Commissioner of Competition Makes his Mark: Rare Merger Challenges
The Commissioner of Competition recently filed a notice of application with the Canadian Competition Tribunal challenging the acquisition of a Canadian software company by a United States private equity firm, Thoma Bravo LLC, that closed on May 13, 2019, the first contested merger challenge since the Staples / Office Depot transaction in 2015 and the first by the current Commissioner who himself received a permanent appointment as Commissioner only in March 2019.
The Commissioner’s decision to review and challenge the transaction is particularly noteworthy since it appears that the transaction was not subject to pre-merger notification under the Competition Act. This is consistent with the Commissioner’s recent speech at the Canadian Bar Association where he stated that: “we have expanded the role of the Merger Intelligence and Notification Unit to include a broader focus on intelligence gathering. This will assist in fulfilling our mandate to detect, investigate and challenge mergers that could breach the Act. Notification provisions allow detection of most, but not all, potentially anti-competitive transactions. Our intelligence gathering efforts are capturing other transactions.”
The Bureau is alleging in its application challenging Thoma Bravo’s acquisition that the transaction is likely to result in a substantial lessening of competition in the market for the supply of business critical reserve reporting and valuation software (known as “reserves software”) for medium and large oil and gas producers in Canada, on the basis that Thoma Bravo, through its ownership of a competitor, will essentially monopolize a market that displays high barriers to entry.
The Commissioner’s substantive case
According to the Commissioner’s notice of application, the acquisition by Thoma Bravo of 3ES Innovation Inc. - carrying on business as Aucerna - is likely to result in a substantial lessening of competition in the market for reserves software for oil and gas producers in Canada. By bringing Aucerna and Thoma Bravo’s wholly owned subsidiary, Quorum Business Solutions (“Quorum”), under common ownership and control, the Commissioner argues that the transaction will combine the two largest Canadian suppliers of reserves software. The Commissioner has further alleged that post-transaction there would be no effective remaining competitors, in effect declaring the transaction a merger to monopoly.
The Commissioner has identified Aucerna’s Value Navigator product (“ValNav”) and Quorum’s Entero MOSAIC product (“MOSAIC”) as having been built and developed in Canada specifically for the Canadian market, which market is only modest in size, with international competitors such as Schlumberger and Halliburton not offering products sufficiently tailored to the needs of Canadian customers. The unique features of the parties’ software for the Canadian market include adapting the software to collect the detailed information needed by Canadian producers to comply with federal, provincial and territorial taxation, royalty and other obligations, as well as to comply with obligations pursuant to agreements with Canadian Indigenous groups. Additionally, Canadian reserve software must enable producers whose stock is traded on a Canadian public exchange to fulfil specific reporting obligations that are enforced by provincial and territorial securities regulators.
The lack of existing or potential competition from third parties is likely, according to the Commissioner, to result in increased prices or lower quality of services and reduced innovation and product quality enhancement through decreased incentives to invest in research and development post-merger. The Commissioner further alleges that barriers to entry into the supply of reserve software in Canada are high, given the onerous regulatory landscape, the time and cost of adapting existing software to comply with Canadian requirements, and the small overall size of the market that is characterized by infrequent customer switching.
The Commissioner has requested that the Tribunal require Thoma Bravo to dispose of all of its interests in one of the two reserve software businesses or, alternatively, to dispose of such assets or shares as may be required to remedy the alleged substantial lessening of competition resulting from the transaction.
Next steps in the Competition Tribunal’s procedure
Thoma Bravo has 45 days from when the application was made to respond to the Commissioner’s notice of application, and such response is likely to shed more light on the background to the Commissioner’s review and challenge of the transaction. As it stands, it is not clear whether the Commissioner will request that the matter proceed under an expedited Tribunal process, which was introduced earlier this year as a means of bringing matters for hearing within approximately five or six months of the filing of a notice of application, or whether the case will proceed along the traditional path that can take significantly longer to complete.
Furthermore, it is noteworthy that the application has been filed within approximately four months of the announcement of the transaction, and within one month of closing. This shows the speed with which the Commissioner can move in transactions where it identifies potential concerns. At this stage, however, it is unclear at what point in time the Commissioner became aware of the matter. According to materials available on the Tribunal’s website, the Commissioner has not yet sought interim relief from the Tribunal, either before closing by seeking an order permitting closing but requiring the parties’ businesses to be held separate pending completion of the inquiry and decision regarding enforcement action; or by seeking post-closing interim relief, most likely via a hold-separate order. Given that the Commissioner has alleged that a substantial lessening of competition will arise by the combination of Aucerna and Quorum, it is still possible that the Commissioner will seek such interim relief under section 104 of the Competition Act while the application is under consideration by the Tribunal.
There are several implications from the Commissioner’s recent action in this transaction:
- First, this challenge is further evidence of the Commissioner’s commitment to actively monitor and investigate all merger transactions that may raise competition concerns, including those that do not exceed the thresholds for mandatory pre-merger notification. Commissioner Boswell has reported this policy at several recent speaking engagements, including the Canadian Bar Association’s spring conference in Toronto. The Bureau has invested in full-time resources in its Mergers Intelligence and Notification Unit, which is devoted to identifying such transactions.
- Second, even in cases where the pre-merger notification thresholds are not met and the size of the potential market at issue is small, this transaction shows that the Commissioner will not hesitate in seeking to challenge those transactions where it considers there is evidence of potential anti-competitive effects, including in circumstances where the deal has already closed.
- Third, the Commissioner’s on-going focus on the digital economy, including the appointment of a Chief Digital Enforcement Officer (which was announced on July 2nd 2019), means that companies operating in the technology sector need to be particularly vigilant when assessing the likelihood of the Bureau initiating a review in a particular transaction. Firms seeking to make acquisitions of Canadian companies that likely do not trigger a mandatory filing under the Competition Act should nevertheless take steps to assess the extent of any overlap with the target business prior to signing a definitive agreement, in order to be prepared for any inquiries initiated by the Commissioner, which can be commenced any time up to one year after closing.
Shortly after the Commissioner sought to challenge Bravo Thoma/Aucerna, further developments have demonstrated the emphasis being placed on investigating non-notifiable transactions at the Bureau. On June 25th, 2019, the Commissioner sought an order from the Competition Tribunal under section 11 of the Competition Act (this being the section of the Act where the Commissioner can apply for various investigative measures, such as requiring the production of records and interview of witnesses) in relation to its inquiries into another non-notifiable transaction, the proposed acquisition by PSAV of Encore Event Technologies. This order would require the parties to furnish the Commissioner with a wide range of documents and other information, including from the parties’ foreign affiliates. The Commissioner initiated inquiries into the transaction after receiving complaints from third parties in January 2019. While the Commissioner’s application indicates the Bureau has received a wide range of information and documents from customers and from the merging parties, the Commissioner considers it necessary to obtain further records (i.e., internal documents) and information from the parties in order to complete a “thorough review” of the transaction. The Commissioner’s willingness to utilize his statutory information-gathering powers in the context of a non-notifiable transaction further shows the close scrutiny at the Bureau on transactions which fall below the applicable thresholds.