Merger challenge shows Competition Bureau focus on digital economy

Canada’s new Commissioner of Competition, Matthew Boswell, appointed just four months ago, has taken little time to make his mark as a man of his word.

By initiating the first contested merger challenge since 2015, the first merger challenge ever involving software companies, the first involving a private equity company, and a rare challenge to a non-notifiable transaction under the Competition Act, Boswell is wasting no time implementing his publicly stated focus on active enforcement.

“At a high level, we want the [Competition] Bureau to be among the leaders in the world in terms of how we do our work,” he told the Financial Post. “That means vigorous enforcement in an increasingly digital age, something that will require quicker and more nimble responses from a staff empowered with cutting-edge tools and techniques.”

Indeed, the merger challenge application to the Competition Tribunal was filed within four months of the transaction’s announcement and within one month of its closing in May.

In a speech to the Canadian Bar Association, Boswell spoke of a “broader focus” on intelligence gathering.

“This will assist in fulfilling our mandate to detect, investigate and challenge mergers that could breach the Act,” he said. “Notification provisions allow detection of most, but not all, potentially anticompetitive transactions. Our intelligence gathering efforts are capturing other transactions.”

The impugned transaction involves the acquisition of Canadian software company of 3ES Innovation Inc., carrying on business as Aucerna, by a U.S. private equity firm, Thoma Bravo LLC. The bureau alleges that the merger will result in a substantial lessening of competition in the market for “reserves software” (reporting and valuation) aimed at Canadian oil and gas producers.

Although multinationals such as Schlumberger and Hamilton have similar software, they have not tailored it to Canadian customers. The merger, which unites the two largest Canadian suppliers of reserves software, is therefore alleged to have created a monopoly that will bring increased prices, lower service quality and reduced incentives to invest in similar products in a small market characterized by customer loyalty.

“What exists post-merger is one product, one company and a limited set of customers,” said Joshua Krane, a competition lawyer in Blake, Cassels & Graydon LLP’s Toronto office.

By way of remedy, the bureau seeks to have Thoma Bravo dispose of one of its two businesses, or of as many assets or shares as necessary to remedy any substantial lessening of competition.

As Krane sees it, the challenge reflects changing realities in the software and tech industries.

“Traditionally, the belief was that it was fairly easy to enter these industries,” he says, “But that mentality has changed and there’s a greater appreciation of how difficult it is to become a new player and compete in that space.”

More evidence of the bureau’s intensified focus on the digital economy and non-notifiable transactions comes from the bureau’s application for production of records and interview of witnesses regarding its investigation into the proposed acquisition by PSAV of Encore Event Technologies in the event production market.

“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,” write Jason Gudofsky and Michael Caldecott in a client newsletter issued by McCarthy Tétrault LLP’s Toronto office.

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