Does competition law and Canada’s foreign investment review enable or hinder innovation?

Buying and merging companies is about to get more complicated, thanks to legislation moving its way through Canada’s Parliament. At the centre of government concerns are the burgeoning technology sector and artificial intelligence.

Will these changes, included in recently passed amendments modernizing the Investment Canada Act and updates to the Competition Act still awaiting final passage in the Senate, simply add to the routine checklist of issues that need resolution by corporate counsel when a deal is contemplated? Or will it send a damaging chill through the whole technology sector and materially slow down transactions?

That’s what a panel at the CBA Spring Competition Law Conference in Montreal will be looking into on May 2. The stakes are high. Technology, whether in AI, video games, electric vehicles, or pharmaceuticals, is seen as key to Canada’s growth as the country’s failure to produce robust productivity gains becomes an increasing focus of economic concern.

Yet at the same time, acquisitions in these areas also can pose national security threats if unfriendly state actors or foreign corporations get a hold of leading-edge technology, in the same way that there are worries about foreign acquisitions involving strategic minerals like lithium and nickel.

In addition, Bill C-59, which implements measures from last fall’s economic statement, includes several technical changes that will increase the number of transactions that will require mandatory pre-merger notification under the Competition Act. There’s also a significant change in the time delay allowed for the challenge of a merger.

Currently, the bureau cannot challenge a merger more than one year after it has been substantially completed. But under C-59, that challenge period will be extended to three years if the competition commissioner has not received pre-merger notification of the deal. If there has been notification, the challenge period will remain at one year.

In March, Parliament passed a law amending the Investment Canada Act, which focuses on strengthening the national security review system. This involves introducing a regime of pre-closing notifications for investments in sensitive sectors that will soon be designated by the government and are expected to include critical minerals like lithium, as well as the digital technology sector. It will also give the government more powers to review investments by state-owned enterprises from abroad, including any assets of a Canadian business.

Conference panelist David McFarlane, a partner at FGS Longview, a communications firm specializing in mergers and acquisitions and foreign direct investment, sees the Investment Canada changes as “highly positive” because they will allow the industry minister to accept undertakings that will mitigate risk and allow for more flexible outcomes.

He admits that initially, uncertainty about regulations will make investors more cautious and see them seek advice about what outcomes are possible, but “good commercial opportunities are still likely to be pursued,” he says.

McFarlane, who was director of policy for former industry minister Navdeep Bains, says that the changes to the Act reflect radical geo-political shifts in the world, including tensions with Russia and China, and the fact that economic security is now considered a major component of national security. He notes national security reviews can apply to a broader scope of investment than just mergers and acquisitions, including oversight of newly formed companies.

Although changes to Canada’s competition law, which were included in three separate pieces of budget omnibus bills over the past two years, have had broad political support, there is still a divide on whether Canada needs stronger competition laws. The organized business community in particular has opposed many of these changes.

Jerome Gessaroli, a corporate finance professor at the British Columbia Institute of Technology and a senior fellow at the Macdonald-Laurier Institute, worries that the changes in competition policy will just lead to more regulation of the economy that will do nothing for Canada’s lagging productivity record.

“Overall, I cannot see the changes fostering innovation or improving productivity,” he said. “The revisions seem to reflect a prevailing skepticism in Canada regarding the self-regulatory ability of markets -- the underlying idea that abnormal profits prompt market entry, ultimately driving down costs and improving products or services.”

Specifically, Gessaroli worries that the new rules make it harder for larger corporations to acquire smaller ones, which could lead to a significant deterrent effect on entrepreneurial activity and damage the whole startup ecosystem of entrepreneurs, venture capitalists, and large tech companies.

Fifty per cent of startups view acquisition by a bigger entity as their primary exit strategy compared to just 18 per cent who are looking to do an IPO, Gessaroli said. If big firms are discouraged from making these acquisitions, venture capitalists may be less willing to finance these firms from the start because of less opportunity to cash out.

“Money flows to startups may fall, making it more challenging for entrepreneurs and innovators to obtain financing,” he said.

On the other side of the divide, Keldon Bester, executive director of the Canadian Anti-Monopoly Project, welcomes the changes in competition law and doesn’t expect a huge impact on innovation investments or merger activity. He notes that the Competition Bureau intervenes on only “a razor-thin amount of merger cases,” with consent agreements accounting for less than one per cent of all mergers.

“Even if that grows, we’re only talking about a very narrow subset of the universe of mergers and acquisitions activity and that’s not going to change dramatically,” Bester says.

“So on balance, we are addressing a fairly narrow set of circumstances and leaving much of the capital markets world untouched.”

If there are restrictions, it should be on the type of deals that could do the most harm to Canadians without contributing anything to the economy, Bester says, such as transactions where an already dominant player tries to acquire an existing or potential competitor.

“We don’t want Rogers to think they can buy Quebecor for its telecom assets. We want them to think about how to grow their businesses organically.”

Paul Gagnon, a partner and technology and AI co-lead at BCF in Montreal, doesn’t think the changes will make a huge difference.

“The key is building great businesses,” he says.  

In the government’s actions, Gagnon sees a desire to make sure that more strategic businesses such as those in technology stay under Canadian ownership.

“The tech entrepreneurs I work with, none of them wakes up in the morning and thinks about Canadian policy before starting to code,” he says of his clients.

“Our jobs as lawyers is to make these things relevant and to prepare companies for when those considerations could come into play.”

Gagnon also downplays concerns over the fact that there’s now a three-year challenge period for transactions that aren’t subject to pre-merger notifications.

“I think it’s creating incentives to communicate more with the Competition Bureau,” he says.

“Innovation and incentives to innovate are really key to AI and are important to our competitiveness. That’s consistent with what we’re seeing in these legislative changes.”