The Cost of Regulatory Opacity

The Canadian government’s recent blocking of the sale of Progress Energy Resources to Malaysian state-owned Petronas has raised calls to act on the vagueness of the “net benefit” test applied to mergers in Canada over $331 million. The lack of clear criteria for this net benefit test has serious economic implications for investment in Canada.

When Canada blocks a merger it creates costs and uncertainty for Canadian businesses.

The potentially unfounded, or at least unclear, blocking of a major merger limits potential competition for the sale of Canadian companies, reducing the value of Canadian companies and increasing investor uncertainty.

Fewer takeovers could damage Canada’s labour productivity. Mergers and takeovers create new more efficient organizations by eliminating duplicate positions or centralizing administration that can make the Canadian economy more productive.

The unfounded (or at least unspecified) rejection of major mergers could create a more hostile environment for Canadian businesses trying to merge with companies overseas. Foreign governments likely aren’t going to allow Canadian companies to reap the benefits of mergers when their companies cannot.

The net effect is that every time that the government intervenes in business actions like mergers, it reduces business investment.  In a paper from the Cato Institute – a libertarian think-tank – George Bittlingmayer estimated that every antitrust case brought against business in the U.S. reduced investment a staggering $1.7 billion. At least in the case of antitrust cases in the U.S. though, the justification of why the merger or other action was blocked is clearly laid out. In the case of antitrust lawsuits though, the final outcome of the case and why the merger or acquisition is stopped is clearly laid out. When mergers are stopped in Canada under the Investment Act, the effect on depressing investment is amplified because no public justification is given.

Ensuring that Canadians are protected from monopolies and potential security risks is critical, and certainly may justify stopping some mergers. However, a lack of clarity on how the Canadian government actually weighs these costs to the benefits of major mergers creates an uncertain business environment that stifles investment throughout the country.