CP Rail at Play in a Sea of Policy Changes 

publication 

July 23, 2007 - ( Lang Michener Transportation Alert)

Lang Michener Transportation Alert

Lost in the noise surrounding an offer for CPR by Brookfield/Caisse de dépôt/Goldman Sachs or by MacQuarie Bank or even a strategic play by Union Pacific, is the shifting legislative environment in which such a deal could transpire.  Three important areas of change are occurring in foreign investment policy, competition policy and transportation policy.

Foreign Investment Policy:  The federal government recently announced (see News Release) the formation of a Competition Policy Review Panel to examine the Competition Act as well as the Investment Canada Act.  In particular, the federal government is grappling with whether foreign investment policy should address questions of national security, instead of merely deciding whether an acquisition of a Canadian business is of "net benefit" to Canada.  One has to ask whether an acquisition of CPR would pass a "national security" test and whether such a test gives an advantage to Canadian buyers.  The panel is slated to report in mid-2008, so non-Canadians might wish to make their play for CPR before such a test is put into law.

Competition Policy:  The Competition Bureau has been undergoing its own review of the merger control mechanisms it employs for all transactions (see "M is for Merger").  In particular, the Bureau has issued several significant policy documents, including its revised Merger Enforcement Guidelines and its Information Bulletin on Merger Remedies (see Final Merger Remedies White Paper).  These documents highlight the Bureau's role in preserving competition, rather than regulating it. 

What impact does this have on a sale of CPR?  An acquisition by financial buyers, such the one led by Brookfield, or even McQuarie Bank, would scarcely raise any issues under the Competition Act administered by the Bureau.  A merger involving a strategic buyer such as Union Pacific likely would involve passing muster with the Bureau somewhat more than a mere financial play, but not that much more, as occurred in 1998 when the BNSF Railway tried to merge with Canadian National Railway (see "Mergers of Transportation Undertakings").  At that time, and until a few weeks ago, there was no effective way to preserve competition after a rail merger in Canada, except in a few select circumstances such as in the CN/BC Rail merger, where the customers of BC Rail obtained an extraordinary remedy by consent from the Competition Bureau.  That is why the most recent set of amendments to Canada's transportation policy is the most important development by which to determine the kind of treatment a CPR sale would get today.

Transportation Policy:  On May 4, 2006, the Minister of Transport introduced Bill C-11 in the House of Commons to amend the Canada Transportation Act (CTA). The bill received Royal Assent on June 22, 2007.  The most significant amendment brought by this bill involves a brand new scheme to review transportation mergers.  Perhaps the most interesting aspect of the timing of the legislation is that Brookfield attempted to strike a deal with CPR last April, before Bill C-11 came into force, but after it was introduced.

Bill C-11 introduces a new regime that would govern the acquisition of any federal transportation undertaking (air, rail, marine, buses, trucks, airports or marine ports).  Parties to a transaction involving a transportation undertaking that is notifiable under the Competition Act must now give notice to the Minister of Transport.  In addition to the information required by the Competition Act, the notice must contain information that will allow the Minister to assess public interest concerns in relation to national transportation. 

The Minister of Transport must then publish guidelines with respect to the information parties provide regarding the public interest impact of the transaction.  If the Minister is of the opinion that the proposed transaction does not raise public interest issues, the Minister must notify the parties of that opinion within 42 days.  If public interest issues arise, the Minister may direct the Agency or a third party to examine those issues.  The Governor in Council must ultimately approve the proposed transaction.

Additionally, the Commissioner of Competition must now report to the Minister and the parties to the transaction on "any concerns regarding potential prevention or lessening of competition that may occur as a result of the transaction."  The report must be made within 150 days after the original filing date, or any longer period the Minister may allow.  The report immediately becomes public after receipt by the Minister.

Before the Minister makes a recommendation to the Governor in Council for approval, the Minister must:

  • consult with the Commissioner about overlap between concerns the Minister has regarding the proposed transaction and any competition concerns raised by the Commissioner's report; and
  • consult with the parties to address those public interest and competitive concerns, after which the parties must inform the Minister and Commissioner of any measures they are prepared to undertake to address those concerns, including revisions to the transactions.

The Governor in Council may approve the transaction with or without conditions, if satisfied that it is in the public interest to do so.

In conclusion, the new double review process adds substantial lead times that will prevent parties from engaging in quick "done deals" and hostile bids.  Further, the fact that the Governor in Council possesses the authority to ultimately approve a transaction means a decision to approve or disapprove a transaction will be informed by not only quasi-judicial and administrative considerations, but also by political and public interest.  The more important question is whether CPR's customers (the shippers), who are clearly the most interested members of the public, now will have a better opportunity to address their concerns.  Bill C-11 restores Canada's ability to review transactions affecting Canada's transportation economy, a power that was stripped away from the Canadian Transportation Agency in 1996 when CN was privatized.  That power is very important when one considers that railways are largely unregulated natural monopolies.