The Competition Tribunal’s widely unexpected dismissal of the Commissioner of Competition’s application to delay Labatt Brewing Co. Ltd.’s $201-million takeover of discount brewer Lakeport Brewing Income Fund will give lawyers a new tool to get mergers done faster, say lawyers for the now-merged brewers.
After Labatt and Lakeport sent merger filings to the Competition Bureau, the commissioner classified the transaction as “very complex” and told the parties it would need five months from the filing date to complete its review.
The statutory time period for reviewing complex cases under the Competition Act is 42-days, but the bureau’s guidelines allow it to take up to five months.
From the outset, the brewers offered to enter into a hold-separate agreement. Under this agreement, the deal would close on March 29, after the 42 days expired, but Labatt would hold its newly acquired business separate for one month after closing.
This way, unit holders would get their money, but Lakeport could be sold back into the marketplace as an independent competitor if a tribunal later decided the merger substantially lessens competition and ordered it to do so.
The commissioner, however, refused to allow the two companies to close into a hold separate.
Labatt didn’t want to remain in merger limbo for five months leaving it vulnerable to competing bids. Last year, when Labatt was acquiring Sleeman Breweries Ltd. and was stalled by a long review, Japan’s Sapporo Breweries snatched it up.
So in this case, Labatt asked lawyers Neil Finkelstein and Brian Facey at Blake Cassels & Graydon LLP about its options and they agreed to assert their right to close after the statutory period expired, unless a tribunal ordered otherwise.
The commissioner started an inquiry into the proposed merger and filed an application for an injunction under s. 100 of the Competition Act to prevent the brewers from closing or taking steps to close the deal for 30 days because she needed more time to complete her inquiry, and decide whether to issue an s. 92 application under the Competition Act to stop the merger.
Under the s. 100 legal test, the tribunal must consider whether an inquiry is ongoing and the commissioner needs more time to complete it. It must also decide whether, without an interim order forbidding any action to bring the merger closer to completion, actions which are difficult to reverse will occur which would substantially impair the tribunal’s capacity to remedy the merger in the event that it is contested.
The bureau’s legal team, led by Bryan Finlay, a partner at WeirFoulds LLP, argued that the commissioner’s opinion about the time required should be enough for an order, and should only be questioned if it seems patently unreasonable.
The Labatt-Lakeport merger would be difficult to reverse, Finlay argued, and the tribunal’s powers to remedy its effects on competition would be substantially impaired. And after the deal closed the tribunal could no longer access pre-merger remedies under s. 92 of the Competition Act, including forbidding the merger.
According to the bureau, the terms of the proposed hold separate would have anti-competitive effects that would be difficult to reverse. For instance, Labatt would receive competitively sensitive information during the interim period, and use it against Lakeport during the interim period, and after if the merger was ordered dissolved.
Labatt and Lakeport’s lawyers argued that the commissioner had enough information about the brewing industry based on this case and previous reviews to complete her review in 42 days.
They also argued that the merger wouldn’t be difficult to reverse because they would enter into a hold-separate agreement, and give an undertaking to the tribunal to comply with its terms. And they said Labatt had no intention of harming Lakeport.
“You don’t spend $200 million to buy a bunch of brands and then throw them in the garbage,” says Brian Facey.
In the end, the tribunal dismissed the commissioner’s application because it failed to meet the substantial impairment test.
“The tribunal is mindful that the commissioner has been involved with this industry recently and over an extended period,” wrote Justice Michael Phelan in his decision.
“The commissioner has now had more than 40 days to review this specific transaction, yet there is insufficient evidence presented as to market structure to establish the impairment of the tribunal’s ability to remedy in accordance with Canadian law.
“The respondents rebuttal evidence is substantially directed to the transaction as they were prepared to have it, with a hold separate. The respondents don’t really address the non-impairment issue absent an HSA, but that was not their burden - it was the commissioner’s.”
Phelan did not require the parties to enter into a hold-separate agreement.
“Other hold separates such as standstill agreements not dependant on the commissioner’s participation may raise less troublesome issues, but this HSA cannot operate without a participant who remains unwilling to participate. Even if the tribunal under its power to impose terms could require the commissioner to enter into an HSA, I would not [do] so because it would be an unworkable situation.”
A decade ago, the competition bureau was more open to parties closing into hold separates, although it usually completed reviews before parties resorted to that, says Facey.
But over time, this has changed. The bureau’s guidelines now allow it to take up to five months to review very complex transactions, and last September, the bureau released further guidelines stating it will not consider a hold separate until a review is complete, he says.
After then-Federal Court of Appeal justice Marshall Rothstein applied the s. 100 test for the first time in 1998 and dismissed a similar application in the Director of Investigation and Research v. Superior Propane, the competition bureau amended the wording of the test so that the tribunal is no longer required to find that the “proposed merger is reasonably likely to prevent or lessen competition substantially,” explains Facey, who also argued and won that case.
With the spike in mergers and acquisitions over the last couple years, waiting five months is a lifetime, he says, and the bureau’s five-month policy should be amended, if not repealed entirely, because it does not reflect the current market reality.
“The tribunal has said there is a high expectation that merger reviews will be completed within 42 days. I think those guidelines are going to be repealed and I think people will now proceed with mergers on a more aggressive timetable.”
Those who do merger work are frustrated by the bureau’s long delays and refusal to negotiate hold separates, says Katherine Kay, a partner at Stikeman Elliott LLP, who argued the case for Lakeport, but this decision shows that the commissioner refuses to discuss hold separates at her peril.
“We’ve all kind of assumed that the bureau could just go to the tribunal and get an order,” she says. “Now, if you’re able to offer up a hold separate, I think the commissioner is going to have to deal with that.
“She’s going to have to negotiate off that because otherwise she’s not going to be able to meet the legal test before the tribunal, which means she can’t stop the closing.”
The bureau doesn’t negotiate hold separates before closing, says Kay, because they know that businesses want to close deals and they use that leverage to negotiate. But they will now lose that leverage when parties have the ability to credibly threaten to close anyway, and deal with competition later, she says. “I think that attitude of ‘We’re not even going to talk about it’ ultimately hurt them a lot.”
The Competition Bureau is reviewing the reasons to decide whether it’s appropriate to bring an appeal to the Federal Court of Appeal, says Melanie Aitken, acting deputy commissioner of competition in the bureau’s merger branch.