Competition Act Section 100 Proceedings Jason Gudofsky / Litsa Kriaris / Chad Leddy Young Competition Lawyers Initiative of the CBA’s Competition Law Section June 5, 2008 © Blake, Cassels & Graydon LLP

2 Introduction Today’s presentation: Merger review process Pre-Labatt decision Labatt decision Section 100, Competition Act Post-Labatt decision Final remarks

3 Merger Review Process Statutory maximum waiting periods: –14 days: short-form notification –42 days: long-form notification No statutory bar on closing once period has expired, unless the Competition Tribunal has issued an order delaying completion Bureau Policy –under Fee and Service Standards Handbook (the “Handbook”), adopted in December 2003, the Bureau classifies transactions as: “non-complex” (up to 2 weeks), “complex” (up to 10 weeks), or “very complex” (up to 5 months)

4 Pre-Labatt Decision Pre-1999 Section 100: –2 principal elements: proposed merger is reasonably likely to prevent or lessen competition substantially; and an action likely to be taken that would substantially impair the ability of the Tribunal to remedy the effect of the proposed merger on competition because action would be difficult to reverse. Director could apply ex parte (10 day order) max. 21 day delay (plus 21 for long form) (aggregate 42 day delay possible)

5 Section 100 before Labatt Superior Propane (1998) – Comp. Trb. Director’s application for a s.100 order was denied Decided under previous formulation of section 100 (i.e., prior to 1999 amendment) Director failed to prove that SLC reasonably likely

6 Section 100 before Labatt Superior Propane Tribunal did not have to interpret second prong of test - substantial impairment to ability to order a remedy In obiter, Tribunal indicated that it may not have power to order a hold separate

7 W hat Happened in Labatt? Background: Labatt proposed a friendly take-over bid for Lakeport, a discount brewer in Ontario, in a deal worth $200 million Labatt sought to close quickly (public market transaction and missed opportunity for Sleemans attributed to Bureau process) Labatt and Lakeport submitted a long-form notification and responded to section 11 order within allotted time Labatt offered a hold separate from the start and continued to make this available to the Commissioner prior to closing

8 W hat Happened in Labatt? Background: Bureau’s experience with the beer industry included: –In 2003, the Commissioner conducted an inquiry in relation to the Standard Mould Bottle Agreement among breweries –In 2006, in connection with Labatt’s abortive attempt to acquire Sleeman, Labatt provided the Commissioner with information in its request for an advance ruling certificate pursuant to s. 102 –In 2006, the Commissioner carried a review in connection with the sale of Sleeman to Sapporo –On January 31, 2007, Labatt and Lakeport provided the Commissioner with information in connection with Labatt’s proposed takeover through filings made in accordance with s. 114 –In February of 2007, the Commissioner obtained information from Labatt and Lakeport pursuant to a s. 11 order

9 What Happened in Labatt? Background Commissioner initiated s.100 application for a temporary delay First case since Superior Propane and the 1999 Amendment Turned on whether Tribunal’s ability to remedy a SLC would be substantially impaired

10 W hat Happened in Labatt? Statutory scheme: Burden on Commissioner to establish: –an inquiry has been initiated –more time is required to complete the inquiry, and –if the interim order is not granted, a person is likely to take an action that would substantially impair the ability of the Tribunal to make an order under section 92 to remedy the effect of the proposed transaction on competition because that action would be difficult to reverse 48 hours notice required – ex parte not available (only available in limited circumstance where order derives from a failure to notify) Tribunal can issue order for 30 days; Commissioner can apply for one extension of an additional 30 days (aggregate maximum delay of 60 days) Where the Tribunal issues an order, Commissioner must complete her inquiry as “expeditiously as possible”

11 W hat Happened in Labatt? Procedure: Labatt advised the Bureau of its proposed acquisition once the deal became public, on February 1, 2007 On February 12, 2007, both Labatt and Lakeport filed a complete long-form notification Deal was scheduled to close shortly after expiration of the statutory 42 day waiting period On March 22, 2007, the Commissioner filed an application for an interim order pursuant to section 100

