Commissioner of Competition Challenges Software Deal

On June 14, 2019, the Canadian Commissioner of Competition (Commissioner) sued to unwind a recently completed merger involving companies that offer software to manage oil and gas reserves.

WHAT BUSINESSES NEED TO KNOW

• The Commissioner indicated in a recent address that he would be stepping up enforcement of the merger provisions of the Competition Act, including transactions that fall below the mandatory notification thresholds.
• This is the first merger challenge in four years under the Competition Act and the first challenge involving a merger in the Canadian information technology (IT) industry.
• The case may provide a litmus test for the efficiencies defence in the context of a merger of IT firms.
• This is also the first merger challenge in Canada involving a private equity buyer.

ANALYSIS

On January 28, 2019, an affiliate of private equity firm Thoma Bravo agreed to purchase the shares of Wrangler Holdings, Inc. (Wrangler). Wrangler, carrying on business as Aucerna, produces software used by oil and gas producers in Canada to monitor and evaluate reserves. Only a few months prior to this acquisition, Thoma Bravo acquired ownership of another company that offers competing software. The transaction closed on May 13, 2019 and the Commissioner filed suit a month later.

The Commissioner’s application, filed with the Competition Tribunal (Tribunal) on June 14, 2019, identifies the companies as the only suppliers in Canada of reserves software. The Commissioner notes that the companies competed head-to-head not only in terms of price, but also in terms of product innovation.

Turning to the factors identified in the Competition Act, the Commissioner alleges that entry by new competitors is unlikely because of the costs and time required to develop reserves software, the complex and unique regulatory system in place in Canada, the market size, and customers’ reluctance to switch suppliers.

The case is still months away from going to trial. In the meantime, the Commissioner and Thoma Bravo will undergo discoveries and exchange expert reports.

Although the Commissioner’s application indicates that Thoma Bravo has not identified any efficiencies from the transaction, Thoma Bravo is entitled to raise an “efficiencies defence,” which can even save a merger-to-monopoly where the efficiencies from the transaction are likely to exceed the anti-competitive effects. The Commissioner will have to quantify the anti-competitive effects of the merger for the Tribunal, failing which, his application will be denied.

For more information on the efficiencies defence, see our May 2019 article, Canada’s Efficiency Defence: Why Ignoring Section 96 Does More Harm Than Good For Economic Efficiency And Innovation.

If you have any questions regarding these developments, please do not hesitate to contact your usual Blakes contact or any member of the Competition, Antitrust & Foreign Investment group.