Competition Act and Investment Canada Act Considerations

• Author: Christopher Nicholls
• Pages: 39-83

39

CHA PTER 2

COMPETITION ACT

AND

INVESTMENT CANADA

ACT

CONSIDER ATIONS

A. INTRODUC TION

There are two federal statutes (in addition to the federal Income Tax Act)

of which Canadian law yers must be especial ly wary when advising on

a large business acquisition: the Competition Act1 and the Investment

Canada Act.2

B.

COMPETIT ION AC T

1) A n ti -Tr u st

The federal Competition Act (once called the Combines Investigation Act)

is the principal source in Canada today for what is often called “anti-

trust” law. The primary pur pose of anti-trust law is to regulate mergers

to prevent the formation of monopolies or oligopolies in which a small

number of companies come to dominate an industr y. Firms with mar-

ket dominance, it is feared, may be in a position to abuse their market

power, chiefly by charging h igher prices for their goods and serv ices

than would be possible if they were subject to effective competition.3

1 RSC 1985, c C-34.

2 RSC 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 ACQUISITIONS40

It may seem peculiar t hat legislation aimed main ly at preventing

anti-competitive actions of corporations should be known as anti-trust

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 Amer ican indus-

tries consolidated t heir operations using structures that included trust

agreements. Melvin Urofsky ha s explained these e arly 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 their stock and receive trust cert ificates.

The affairs of all the compan ies are then run by tr ustees.”4

The facts in the key 1911 US Supreme Court anti-trust decision,

Standard Oil Co v US provide an illustration of this techn ique.5 There, it

was alleged that the defendant s had “entered into a contract and trust

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 ag reement was in 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 1890),7 many voting trusts “converted themselves into

New Jersey registered holding companies . . . that were identical in func-

tion but escaped the initi al round of antitrust legislation.”8

Today, the sort of business combinat ion that may threaten to le ssen

competition almost invariably involves corporations a nd rarely, if ever,

involves a trust structure.

Competition Bure au, in its Merger Enforcement Guidelines, states t hat references

to an increas e in price include “an increase i n the nominal price, but may al so

refer to a reduction in qu ality, product choice, service, innovat ion or other

dimensions of c ompetition that buyers value.” See Competit ion Bureau, Merger

Enforcement Guidelines at par a 2.2, online: www.competit ionbureau.gc.ca/eic /

site/cb-bc.nsf/ vwapj/cb-meg-2011-e.pdf/$FILE /cb-meg-2011-e.pdf. The Merger

Enforcement Guidelines were i ssued by the Competition Bureau “to pr ovide

general direct ion on its analytical appr oach to merger review.” See Merger

Enforcement Guidelines, Foreword, at 1. The most recent ve rsion of the Merger

Enforcement Guidelines was p ublished in October 2011.

4 Melvin I Urofsky, “Louis D. Bra ndeis, Progressivi sm, and the Money Trust” in

Louis D Brandei s, Other People’s Money and How the Bankers Use It, ed Melv in I

Urofsky (New York: Bedford Books, 1995) at 5n [emphasi s in original].

5 31 S Ct 502 (1910).

6 Ibid at 505.

7 15 USC §§ 1–7.

8 Marco Becht, Patrick Bolton, & Ai lsa Röell, “Corporate Gover nance and Con-

trol” in George M Consta ntinides, Milton Har ris, & René M Stulz, Handbo ok of

the Economics of Finance, vol 1A (Nort h Holland: Elsevier, 2003) 1 at 6n.

Competition Act and Investment Canada Ac t Considerations 41

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 any where in the world.”10

2) The Problem of Monopoly Power

The concerns raised by monopoly power and agreements made in

restraint of trade have been recognized for centuries. Adam Smith fam-

ously observed that “[p]eople of the same trade seldom meet together,

even for merriment and diversion, but the conversation ends in a con-

spiracy against t he public, or in some contrivance to raise prices.”11 The

problem raised by monopolies is an intuitive one. Economists often t ry

to illustrate the problem that monopolies pose for consumers w ith a

little more precision, enlisting t he aid of graphs depicting “margin al

cost” curves, “margi nal revenue” curves, demand curves, and so on.

Arguments that c an 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 co st) is just equal to the additional amount to be e arned 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 th at the monopolist cannot discr imin-

ate between 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 monopolists might have an incentive to limit the number of

items they supply to the market. Simply put, producing fewer items and

selling them to those buyers willing to pay a high price for them will

be more profitable than producing a larger number of items for which

9 1889 (UK), 52 Vic, c 41.

10 “Introduct ion,” Interim Repor t on the Competition Act, Se venth Report of the Stand-

ing Committee on Industr y (Susan Whelan, Chair), June 2000, online : www.parl.gc.ca.

11 Adam S mith, Wealth of Nations (Amherst: Promet heus Books, 1991) Book I, ch

10 at 137.

12 Examples m ay be found in any introductory mic roeconomics text. See, for

example, Rober t H Frank et al, Principles of Microeconomics, 2d Canadian ed

(Toronto: McGraw-Hill Ryerson, 2005) at 235, 237, & 238.