In this edition: Merger notification and foreign investment review thresholds for 2024, Commissioner of Competition advocates for further amendments to the merger regime under the Competition Act, new Investment Canada Act policy statements on foreign investments in the interactive digital media sector, and more...
News You Need to Know
- The merger notification thresholds under the Competition
Act (CA) are unchanged for 2024. The transaction size
threshold continues to be C$93 million, while the
party size threshold remains C$400 million.
- The thresholds for pre-closing "net benefit" reviews
under the Investment Canada Act (ICA) of direct
acquisitions of control of Canadian businesses (that are not
cultural businesses) have increased for 2024.
- C$1.989 billion (from C$1.931 billion) in
enterprise value of the Canadian business for trade agreement
investors, which includes investors from the US, EU, and Japan,
among others;
- C$1.326 billion (from C$1.287 billion) in
enterprise value of the Canadian business for investors from
countries that are members of the World Trade Organization (WTO);
and
- C$528 million (from C$512 million) in asset
value of the Canadian business for state-owned or influenced
enterprises from WTO countries.
- C$1.989 billion (from C$1.931 billion) in
enterprise value of the Canadian business for trade agreement
investors, which includes investors from the US, EU, and Japan,
among others;
- The Commissioner of Competition has submitted a letter the House of Commons and Senate
Standing Committees on Finance, which are currently studying the
amendments to the CA proposed in Bill C-59 (Fall Economic
Statement Implementation Act 2023), in which he urges the
adoption of additional amendments that would purportedly aimed at
"strengthening" the draft legislation. Among other
things, the Commissioner has proposed the adoption of rebuttable,
structural presumptions aligned with the thresholds set out in the
(highly controversial) 2023 US Merger Guidelines (the US Guidelines).
The US Guidelines use a measure of concentration called the
Herfindahl-Hirschman Index (HHI) to measure market concentration
and changes in concentration resulting from a proposed transaction.
Under the US Guidelines, and as proposed in the Commissioner's
letter, a transaction with a post-merger HHI above 1,800 and a
change in HHI of 100 would be presumptively unlawful as would a
transaction with a post-merger market share above 30 percent
accompanied by a change in HHI greater than 100. Applying those
thresholds, it appears that a "7-to-6" merger in a market
where competitors have equal market shares will be presumptively
anticompetitive. So too would a combination of two companies with
shares of 28% and 2%. (HHI is calculated by squaring the market
share of each firm competing in the relevant market and then
summing the resulting numbers.)
- The Commissioner's letter also advocates for an amendment to the remedial standard in merger challenges before the Competition Tribunal. Currently, when the Tribunal determines that a merger has or is likely to substantially lessen or prevent competition, the remedy imposed is required to be the "least intrusive" remedy that "restore[s] competition to the point at which it can no longer be said to be substantially less than it was before the merger." The Commissioner's letter argues this standard should be amended so that any remedies granted by the Tribunal would be required to restore competition to the level that would have existed without the merger.
Foreign Investment Review Update
- The Canadian government has issued new policy statements under the ICA
regarding foreign investments in the interactive digital media
(IDM) sector.
- For the purpose of the new policies, "IDM" includes,
but is not limited to, digital content and/or an environment in
which users can actively participate or that facilitates
collaborative participation among multiple users for the purposes
of entertainment, information or education, and commonly delivered
via the Internet, mobile networks, gaming consoles or media storage
devices. Examples of activities that fall under the category of
interactive digital media include, but are not limited to, video
gaming (including PC gaming, console gaming, cloud gaming, mobile
gaming) and technology platforms that can be used for entertaining,
education, training, and e-commerce (including some mobile apps,
virtual and/or extended reality devices).
- "[R]ecognizing that hostile state-sponsored or influenced
actors may seek to leverage foreign investments in the [IDM] sector
to propagate disinformation or manipulate information in a manner
that is injurious to Canada's national security," the Policy Statement on Foreign Investment Review in
the IDM Sector prescribes that investments in the IDM sector by
entities owned or influenced by foreign states, particularly states
that engage in activities that may pose a risk to Canada's
national security, will be subject to enhanced national security
scrutiny.
