Feds heightening scrutiny on M&A activity: Stikeman Elliott head of competition, foreign investment
The lowering of review thresholds under the Competition Act and Investment Canada Act show the Canadian Government is intensifying scrutiny on M&A activity, says Michael Kilby, head of the competition and foreign investment group at Stikeman Elliott LLP.
“There have been a number of developments in 2020 and beyond, as it relates to the review of foreign investments in Canada,” says Kilby. “Most notably, the Canadian government has adopted a very thorough and diligent and careful approach in relation to reviewing foreign investments.”
The Competition Bureau has also applied “renewed vigour” in looking at transactions that fall under the threshold to notification, in part through expanding the mandate of the merger intelligence notification unit, he says. The decrease in threshold is consistent with that approach and will cause a “slightly larger number” of transactions to be flagged to the Competition Bureau ahead of time, says Kilby.
“The overall trend on the Competition Act side of things has been to approach transactions that fall under the thresholds more carefully,” he says.
“That can cause parties to be somewhat more risk averse, or to think through the competition implications of their transaction before proceeding, on the basis that the bureau may well be inclined to look at it.”
The “big trend” in deals under the Investment Canada Act is an increase in national security reviews, partly because of COVID, says Kilby.
“There has been a noticeable increase in the number of transactions that are being subjected either to national security questions, or even national security reviews. That is consistent with the international trend… including in countries such as the U.S., Australia, the UK, parts of the EU, and would be expected to continue.”
In February, the Competition Bureau announced it had decreased the pre-merger notification transaction-size threshold. If a transaction target has assets in Canada worth more than $93 million, or the gross revenue generated from those assets produce more than $93 million, the Bureau needs advanced notice of the proposed transaction. That is down from the current threshold of $96 million. Advanced notice is also required when the purchaser and target, together, have a combined Canadian asset value or gross revenues exceeding $400 million.
The thresholds triggering a net-benefit review under the Investment Canada Act have also been lowered. Carried out by the Minister of Innovation, Science and Industry, the net-benefit review determines whether a foreign entity’s acquisition of a Canadian business will serve the interests of Canadians. The Minister looks at plans for employment, management levels, head-office, capital spending and other economic factors, says Kilby.
If the acquiror hails from a country which is a member of the World Trade Organization, a net-benefit review is required if the enterprise value of the target is above $1.043 billion, a decrease of $32 million. Where the acquiror comes from a country which has a free trade agreement with Canada, the threshold has dropped by $48 million to $1.565 billion. The threshold on transactions involving state-owned enterprises is $415 million, down from $428 million. The threshold for acquirors from non-WTO-member countries has remained the same.
While Canadian M&A was down in 2020, Stikeman securities and corporate law partner J.R. Laffin told Canadian Lawyer he expects a rebound in 2021.