Small Interest, Big Impact: Competition Bureau Report on Proposed Bunge/Viterra Transaction Highlights Impact of Minority Interests in Canadian Merger Review
Introduction
On April 23, 2024, the Canadian Competition Bureau (Bureau) issued its report (Report) on the proposed acquisition of Viterra Limited (Viterra) by Bunge Limited (Bunge), concluding that the transaction (Proposed Transaction) is likely to result in substantial anticompetitive effects in certain agricultural markets in Canada.
Bunge and Viterra are both multinational agribusiness companies. In Canada, Bunge’s business includes grain origination (an industry term for the purchase of grain from farmers, whether by primary grain elevators or processing elevators) and grain processing, including at its oilseed crushing facilities. Viterra is the licensee for 65 primary grain elevators in Western Canada, owns two operating oilseed crushing facilities (and had announced plans in 2021 to build a new oilseed crushing facility in Saskatchewan), and owns terminal elevators used for the export of grain at ports in British Columbia, Ontario, and Quebec (see Report, s. 4).
Background to the Report
Unlike the standard merger review process under the Competition Act (Act), the Bureau’s review of the Proposed Transaction was undertaken in the context of the Canada Transportation Act (CTA) framework for reviewing merger transactions involving “transportation undertakings” (see section 53.1 of the CTA). The Proposed Transaction qualified as such because of Viterra’s ownership and operation of port terminal grain elevators. In such CTA reviews (which are few and far between), the Bureau is required to submit a report to Canada’s federal Minister of Transport (Minister) on any competition concerns that may result from the transaction under review. Independently, officials of the federal Department of Transport (Transport Canada) must submit a separate report to the Minister regarding the transaction’s impact on “the public interest as it relates to national transportation”. Ultimately, the federal Cabinet (on advice from the Minister) will determine if, and under what conditions, the transaction will be permitted to proceed (see section 53.1 of the CTA). In the three CTA reviews prior to this one, the Minister ultimately concluded that the transaction should proceed (with conditions), notwithstanding the Bureau’s objections on competition grounds. Accordingly, it is by no means certain that the Minister will agree with the Bureau’s conclusions with respect to the Proposed Transaction.
From a merger analysis perspective, the Report is notable as one of the very few instances in which the Bureau has publicly addressed the implications of a purchaser’s pre-existing minority interest in another participant in the relevant market. It thus provides rare transparency into the Bureau’s treatment of this issue, especially in a case-specific context. We discuss this aspect of the Bureau’s analysis, and the lessons for parties investing in Canada, below.
The Issue
Bunge and G3
Pre-dating the announcement of the Proposed Transaction, Bunge held (and continues to hold) a 25% interest in the parent company of G3 Global Holdings Limited Partnership (G3), a joint venture between Bunge and Saudi Agricultural Livestock Investment Company (SALIC), a global agribusiness investment company wholly-owned by the Saudi-Arabian government. Founded in 2015, G3 is active at multiple levels of the Canadian grain supply chain, operating 20 grain elevators (19 in Western Canada and one in Quebec) and terminal elevators at ports in British Columbia, Ontario and Quebec. Bunge and G3 also have a number of commercial arrangements, including commercial agreements relating to the purchase and marketing of grain (see Report, ss. 4, 8).
The Bureau’s analysis identified G3 as a participant in many of the same markets as Viterra. Accordingly, in assessing the extent of competitive overlap between Bunge and Viterra, the Bureau had to consider whether it should treat G3 as an independent competitor or essentially regard Bunge and G3 as if they “act as one in the marketplace”. Based on the terminology of the Act, this required the Bureau to determine if Bunge’s 25% stake gives it “significant interest” in the G3 joint venture, even if it does not hold a controlling interest (see Report, s. 8).
Defining “Significant Interest”
In the merger review context, the Bureau may consider the relevance of a minority shareholding in one of two ways: (a) in determining whether an acquisition of a minority interest qualifies as a “merger” for the purposes of the Bureau taking substantive jurisdiction over the matter or (b) where a purchaser already holds a minority interest in a market participant other than the target, as an ancillary factor relevant to the likely substantive impact of the transaction.
In the first scenario, the Bureau will be guided by the definition of “merger” in the Act, which broadly defines a “merger” as “the acquisition or establishment, direct or indirect, by one or more persons, whether by purchase or lease of shares or assets, by amalgamation or by combination or otherwise, of control over or significant interest in the whole or a part of a business of a competitor, supplier, customer or other person (emphasis added)” (see Act, s. 91).
As to the second scenario, although there is no express statutory basis for this, the Bureau has stated that it will also consider whether the purchaser’s minority shareholding gives it a “significant interest” in the other market participant in assessing the likely substantive impact of this pre-existing interest on the merger transaction in question (see 2008 Submission to OECD, p. 99).
