The COVID‑19 crisis is creating significant challenges for the Competition Bureau and Canadian government as they review competitor collaborations and M&A activity.
As a result of the current crisis, many businesses are collaborating with their competitors to try to find solutions to common problems, such as keeping supply chains open and facilities operational. In the circumstances, these discussions may be desirable and even a market necessity. However, in some cases these discussions may lead to inappropriate agreements that could contravene rules on price fixing and market allocation. In other cases, there may be uncertainty as to the legality of proposed arrangements.
The Competition Bureau has recognized, at this time, that formal and strict enforcement may chill business conduct required to best help Canadians navigate the current crisis. In a recent statement, the Bureau announced that it is willing to provide "informal guidance" to competitors seeking to collaborate in response to COVID‑19. This is a welcome development.
However, the policy statement raises procedural and substantive considerations that may make seeking informal guidance unappealing or impractical for many businesses:
Practicability. The application process may be complicated and time-consuming. The Bureau requires detailed disclosure of proposed collaborations and explanations as to why they are in the public interest. Public consultations may also be part of the assessment. While the statement indicates assessments will be "rapid", no firm timing commitments are provided. In the context of a crisis where business decisions may have to be made in hours or days, this process may in many cases still prove to be too cumbersome and slow to be of practical utility.
Acceptable conduct. The Bureau’s statement sends mixed signals about their attitude toward competitor collaborations. The objective of the policy is to reassure businesses that the Bureau will decline to take enforcement action in appropriate cases. But the statement itself refers to a "zero tolerance" approach towards arrangements it does not believe merit exclusion. Some of the conduct the Bureau identifies as being potentially acceptable, such as collaborative buying groups, is already viewed generally as non-problematic. The suggestion that the Bureau may be taking a broad view of its jurisdiction and that it will aggressively enforce against certain arrangements may lead some business to shy away from seeking guidance from an agency that still may be reflexively skeptical of their commercial objectives.
Litigation risk. The statement correctly points out that even if the Bureau declines to take enforcement action, private litigation is still possible. This highlights an important limitation to the Bureau's authority. As a practical matter, many businesses may be reluctant to engage in conduct that would otherwise be in the public interest because of the risk of private damages claims.
Barring clarifications to the statement, or legislative amendment to authorize "crisis cartels," we expect most businesses to continue to self-assess enforcement risk.
To date there appears to be little change in how the Bureau is handling merger reviews. While the start of the crisis saw early warnings of potential delays, the Bureau’s reviews are progressing largely in the ordinary course.
We expect the Bureau’s task will become more challenging in months ahead, as discussions between competitors morph into M&A activity. In the medium term, we are likely to see significant industry consolidation as distressed businesses seek to combine to survive—with hard-hit industries like hospitality, oil & gas, retail and travel potentially among the first to do so.
Assessing mergers in this environment will be challenging, and outcomes could be difficult to predict. The Bureau, as a general starting point for merger review, will typically rely on historic market share and other data to predict the future competitive impact of business combinations. But current or past data may give little predictive value to what the post-pandemic future may hold. The complexity of the Bureau’s job will be compounded if governments increase regulation of industries, encourage consolidation or themselves begin to own or control businesses.
Moreover, the rapid deterioration of some businesses will mean some merger assessments will need to be made quickly. For an agency that often makes merger review decisions after methodically reviewing large amounts of data, that may not come easily. This tension could be compounded if merger assessments involve complex analyses relating to failing firm or efficiencies defences.
Foreign investment review
M&A activity is also likely to be cross-border, and the government is concerned that sudden declines in valuations could lead to opportunistic investment behaviour. As a result, it recently announced that it will "scrutinize with particular attention … foreign direct investments of any value, controlling or non-controlling, in Canadian businesses that are related to public health or involved in the supply of critical goods and services to Canadians or to the Government." Particular focus is given to state-owned or state-influenced investors.
The announcement does not amend the Investment Canada Act, nor alter review thresholds or jurisdictional scope of the government to review investments. It is, rather, a restatement and reiteration of enforcement policy highlighting the new reality the crisis brings. With this sort of advance warning, foreign investors potentially subject to the policy would be well advised to assess risk early in the transaction planning process.
The COVID‑19 crisis has prompted regulators to react and adjust. The need for increased vigilance in some situations and flexibility in others will be an important balance for regulators to strike. While it is expected they will be sensitive to the extraordinary marketplace effects of the crisis, how far regulators’ approach to enforcement will change remains unclear.
Ultimately, however, these announcements confirm that transactions and other business conduct will be assessed through the lens of the COVID‑19 crisis. It will be more important than ever to be able to mobilize to analyze and assess risk quickly in response to unprecedented and fast-changing market conditions the pandemic has wrought.
To discuss these issues, please contact the author(s).
This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.
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