Will Competition Act amendments upend Canada’s merger review regime?

Amendments to the Competition Act that came into force last week should make it easier for the Commissioner of Competition to challenge complex mergers, but are likely to have little impact in most cases.

What you need to know

• Structural presumptions. The amendments introduce rebuttable presumptions that mergers are anti-competitive if they result in certain concentration levels being exceeded. In these cases, merger parties will have to prove that the proposed transaction will not in fact lessen competition.
• Key changes to other merger review provisions. The amendments make several revisions to the merger review provisions of the Competition Act. These include changes to the notification thresholds, an extension of the limitation period for challenging closed mergers, the introduction of automatic injunctions to stop certain mergers from closing, and a new remedial standard which may require merger parties to offer more significant divestiture packages to secure approvals.

Structural presumptions and market shares

Until now, the Commissioner of Competition (the Commissioner) had to prove on a balance of probabilities that a merger was likely to substantially lessen or prevent competition. The decision-making Competition Tribunal (the Tribunal) was expressly precluded from concluding that a merger would be anti-competitive based solely on market shares or concentration levels.

The Competition Act (the Act) now makes strategic mergers and acquisitions that trip statutory concentration levels presumptively anti-competitive. For such mergers, the burden will shift to the merger parties to rebut these presumptions on a balance of probabilities. The amendments therefore allow the Competition Bureau (the Bureau) and the Tribunal to rely solely on market shares when challenging a merger and determining that it is anti-competitive, respectively. 

Structural presumptions

The amendments mirror the structural presumptions in the 2023 U.S. Federal Trade Commission and U.S. Justice Department Merger Guidelines, but codify them into the Act.

They introduce two different structural presumption thresholds based on the Herfindahl-Hirschman Index (HHI). HHI is a measure of market concentration commonly used in U.S. merger reviews which, until now, was rarely used in the Canadian context. It is calculated by summing the squares of firms’ market shares in a defined market. The higher the total HHI, the more concentrated the market.

Under the Act’s new rules, a merger will be considered presumptively anti-competitive if:

(a) the HHI increases or is likely to increase by more than 100; and

(b) either the total HHI is or is likely to be more than 1,800, or the market share of the parties to the merger or proposed merger is or is likely to be more than 30%.

These values may be revised through regulation.

The amendments do not apply to mergers notified or completed prior to the new law coming into force.

How the structural presumptions work

The table below sets out an example calculation with respect to the hypothetical merger of Firms A and B.

Under the new rules, a combination of Firms A and B is presumptively anti-competitive and illegal because the post-merger HHI would be above 1,800, with the merger resulting in an increase of over 100. In this example, the second rebuttable presumption is not satisfied. Although the HHI increases by over 100, the parties’ combined post-merger market share does not exceed the 30% threshold.

Other changes

Numerous other changes are also now in effect:

• New review thresholds. Parties to M&A transactions are required to seek approval for mergers that exceed certain asset or revenue thresholds. Until last week, those thresholds included a “size-of-target” test that factored in target domestic sales in Canada and exports from Canada, but not sales into Canada from abroad. Now, they do. Although the financial thresholds themselves have not changed, they are de facto lowering for businesses with operations in the U.S. or elsewhere that sell directly to customers in Canada, because more revenue will be included in the threshold analysis.
• Extended limitation period. For mergers not subject to mandatory reporting, the Commissioner now has up to three years (up from one) after closing to open an investigation and seek a remedial order. At the same time, the Bureau is now regularly monitoring media and other information sources for unreported transactions. Merger parties to smaller transactions or transactions with a limited nexus to Canada (or their counsel) are now routinely contacted by the Bureau to confirm why notification was not required. In some cases, these inquiries have led to full investigations.
• Automatic injunctions. The amendments also automatically prevent merger parties from closing transactions if the Commissioner is seeking an interim remedial order. Until now it was at least theoretically possible for merger parties in rare instances to be legally entitled (and able) to close before an injunction was ordered. That avenue is now clearly closed.
• New remedial standard. Until last week, the substantive merger test and remedial requirements were in alignment. A merger could not substantially lessen competition and if it did, the remedy had to remove the “substantial” lessening of competition—some lessening was allowed. Now, the remedy must effectively reverse the merger in affected markets and return the market to the pre-merger state. This change results in an unusual misalignment between the substantive and remedial standards. For example, a transaction that lessens competition but not “substantially” would not be required to agree to any remedy. A merger that lessens competition substantially would have to revert to the pre-merger condition—no slight lessening is allowed.

Impacts of the amendments

For most transactions that are substantively non-complex, the changes are likely to have little impact.

For complex strategic deals, the changes will likely give the Bureau an upper hand in merger review and remedy negotiations, as well as the ability to threaten a more aggressive litigation posture.

In these cases, assessments are likely to focus on market definition and share calculation. In matters where markets and shares are well defined, either through case law or prior reviews, parties’ advocacy may focus on low barriers to entry or other countervailing factors that would prevent anti-competitive harm. Where markets are not clearly defined, parties will have to exercise caution and thoughtfulness when providing market share information, especially if that information is not based on third-party data or competitors’ shares are not well known.

However, market share considerations in merger reviews are not new and defining relevant markets is usually a central part of a Bureau assessment. It is often complex and hotly contested. The law still requires that the Bureau define markets and establish that shares and HHIs exceed the relevant statutory thresholds. That is often a challenging task, and in some recent contested cases, the Bureau has been unable to prove its market definition.

It is also not clear whether the Tribunal will be stringent or liberal in its approach when parties seek to rebut the statutory presumption. Presumably, it will be guided by U.S. case law in the area.

Conclusion

Overall, the changes are likely to have a real impact in cases where the Bureau can reasonably establish that the structural presumptions are satisfied. In those cases, the presumptions, coupled with injunction powers and the more stringent remedial standard, are likely to tilt the review process in the Bureau’s favour when solutions are negotiated or in extreme cases when the Bureau wants to block a deal in its entirety. Although these cases will be a small minority, the new rules will add a layer of complexity for parties seeking to get those deals done in Canada.