Regardless of how the minority shareholding issue may arise, the Act does not provide a definition for “significant interest”. The issue is discussed to some extent in the Bureau’s Merger Enforcement Guidelines (Guidelines, paras. I.4-I.19), but the Bureau’s analysis in the Report represents its most extensive and recent description of its approach to analyzing this question. In this instance, of course, the Bureau’s concerns were driven by scenario (b), i.e. the substantive impact of Bunge’s pre-existing 25% interest in G3.
According to the Report, the Bureau will conclude that one party has a significant interest in another “when the entity which holds the [minority] interest has the ability to materially influence the economic behaviour of the entity in which the interest is held, including but not limited to decisions relating to pricing, purchasing, distribution, marketing, investment, and financing (emphasis added)” (Report, s. 8.1). In assessing whether a particular minority stake rises to the level of a significant interest, the Bureau will examine the full context of the relationship and consider both de jure and de facto influence. Relevant factors in this regard may include:
(a) voting rights attached to the minority interest holder’s shareholdings or interest in a combination;
(b) the status of the holder of partnership interests (e.g., general or limited partner) and the nature of the rights and powers attached to the partnership interest;
(c) the holders and distribution of the remaining shares or interests (whether the business is widely or closely held, and whether the minority interest holder is the largest shareholder);
(d) board composition and board meeting quorum, attendance and historical voting patterns (whether the minority interest holder will be able to carry or block votes in a typical meeting);
(e) the existence of any special voting or veto rights attached to the minority interest holder’s shares or interests (e.g., the extent of shareholder approval rights for non-ordinary-course transactions);
(f) the terms of any shareholder or voting agreements;
(g) the dividend or profit share of the minority interest as compared to the minority interest holder’s equity ownership share;
(h) the extent, if any, of the minority interest holder’s influence over the selection of management or of members of key board committees;
(i) the status and expertise of the minority interest holder relative to that of other shareholders;
(j) the services (management, advisory or other) the minority interest holder is providing to the business, if any;
(k) the put, call or other liquidity rights, if any, that the minority interest holder has and may use to influence other shareholders or management;
(l) the access the minority interest holder has, if any, to confidential information about the business; and
(m) the practical extent to which the minority interest holder can otherwise impose pressure on the business’s decision-making processes (see Report, s. 8.1).
The Report also contains two other important observations.
First, as a general proposition, the Bureau will not consider an interest of less than 10% of the voting shares of a company to be a significant interest, absent elements of the relationship that indicate otherwise, such as shareholder agreements, non-ordinary-course loan arrangements or other contractual arrangements that confer material influence (see Report, s. 8.1).
Second, even in the absence of a material influence, the Bureau might still determine that a minority interest will have a negative effect on competition. According to the Bureau:
A firm that holds a minority position in a business and acquires a competitor to that business might have a reduced incentive to compete with the business in which it holds an interest. If the firm raises its price and consequently loses sales, it will benefit, through its minority interest, from sales that flow to the business in which it holds a minority interest. In effect, the firm will recapture some of the sales diverted to the business in which it holds a minority interest and may thus have a greater incentive to raise its own price than it would absent the minority interest. In its assessment of a minority interest, the Bureau also considers the extent of diversion between the firms’ products and the profits earned on these diverted sales. The Bureau also examines the likelihood, significance and impact of any such change to the incentives of the minority interest holder (see Report, s. 8.3).
Three’s a Crowd – G3 Interest Impacts Bureau’s Analysis of Bunge/Viterra Merger
In conducting its analysis, the Bureau reviewed information provided by Bunge and G3, including formal agreements governing Bunge’s interest in and relationships with G3, such as shareholder agreements and commercial agreements; records reflecting the operations of G3’s board, such as board meeting minutes and board meeting materials; and ordinary-course records reflecting the flow of information between Bunge and G3, as well as internal decision-making and discussion at both Bunge and G3 about G3’s operations and strategy. The Bureau also hired a corporate governance expert to assist with this analysis (see Report, s. 3.1).
Based on its review, the Bureau concluded that Bunge’s 25% stake in G3 indeed constituted a significant interest in the joint venture such that Bunge could exercise material influence over G3 notwithstanding that it does not have a controlling stake. The Report emphasized the following factors in this regard:
- Bunge’s rights as a shareholder in G3: The shareholder agreement governing the joint venture gives Bunge the right to appoint a minority of directors. However, it also gives Bunge veto rights over a number of significant decisions relevant to core elements of G3’s competitive position, including its competitive strategy and entry and expansion into new markets. According to the Bureau, the existence of these veto rights “weakens the ability” of the majority shareholder (SALIC) to “constrain Bunge’s influence” (see Report, s. 8.2.2).
