A Guide to Canada’s Merger Review Regime: Is Your Merger a Notifiable Transaction?

By: Xenos Chu

Inflation and the cost-of-living crisis has captured headlines in Canada over the past two years and placed renewed attention on consolidation within market sectors and anti-competitive practices. From a public policy perspective, maintaining a certain level of diversity and competition in the marketplace is essential to preventing the formation of monopolies or oligopolies that stifle innovation and eliminate price competition. In Canada, the legal mechanisms by which the federal government may exercise these regulatory functions are set out in the Competition Act, R.S.C., 1985, c. C-34 and the regulations thereunder (collectively, the “Act”). This article provides an overview of the criteria that determine when the merger review framework set out in the Act applies to a proposed merger transaction.

The Act regulates three types of conduct: mergers, offences, and reviewable practices. A merger is defined under the Act to mean “the acquisition or establishment, direct or indirect, by one or more persons, whether by purchase or lease of shares or assets, by amalgamation or by combination or otherwise, of control over or significant interest in the whole or a part of a business of a competitor, supplier, customer or other person”. For business leaders who are considering the acquisition or sale of the whole or part of a business, the application of the Act to mergers should be a key consideration as transaction costs and timelines may be significantly impacted where steps must be taken before closing to achieve compliance.

Transactions that meet certain prescribed criteria and which are subject to regulatory review prior to closing as a result are known as “notifiable transactions”. Notifiable transactions cannot be completed until the parties have complied with Part IX of the Act. The parties are also prohibited from taking steps to integrate their operations or participate in the conduct or operation of each other’s businesses until such compliance is achieved.

Before delving into the tests for determining whether a proposed merger is a notifiable transaction, one needs a basic understanding of the two most common ways in which merger transactions are structured. The first is a share transaction where the shares representing ownership in the corporate body that owns the target business is sold to the purchaser. The second is an asset transaction where the entity that owns the target business sells substantially all the assets connected to the target business to the purchaser. There are pros and cons to each transaction structure but, for the purpose of this article, one only needs to understand that the criteria for determining whether a proposed merger is a notifiable transaction differ slightly depending on whether that merger is structured as a share or asset deal. The Act also specifies specific criteria where a merger is structured as an amalgamation or combination, but to keep this article digestible for the general reader, they will not be addressed here. 

Below is an overview of the criteria for determining whether a proposed share or asset transaction would constitute a notifiable transaction under the Act:

1. Operating Business Test

An “operating business” is defined in the Act as “a business undertaking in Canada to which employees employed in connection with the undertaking ordinarily report for work”.

If the proposed merger is a share deal, ask:

  • Does the issuing corporation of the shares being transacted (the “target corporation”) control an operating business?

If the proposed merger is an asset deal, ask:

  • Are the assets being transacted those of an operating business?

If the answer is “yes”, proceed to the next step.

2. Ownership Threshold

This step is only applicable to share deals. Ask:

  • Would, as a result of the proposed acquisition of the voting shares, the purchaser(s) together with their affiliates, own voting shares of the target corporation that in the aggregate carry more than the following percentages of the votes attached to all the target corporation’s outstanding voting shares:

(a)    20%, if any of the target corporation’s voting shares are publicly traded;

(b)   35%, if none of the target corporation’s voting shares are publicly traded; or

(c)    50%, if any of the purchaser(s) already own more than the percentage set out in (a) or (b), as the case may be, before the proposed merger.

If the answer is “yes”, proceed to the next step.

3. Size of Parties Threshold

Do the parties, together with their affiliates, have either:

(a)    assets in Canada that exceed $400 million in aggregate value; or

(b)   annual gross revenues from sales in, from, or into Canada that exceed $400 million in aggregate value?

If the answer is “yes”, proceed to the next step.

4. Size of Transaction Threshold

If the proposed merger is an asset deal, ask:

  • Is the aggregate value of the assets, or the annual gross revenues from sales in or from Canada generated by those assets, in excess of the prescribed amount?

If the proposed merger is a share deal, ask:

  • Is the aggregate value of assets in Canada directly or indirectly controlled by the target corporation, or the annual gross revenues from sales in or from Canada generated by those assets, in excess of the prescribed amount?

The “prescribed amount” is adjusted annually and published in the Canada Gazette. The prescribed amount as of the writing of this article is $93 million (CAD). Innovation, Science and Economic Development Canada has yet to announce whether an adjustment will be made for 2024.

If the answer is “yes” for each of the steps set out above, then the proposed transaction may be a notifiable transaction and legal counsel with expertise in the merger control regime should be consulted to identify the appropriate next steps.

Where a proposed merger is a notifiable transaction, the best approach to achieving compliance with Part IX of the Act depends on factors such as whether the proposed merger is likely to result in a substantial prevention or lessening of competition and whether the transaction is subject to specific timelines, amongst other considerations. Legal counsel experienced in navigating the merger review process will be best positioned to assist the parties with minimizing risks, costs, and delays.

We note the above overview is a simplification of the applicable legal tests and is intended only as a conceptual introduction of the notifiable transactions regime. Intricacies such as which entities are considered “affiliates”, how assets and revenues are to be calculated for the Size of Parties and Size of Transaction thresholds, and certain exceptions are also prescribed in the Act but are beyond the scope of this article.

The federal government is also in the process of updating the Act to address public concerns with market consolidation and anti-competitive practices. At the time of writing, Bill C-59 is in second reading and, if enacted, would render more transactions as notifiable. Some of the proposed amendments include:

  • In respect of the Size of Transaction Threshold, the value of gross revenues of sales into Canada generated by assets being transacted, or which are owned or controlled by the target corporation, that are situated outside of Canada will also be captured.
  • In respect of the Size of Transaction Threshold, where the proposed merger will be completed through a combination of share and asset transactions, the asset and revenue values for each are to be aggregated for the purpose of assessing whether the threshold would be met or exceeded.

Legal practitioners and business leaders alike should ensure all legislative and regulatory updates are considered when assessing whether a proposed merger is a notifiable transaction.

This article is not legal advice and any person considering entering into a merger transaction that might meet or exceed the prescribed criteria should engage legal counsel to determine whether any steps should be taken in their specific case to ensure compliance with the Act.