- The Policy Statement on the benefit reviews of Foreign Investments in Cultural Businesses in the IDM Sector under the ICA prescribes that foreign investments in cultural businesses in Canada's IDM sector that own or create their own IP and which are subject to "net benefit" approval under the ICA, will likely be subject to stringent undertakings. Additionally, for foreign investments in the cultural IDM sector which include the creation and ownership of IP, the continued expression of Canadian voices and stories reflective of Canadian values will be of particular concern and may require additional undertakings, including commitments to ensure the creative independence of the Canadian business.
- For the purpose of the new policies, "IDM" includes,
but is not limited to, digital content and/or an environment in
which users can actively participate or that facilitates
collaborative participation among multiple users for the purposes
of entertainment, information or education, and commonly delivered
via the Internet, mobile networks, gaming consoles or media storage
devices. Examples of activities that fall under the category of
interactive digital media include, but are not limited to, video
gaming (including PC gaming, console gaming, cloud gaming, mobile
gaming) and technology platforms that can be used for entertaining,
education, training, and e-commerce (including some mobile apps,
virtual and/or extended reality devices).
Back to Basics
- Each and every time a "non-Canadian" establishes a
new Canadian business, a notification is required to be filed under
the ICA within 30 days of implementation of that investment. For
the purposes of the ICA, a "non-Canadian" is anyone who
is not a Canadian citizen or a permanent resident and includes any
entity that is not controlled or beneficially owned by Canadians. A
"business" is defined in Section 3 of the ICA as
"any undertaking or enterprise capable of generating revenue
and carried on in anticipation of profit." The Minister
responsible for the ICA has issued an interpretation note
clarifying when an undertaking or enterprise will and will not be
considered to be a "business" within the meaning of the
ICA; specifically:
- Capable of Generating Revenue: An undertaking
or enterprise must be capable of generating revenue and be carried
on in anticipation of profit before it is considered to be a
business. It must therefore be actively earning revenue or be in a
present position to produce revenue earning goods or services.
Market research, test marketing or feasibility studies are not by
themselves considered activities capable, of generating revenue. If
it is in a pre-operational state due to the lack of an essential
asset, source of supply or manpower, it is not considered to be a
business within the meaning of the ICA;
- Carried on in Anticipation of Profit: If an
undertaking or enterprise is carried on with a charitable or other
non-profit objective, it will not be considered to be a business.
Profit-making must be a purpose of the undertaking or enterprise;
however, even if it is being carried on at a loss in the
expectation of future profit, it is considered to be a
business;
- Oil and Gas Properties: A property upon which
only exploration for oil or gas has been conducted is not
considered to be a business. A property which contains oil or gas
reserves is considered to be a business if production of oil or gas
is actually occurring or if it has been determined that the
property contains economically recoverable quantities of oil or gas
and the drilling of a well to recover such oil or gas for the
purpose of production has been commenced. A property containing
recoverable reserves which is capable of production but which has
been temporarily shut-in is considered to be a business; and
- Other Mineral Properties: As with oil and gas, other mineral properties which are only at the exploration stage are not considered to be businesses. A producing mine, however, is considered to be a business as is a property on which development of a mine has been commenced for the purpose of production. A mine which has been temporarily closed due to prevailing economic conditions and not due to depletion of ore reserves constitutes a business.
- Capable of Generating Revenue: An undertaking
or enterprise must be capable of generating revenue and be carried
on in anticipation of profit before it is considered to be a
business. It must therefore be actively earning revenue or be in a
present position to produce revenue earning goods or services.
Market research, test marketing or feasibility studies are not by
themselves considered activities capable, of generating revenue. If
it is in a pre-operational state due to the lack of an essential
asset, source of supply or manpower, it is not considered to be a
business within the meaning of the ICA;
While a non-Canadian investor is always at liberty to notify the Canadian government before its new business in Canada satisfies the definition of "business" in Section 3 of the ICA (and may be advised to do so as early as possible where the proposed investment may raise national security concerns), the obligation to notify is not formally triggered until a "business" within the meaning of Section 3 has, in fact, been established.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.