It wasn’t until 1986 that Canada introduced modern antitrust legislation in the form of the Competition Act, which has been amended many times. The act contained the country’s first merger clearance regime. Little did its proponents know that two decades later, Canada’s largest law firms would be scrambling to build and promote their competition law departments and that competition considerations would be headline news in the country’s business pages.
“Competition considerations can be deal-breakers and that’s where competition lawyers come in,” says William Rowley of McMillan Binch Mendelsohn LLP. “They’re the ones who can put the grease to the wheel or a sharp sword to the knot.”
The primary reason for the growth of competition law as a practice area is deceptively simple: competition review creates risks, both in process and outcome, whose management requires the intervention of legal expertise. Indeed, the risks have become so significant some sellers have taken to accepting lower bids with fewer competition problems.
“Competition concerns are capable of shifting the leverage between buyers and bidders, so if you’re for sale, you need to assess the competition risk,” Rowley says. “In particular, you need to consider concessions the regulators may force you to make and how much those concessions will affect value.”
Globalization has made the process even more complicated. As the Inco-Falconbridge transaction and the associated battle for control of Inco demonstrates, Canadian companies and their lawyers can no longer confine themselves to domestic competition considerations, even when Canadian companies are merging with each other. At the same time, Canadians can no longer assume that international considerations will not affect them, even where domestic competition considerations are a relatively minor part of a transaction.
This marks a significant change from the incipient days of the globalization rush, when the international competition regulation infrastructure was lacking.
In 1990, there were fewer than 10 competition regimes in the world, and only four of them — in the United States, the European Union, Canada, and Australia — had a meaningful history. Today, over 100 countries have competition laws, thanks in large measure to the World Bank, which has helped countries establish market economies that include antitrust regimes.
“Not all these regimes are effective,” Rowley says. “Many of them are brand new and just learning, but that doesn’t change the fact that the world has adopted a competition culture driven by the realization that competition law and consumer welfare are intertwined.”
As the number of competition regimes grew internationally, they began to present completion risks to multinational mergers.
“The competition stakes in a deal went way up, because now there was risk that some two-bit jurisdiction might start eating into the economics of the transaction and maybe even thwart it altogether,” Rowley says.
What this means is that strategic thinking about competition considerations can’t occur midway through an M&A transaction and certainly not as an afterthought. All the more so because boards of directors are under increasing scrutiny to do their deal-related homework in advance.
“Ten years ago, boards made merger decisions before calling in the competition lawyers,” says Crystal Witterick of Blake Cassels & Graydon LLP. “That doesn’t happen anymore.”
Anthony Baldanza, chairman of the antitrust competition group at Fasken Martineau Dumoulin LLP, is of a similar mind.
“A fix-it-first approach, particularly one that includes a divestiture partner, is a very powerful weapon in securing merger clearance, because it can take the wind out of the Competition Bureau’s sails and avoid a prolonged inquiry,” he says.
In other words, fix-it-first thinking has made a significant contribution to competition counsel’s growing prominence at the deal table.
“Competition counsel are one of the first outside counsel contacted in any strategic merger,” Collins says. “In-house counsel engage them very early, even at the drawing board stage. And the questions asked are threshold queries around such fundamental issues as whether the deal is doable, what it would take to do it, and how long it would take to do.”
George Addy, who leads Davies Ward Phillips & Vineberg LLP’s competition practice and was head of the Competition Bureau from 1993 to 1996, agrees: “Clients have us there from the get-go,” he says. “They want advice about significant matters like the valuation of a deal, the execution risk, and what the final asset package will look like once the regulators complete their review.”
Competition counsel’s analysis is critical in a negotiation dynamic because vendors who foresee competition problems will try to get purchasers to take the competition risks with hell-or-high-water clauses or reverse breakup fees.
When Whirlpool recently triumphed over two other suitors with its US$1.79-billion bid for Maytag, for example, the proposed deal created a market giant that produced half of the
dishwashers and 70 per cent of the clothes washers and dryers manufactured in the United States. The competition risks for the deal were considerable, influencing Maytag to extract a $120-million reverse breakup fee from Whirlpool.
“There’s a very clear trend to vendors conducting sales in a way that relieves them of competition risk to the greatest extent possible,” says Neil Campbell, a partner at McMillan Binch Mendelsohn LLP. “Because these risks invoke complex and costly impacts, the vendor and all the bidders will bring in competition counsel to negotiate.”
When the bid is hostile, things can get even more complicated, especially in the public markets with their securities overlay.
“The competition process can take considerably longer than the 35-day securities waiting period that exists in Ontario,” says Peter Franklyn, chairman of Osler Hoskin & Harcourt LLP’s competition and antitrust group.
While extensions are common in the securities arena, it’s the rare bidder that wants its offer out there for too long.
“Delays raise the prospect of competing bidders, give targets time to find white knights, and aren’t good for share prices because they make the arbitrageurs nervous,” notes Jay Holsten of Torys LLP.
The possibility of delay increases with the number of jurisdictions in which a transaction must pass muster.
“It’s critical that parties avoid getting jammed up with the various filings, and the only way to do that it to file early and keep everything tightly co-ordinated,” says Randy Hughes of Fraser Milner Casgrain LLP.
For their part, targets must make a core decision whether to invoke competition law with the intention of buying time to obtain competing bids that are higher or have less
“But it may also eliminate or reduce the value of a bid that provides the highest value to shareholders,” Campbell observes. “So directors have to exercise their fiduciary duties carefully when contemplating such a strategy.”
And there’s another danger: “If the target says to competition authorities, ‘Don’t let the hostile party buy us because they’ll monopolize the industry,’ what happens if a strategic white knight who also raises competition issues comes into the picture?” asks Hughes. “It’s important to think three or four steps ahead when you’re giving competition advice to clients.”
The greatest threat to a deal, however, may come from marketplace complaints that don’t originate with the parties.
“Competition agencies have made it clear they’re open to submission from any interested parties,” says Paul Crampton of Oslers, who wrote the Compe-tition Bureau’s 1991 merger guidelines.
In other words, customers, competitors, suppliers, trade unions, or other market
participants are all free to complain to the bureau. “And they’re doing so with a rising level of sophistication,” Crampton says.
“We’re doing an ever greater number of cases where complainants retain us to deal with a merger that affects them,” Campbell notes. “Their goal is to make proactive submissions that marshal the competition concerns which they believe the Bureau should address.”
Indeed, a wide range of stakeholders are seeking the advice of competition counsel.
“We’ve been getting calls from investors, debtholders, funds and financial services companies asking how mergers in a particular industry might affect them,” says Michael Osborne of Affleck Greene Orr LLP.
And when clients are doing that, we know what the bottom-line results are for their lawyers.