Competition Act and Investment Canada Act Considerations
| Author | Christopher C. Nicholls |
| Profession | Faculty of Law, University of Western Ontario |
| Pages | 35-70 |
35
CHA PTER 2
COMPETITION ACT
AND
INVESTMENT CANADA
ACT
CONSIDER ATIONS
A. INT RODUC TION
There are two federal statutes of which Canadian lawyers must be espe-
cially wary when adv ising on a large business acqui sition: the Compet i-
tion Act1 and the Investment Canada Act.2
B.
COMPETITION ACT
1) A n ti-Tr u st
The federal Competition Act (once called the Combines Investigation Act)
is the primar y source in Canada today for what is often called “anti-
trust” law. The purpose of anti-trust l aw is to regulate mergers to pre-
vent the formation of monopolies or oligopolies in which a small num-
ber of companies come to dominate an industr y. Firms with market
dominance, it is feared, may be in a position to abuse their market
power, chiefly by charging higher prices for their good s and services
than would be possible if they were subject to effective competition.3
1 R.S.C. 1985, c. C-34.
2 R.S.C. 1985 (1st supp.), c. 28.
3 Of course, there ar e other potential detrime ntal effects of decreas ing com-
petition, beyond si mple increases in nomin al prices. Thus, for example, the
MERGERS AND ACQUISITIONS36
It may seem peculiar t hat legislation aimed main ly at preventing
anti-competitive actions of corporations should be known as anti-t rust
law. The origin of the term anti-trust is American. In the late n ineteenth
and early twentieth centur ies, firms in a number of American indus-
tries consolidated their operations using structures that included trust
agreements. Melvin Urofsky has explained these early industry-con-
solidating structures in this way: “A trust is an organizational device
through which a number of firms combine. In practice, shareholders
in the individual firms turn in t heir stock and receive trust certificates.
The affairs of all the compan ies are then run by trustees.”4
The facts in the key 1911 U.S. Supreme Court anti-trust decision,
Standard Oil Co. v. U.S. provide an illustration of this technique.5 There,
it was alleged that the defendant s had “entered into a contract and tr ust
agreement, by which various independent fir ms engaged in . . . [aspects
of the oil business] turned over the ma nagement of their business to
nine trustee s . . . which said trust agreement was i n restraint of trade
and commerce, and in violation of law.”6 Becht, Bolton, and Röell note
that, in response to early American anti-tr ust legislation (the Sherman
Anti-Trust Act of 18907), many voting trusts “converted themselves into
New Jersey registered holding companies . . . t hat were identical in
function but escaped the init ial round of antitrust legislation.”8
Today, the sort of busines s combination that may t hreaten to lessen
competition almost invariably involves corporations a nd rarely, if ever,
involves a trust structure.
Competition Bure au, in its Merger Enforcement Guidelines, uses re ferences to an
increase i n price to include “an increase i n the nominal price, but may al so refer
to a reduction in qua lity, product choice, service, innovat ion or other dimen-
sions of competition t hat buyers value.” See Competition Bureau, Merger En-
forcement Guidelines at par a. 2.2, online: www.competitionbu reau.gc.ca/eic/site/
cb-bc.nsf/v wapj/cb-meg-2011-e.pdf/$FIL E/cb-meg-2011-e.pdf. The Merger En-
forcement Guidelines were i ssued by the Competition Bure au “to provide general
direction on its a nalytical approach to mer ger review.” See Merger Enforcement
Guidelines, Foreword, at 1. The most recent version of the Merger Enforcement
Guidelines was published in October 2 011.
4 Melvin I. Urofsky, “Louis D. Bra ndeis, Progressivi sm, and the Money Trust” in
Louis D. Brandeis , Other People’s Money and How the Bankers Use It, ed. by Mel-
vin I. Urofsky (New York: Bedford B ooks, 1995) at 5n [emphasi s in original].
5 31 S. Ct. 502 (1910).
6 Ibid. at 505.
7 15 U.S.C. §§ 1–7.
8 Marco Brecht, Patrick Bolton, & Ai lsa Röell, “Corporate Gover nance and Con-
trol” in George M. Const antinides, Milton Har ris, & René M Stulz, Hand book of
the Economics of Finance, vol. 1A (Nort h Holland: Elsevier, 2003) 1 at 6n.
Competition Act and Investment Canada A ct Considerations 37
Canada’s foray into anti-competition law came early. In 1889, Par-
liament enacted An Act for the Prevention and Suppression of Combina-
tions Formed in Restraint of Trade,9 a statute that was, evidently, “the
first of its kind anywhere in the world.”10
2) The Problem of Monopoly Power
The concerns raised by monopoly power and agreements made in re-
straint of trade have been recognized for centuries. Adam Smith fam-
ously observed that “People of the same trade seldom meet together,
even for merriment and diversion, but the conversation ends in a con-
spiracy against the public, or in some contrivance to raise prices.”11
The problem raised by monopolies is an intuitive one. Economists often
try to illustrate the problem that monopolies pose for consumers with
a little more precision, enlisting t he aid of graphs depicting “marginal
cost” curves, “margi nal revenue” curves, demand curves, and so on.
Arguments that can be reduced to graphs rarely persuade lawyers. But
these particular graphs are well worth a look.12 They help to show, pic-
torially, why monopolists (who have the luxury of being “price setters”
rather than “price t akers”) will have an incentive to restrict output to
the point where the cost of producing one additional item for sale (the
marginal cost) is just eq ual to the additional amount to be earned if the
monopolist sells that one additional item (margin al revenue). But there
is an important assumption built into this calcul ation, namely, that the
monopolist must sell every unit for the same price.
In other words, it is assumed that the monopolist cannot dis-
criminate bet ween buyers—charging a higher price to those buyers
who would be willing to pay more for an item, and a lower price to
those buyers who do not value the item so highly. Once it is assumed
that the monopolist must charge a single price for every item sold, one
can begin to see why a monopolist might have an i ncentive to limit
the number of items he or she supplies to the market. Simply put, pro-
ducing fewer items and selling them to those buyers willing to pay a
9 1889 (U.K.), 52 Vic., c. 41.
10 “Introduct ion,” Interim Repo rt on the Competition Act, Seventh R eport of the
Standing Committee on Indu stry (Susan Whelan, Chai r), June 2000, online: w ww.
parl.gc .ca.
11 Adam Smith, Wealth of Nat ions (Amherst: Prometheus Bo oks, 1991) Book I, c.
10 at 137.
12 Examples may be found in a ny introductory microeconomic s text. See, for
example, Rober t H. Frank et al., Principles of Microeconomics, 2d Canad ian ed.
(Toronto: McGraw-Hill Ryerson, 2005) at 235, 237, & 238.
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