12 W hat Happened in Labatt? At the Tribunal: Bureau’s position: –“Very complex transaction” – Commissioner requires up to 5 months –Closing would be difficult to reverse, substantially impairing the Tribunal’s ability to remedy the merger’s effects –The mere closing of the transaction eliminates one of the Tribunal’s available remedies (i.e., prohibition on closing all or part of the merger) Labatt’s position: –No evidence that acquiring Lakeport’s shares would impair the Tribunal’s ability to order dissolution or divestiture, especially since Labatt undertook to comply with a hold separate –Tribunal should exercise its discretion not to make an order, as the Bureau has had ample time to investigate, and has refused to accept a hold separate as an interim measure

13 W hat Happened in Labatt? Tribunal’s key findings: Current s.100 imposes a “less onerous process” on the Commissioner given the elimination of the obligation to demonstrate that merger is “reasonably likely” to result in a SLC: –“However, despite the suggestion that is should be easier to put a temporary stop to a proposed merger, Parliament maintained the significant requirement that the Commissioner establish [the significant impairment element.] … This would indicate that Parliament did not intend to make the obtaining of this order a relatively simple matter based principally on the Commissioner’s need for more time to examine the merger.” [emphasis added] The extension of the statutory review period from 21 days creates a “heightened expectation that 42 days should be sufficient to complete a merger review” Test is not whether the Tribunal will be able to restore competition to the pre-merger level. Per Southam, only relevant whether Tribunal can make an order to remove the substantial harm to competition

14 W hat Happened in Labatt? Tribunal’s key findings: There mere act of closing the merger does not constitute an action that results in a significant impairment; rather, Commissioner must establish that the parties will take an action that will be difficult to reverse and this action itself is sufficiently important to substantially affect any remedy that the Tribunal could order to eliminate the SLC Nothing in the decision precludes the Tribunal from taking in account an undertaking to hold the parties separate and to undertake compliance to the Tribunal: –Tribunal will not assume that such an agreement would be breached

15 W hat Happened in Labatt? Tribunal’s conclusion: The Commissioner had presented “insufficient evidence… as to market structure and conditions to establish the impairment of the Tribunal’s ability to remedy in accordance with Canadian law.” Labatt acquired Lakeport’s shares on the day following the Tribunal’s decision

16 W hat Happened in Labatt? Federal Court of Appeal: Upheld the Tribunal decision Court rejected suggestion that the Tribunal must issue an order unless the Commissioner has acted in a patently unreasonably manner or not in good faith: –“We do not agree that Parliament intended the role of the Competition Tribunal to be so limited.”

17 Timing – Implications of Labbat Effect of ruling in Labatt (Tribunal and Court of Appeal) –confirmation that timelines in Bureau’s Handbook are not law –right to close on expiry of statutory waiting period, unless Tribunal’s ability to order a remedy is substantially impaired –increased certainty around deal timing Hold separate arrangements prior to the Commissioner completing her review have a role to play

18 American Iron & Metal Company’s (AIM) acquisition of S N F Inc. represents the first resolution with the Commissioner following the Federal Court of Appeal’s decision in Labatt –Bureau withdrew s.100 application to block closing –Agreed to an asset preservation arrangement Commissioner Scott confirmed at the 2008 CBA Spring Meeting that there are circumstances where the Bureau will accept a hold separate in lieu of bringing a s.100 proceeding –although Commissioner Scott said that such situations are “rare” Recent Practice Since Labatt

19 Final Remarks In the absence of an order from the Tribunal, merging parties can complete their merger once the statutory waiting period has expired The Handbook does not give the Commissioner the power to block a merger nor does the Commissioner have an automatic right to a s.100 order Labatt confirms the statutory scheme under the Competition Act whereby there is a presumption that the Commissioner will complete her review in 42 days Hold separate arrangements (whether agreed to in the form of a consent agreement under s.105 or undertaken to the Tribunal) can play an important role in ensuring that mergers can be completed in a timely manner Commissioner can bring an application under ss. 92 & 104 at the end of 42 days in appropriate cases