- Commercial and other financial arrangements: Although the Report does not provide specifics, the Bureau concluded that even if the commercial and financial arrangements between G3 and Bunge were entered into on an arms-length basis, they “may also provide Bunge with a strong negotiating position in its dealings with G3”. The Bureau’s review also suggested that “interactions between Bunge and G3 in the context of these agreements may also include discussions of competitive dynamics, including pricing by… Viterra” (see Report, s. 8.2.2).
- Access to confidential information: According to the Report, Bunge’s status as a shareholder entitles its board of director nominees to receive competitively-sensitive information from G3, including detailed financial, strategic, and competitive information. In addition, other Bunge employees who are not G3 directors receive such information. In the Bureau’s view, access to a competitor’s competitively-sensitive operational and financial information (such as confidential information about pricing, costs, capacity, strategic plans, and marketing) may allow the companies to coordinate their conduct in a number of ways that could be detrimental to competition, “including by coordinating pricing or other strategic behaviour, pre-empting scarce resources, or gaining an advantage in contractual negotiations with the rival or third parties”(see Report, s. 8.2.3).
Based on the foregoing, the Bureau concluded that, although Bunge does not “control” G3, the 25% interest Bunge holds in G3 is a significant interest that provides Bunge with the ability to materially influence the economic behaviour of G3. In particular, Bunge has the ability and incentive to influence G3’s strategies with respect to investment, entry, and expansion, as well other factors that impact its general competitive strategy. As a result, the Bureau attributed G3’s business in full to Bunge for the purposes of its analysis of the competitive impact of the Proposed Transaction (see Report, s. 8.3).
This conclusion factored into the Bureau’s ultimate finding that the Proposed Transaction is likely to prevent or lessen competition substantially. Specifically, the Bureau concluded that Bunge’s interest in G3 would contribute to a substantial prevention or lessening of competition in the market for grain origination. The Bureau found, for example, that Viterra is G3’s largest competitor in the areas around each of G3’s 19 facilities in Western Canada. Moreover, G3 “often plays a disruptive role [in the grain origination market in Western Canada]…aggressively gaining market share from established grain companies like Viterra, and offering higher prices to farmers in order to purchase grain”. The Bureau also found that G3 was the fastest-growing competitor in Western Canada, with plans to expand its operations further and to introduce innovations that would improve its service (see Report, s. 9.3).
In those circumstances, the Bureau concluded that the Proposed Transaction would increase Bunge’s incentive to exploit its influence over G3’s economic behaviour to reduce G3’s competitiveness and stymie its growth over time. By contrast, absent the Proposed Transaction, “G3 was likely to continue to be an aggressive and innovative competitor in Canada”. The Bureau was also concerned about Bunge’s access to G3’s competitively-sensitive information and the effect this would have on potential coordinated anticompetitive conduct following the Proposed Transaction; as stated in the Report, “the potential for competitive harm resulting from [Bunge’s] access to [G3’s] confidential information will be greatly amplified given Viterra and G3 compete in a number of markets in the agricultural supply chain in Canada” (see Report, ss. 8.2.3, 9.5).
Implications
It is standard practice in merger reviews for the Bureau to ask purchasers to identify any direct or indirect interests above 10% held by the purchaser, its affiliates, or major shareholders in businesses that compete with the proposed target. Nonetheless, minority interests have (publicly) factored into the Bureau’s analysis of only a very few merger transactions. Past examples include:
- Quebecor Media Inc.’s acquisition of Sogides Ltée’s publishing and distribution business. In that case, the Bureau did not identify concerns with the principal transaction, but learned that Sogides Ltée’s president, Pierre Lespérance, held an interest in a downstream retailer that competed with a Quebecor Media Inc. subsidiary. The Bureau required Mr. Lespérance to resign from the retailer’s board (“Bureau Resolves Competition Concerns over Quebecor/Sogides Merger”).
- Restructuring of Loews Cineplex. In that case, the Bureau identified a prior “merger” between Galaxy Entertainment (a subsidiary of Loews Cineplex) and Famous Players through the acquisition by Famous Players of a minority interest in Galaxy along with other contractual arrangements. Galaxy Entertainment and Famous Players were competitors in the movie theater business. Again, while no concerns were raised about the Loews Cineplex restructuring itself, Famous Players was required to end its representation on Galaxy’s board of directors, divest its interest in Galaxy, and terminate all ancillary agreements (Competition Bureau 2003 Annual Report, p. 43).
Regardless of the final outcome of the Proposed Transaction, the Bureau’s competitive analysis in the Report offers valuable transparency into how the Bureau will analyze situations where a purchaser may have a pre-existing significant interest in a competitor in the relevant market. The Bureau’s decision also serves as a reminder that parties considering investments in Canada should review their existing minority interests in the market when undertaking an analysis of the risks, and likely outcome, of a merger review process.
