFFICIENCIES RESULTING FROM A TRANSACTION CAN RESULT IN MERGER CLEARANCE

Capturing efficiencies is especially important for merging parties in times of economic difficulty. Under the Competition Act, mergers that result in anti-competitive effects cannot be prohibited if the efficiency gains in Canada (fixed and variable cost savings and dynamic efficiencies) outweigh the anticipated anti-competitive effects. The parties to the transaction must demonstrate this to be the case, and the Bureau carefully scrutinizes efficiencies claims. Parties should, therefore, plan and validate their projected efficiencies with the assistance of efficiencies and competition law experts.

A CLOSE LOOK AT PRE-MERGER NOTIFICATION THRESHOLDS IS WARRANTED

Difficult economic circumstances may mean that the notification thresholds under the Competition Act no longer apply to certain transactions. For example:

  • While pre-merger notification thresholds are assessed with reference to the assets or revenues set out in an entity’s most recent audited financial statements, adjustments to these statements in light of an event that impacts the book value, such as the impact of COVID-19 on a business, may result in pre-merger notification thresholds not being triggered.

  • There typically must be an “operating business” to require pre-merger notification, and significant financial difficulty may mean that is not the case for a target.

  • Certain financial service or transportation-sector transactions may be approved by the Minister of Finance or Transport, removing the need for notification to, or the risk of challenge by, the Bureau.

COMPETITOR COLLABORATION MAY BE AN EXPEDITIOUS OPTION

It may be possible to structure agreements or arrangements so as to expedite any required or desired clearances or minimize issues under the Competition Act, such as through a joint venture or other collaborative arrangement. Such civil competitor collaborations can be an important way for parties to achieve cost savings and other efficiencies in times of economic difficulty absent a full-blown merger, while still benefiting from, for example, the efficiencies defence available for mergers.

INVESTMENT CANADA ACT REVIEW OF A TRANSACTION MAY BE STREAMLINED

Investment Canada Act (ICA) review of acquisitions of Canadian businesses by non-Canadian investors may be streamlined when the Canadian business being acquired is facing significant financial difficulty. While transactions exceeding certain thresholds typically require a pre-closing review and ministerial approval, a transaction can close absent such a review where the Minister is satisfied that a delay would jeopardize the Canadian business, evaluated in light of its financial condition. In addition, foreign investors are typically required to submit binding undertakings to the Minister to demonstrate that the investment will be of “net benefit” to Canada in connection with an ICA review, but more limited undertakings may be acceptable when the target firm is in financial difficulty.

Counsel can assist in developing a robust government and public relations strategy to demonstrate the need for an expedited regulatory closing or review process to government officials.

If you have any questions, please do not hesitate to contact your usual Blakes contact or any member of the Blakes Competition, Antitrust & Foreign Investment group.

Please visit our COVID-19 Resource Centre to learn more about how COVID-19 may impact your business.