Anonymised, illustrative composite. A national parts distributor bought a regional rival built on strict, penalty-backed dealer territories — the exact feature its model priced as durable margin, and the exact feature Part VIII of the Competition Act treats as a reviewable practice in its own right.
At a glance
A national distributor of HVAC and mechanical parts agreed to buy a smaller regional competitor with a forty-two-dealer network built up over eighteen years. The financial case was straightforward: the target's dealers did not compete with each other on price, margins had been flat and defensible for six years, and there was no visible channel conflict anywhere in the country. The buyer's model treated that stability as an annuity and paid a full multiple for it.
Legal diligence had already looked at, and cleared, a separate clause requiring each dealer to carry the target's product line to the exclusion of a named competitor's — ordinary exclusive dealing, and not the issue here.
What diligence had not separately flagged was the territory clause itself. Thirty-nine of the forty-two agreements assigned each dealer a defined province or metropolitan region and stripped the dealer's volume rebate — between 4% and 7% of invoice price, depending on tier — on any unit sold to a customer located outside it. Two dealers had been formally warned under the clause in the preceding three years; neither had been terminated.
That is not the same defect as exclusive dealing, and the two must not be run together. Exclusive dealing constrains what a dealer may buy. This constrains where a dealer may sell. The Competition Act defines them separately, gives the Tribunal a separate remedy for each, and a network can carry one without the other — this one carried only the second.
Purchase price $46,800,000 against $41,000,000 of trailing revenue and $7,200,000 of EBITDA, a 6.5× multiple built on the assumption that dealer economics were stable and would stay stable. Restructuring the 39 agreements before closing cost roughly $180,000 in outside counsel across two provinces' worth of dealer relationships and added six weeks to the closing timetable. The buyer's own counsel proposed, and rejected, a $3,100,000 holdback as an alternative — rejected because a holdback insures a dollar loss, and the risk here was never a dollar loss.
Competition Act s.77(1) defines market restriction as “any practice whereby a supplier of a product, as a condition of supplying the product to a customer, requires that customer to supply any product only in a defined market, or exacts a penalty of any kind from the customer if he supplies any product outside a defined market”. The withheld rebate is the penalty; the assigned province is the defined market. The definition does not require a written prohibition on cross-territory selling — a financial penalty for doing it is enough.
Read the remedy provision, not just the definition. Section 77(3) provides that “where, on application by the Commissioner or a person granted leave under section 103.1, the Tribunal finds that market restriction, because it is engaged in by a major supplier of a product or because it is widespread in relation to a product, is likely to substantially lessen competition in relation to the product, the Tribunal may make an order” directed at the suppliers concerned, prohibiting them from continuing the practice. Thirty-nine of forty-two is widespread in relation to the product on any ordinary reading of that word, independent of whether the target counted as a major supplier on its own.
The carve-out the buyer's first-pass memo reached for did not fit. Section 77(4)(a) says the Tribunal shall not make an order where, in its opinion, “exclusive dealing or market restriction is or will be engaged in only for a reasonable period of time to facilitate entry of a new supplier of a product into a market or of a new product into a market”. That is a time-limited launch exemption. A structure running unchanged for the better part of two decades, applied to the dealer's ordinary catalogue rather than a new product being introduced, is not what the exemption describes.
And the applicant no longer has to be the Commissioner. Section 103.1(1) provides that “any person may apply to the Tribunal for leave to make an application under section 74.1, 75, 76, 77, 79 or 90.1”. A dealer who had been penalized under the clause, or a rival supplier trying to recruit one of the target's dealers, could seek leave directly. The exposure did not depend on the Bureau opening a file.
The buyer's counsel treated this as a pre-closing fix rather than a warranty item, for the reason set out above: an indemnity pays a loss, and an order under s.77(3) is not a loss, it is an instruction to stop. Thirty-one of the thirty-nine agreements were amended before closing to a non-binding “primary responsibility territory” — a named region the dealer is expected to focus on, with no penalty for a sale outside it — which several major Canadian distribution networks already use for exactly this reason. The remaining eight were left to run out on their existing one- and two-year terms and were replaced with the new form on renewal.
Closing on the old agreements and hoping the practice never drew an application does not price the risk correctly, because the loss on the other side of an order is not a settlement figure. If a dealer or a rival had obtained leave under s.103.1 and the Tribunal made an order under s.77(3), the order runs forward: the territories stop being enforceable, dealers begin competing on price against each other inside what used to be exclusive ground, and the margin stability the buyer paid 6.5× for degrades on a timeline nobody controls. No indemnity clause reaches that, because nothing was ever paid out to indemnify against — the business simply stops being the business that was valued.
The seller described the network's stability as “excellent, long-standing dealer relationships” on every call. Nobody asked what happened to a dealer who tried to sell across a territory line until diligence asked it directly — and the answer was the rebate clawback, not the relationship.
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