The diligence list two competitors could not exchange

The situation

A strategic buyer agreed heads of terms to acquire a British Columbia commercial refrigeration installation and service business for $14,000,000. The two competed directly for service contracts in two metropolitan markets and nowhere else.

The buyer’s corporate development team issued its standard sixty-one-item request list. It had been written for financial and non-overlapping strategic deals and had never caused a problem, because in those deals nobody on the other side of it was a competitor.

The problem

Four items asked for information neither party should hand the other while both still compete: named-customer price lists, gross margin by account, bid and no-bid decisions on live tenders, and the forward quote pipeline. Eight more asked for cost data granular enough to reverse-engineer those four.

This is not the vendor’s confidentiality problem. Information escaping to a third party is a different file. Here the risk is that two signatories who compete each learn what the other charges and is about to bid — a risk belonging to both, surviving a failed deal, and cured by no undertaking between them, because they are the parties it would have to be given against.

The deal team had the exposure in the wrong place. The assumption was that exchanging the data was itself the criminal offence. It is not, and that error produces the wrong remedy: a longer confidentiality agreement rather than a process control.

The numbers

Sixty-one request items. Twelve reclassified as clean-team only — external counsel and one named consultant see the raw data, the deal team receives aggregated, historical, anonymised output. Four withdrawn until closing: named-customer price lists, the forward quote pipeline, live tender bid and no-bid decisions, customer-level gross margin.

Two overlapping markets out of the eleven the buyer operates in, with combined share material enough that the parties also ran the notification analysis — a separate question with its own thresholds: see pre-merger notification and when a business sale becomes a notifiable transaction.

Direct cost of the protocol: $38,000. Timetable cost: nine days. Both spent before a single competitively sensitive document moved.

The rule that decided it

Competition Act s.45(1) provides that “Every person commits an offence who, with a competitor of that person with respect to a product, conspires, agrees or arranges” to fix, maintain, increase or control price, “to allocate sales, territories, customers or markets for the production or supply of the product”, or to fix, maintain, control, prevent, lessen or eliminate production or supply. The offence is the agreement. Exchanging information is not one of the three listed subject matters.

The Competition Bureau says the same thing in its own guidance. Its Competitor Collaboration Guidelines describe the criminal provision as “reserved for agreements between competitors to fix prices, allocate markets or restrict output”, and state that an acquisition of control “will generally be assessed under the merger provisions in section 92 and following of the Act, and not the civil agreements provision in section 90.1 or the conspiracy provision in section 45 of the Act”. On its worked information-sharing example the Guidelines conclude: “Accordingly, the Bureau would examine the agreement under section 90.1 of the Act, and not under subsection 45(1).”

So why does an unrestricted exchange still matter? Three reasons, in three places.

First, s.45(3): a court “may infer the existence of a conspiracy, agreement or arrangement from circumstantial evidence, with or without direct evidence of communication between or among the alleged parties to it”. Two competitors holding each other’s forward pricing, whose quotes then converge, have built that record themselves.

Second, the real offence is coordination before closing — not bidding against each other while the deal is pending, or aligning quotes. That is an agreement within s.45(1)(a) or (b), and s.45(2) makes it indictable, carrying “imprisonment for a term not exceeding 14 years or to a fine in the discretion of the court, or to both”.

Third, if the deal fails the information sits in a competitor’s hands and the arrangement is reviewable civilly under s.90.1, which reaches an agreement between competitors that “prevents or lessens, has prevented or lessened or is likely to prevent or lessen competition substantially in a market”.

Restrictions inside the purchase agreement — a standstill, a customer no-solicit — sit under the s.45(4) ancillary restraints defence, which the party must establish: ancillary to a broader agreement and “directly related to, and reasonably necessary for giving effect to, the objective of that broader or separate agreement or arrangement”. Not a free pass.

The outcome

A written clean-team protocol, agreed before the data room opened. External counsel and one named consultant saw the raw material; the deal team saw it aggregated across customers, historical rather than forward-looking, named accounts coded. Nobody with pricing or bidding authority sat on the deal team, and the forward pipeline and live tender decisions were withheld until closing.

The protocol was drafted to survive a failed deal: working papers destroyed or returned, clean-team members barred from operational roles in the overlapping markets for a defined period, obligations surviving the letter of intent. The deal closed nine days late. Related: managing confidentiality during a live process and the conspiracy provision that catches buyers and sellers.

What it would have cost otherwise

Not, in all likelihood, a prosecution — but the parties would have manufactured the evidence for one and kept nothing to answer it with.

An investigation into a concentrated regional market that begins with two competitors holding each other’s customer-level pricing is not explained away by pointing at an NDA. A clean-team protocol dated before the exchange is the answer to the s.45(3) inference, and it only works if it existed first.

There is also the ordinary commercial cost: had the deal broken after the buyer received named-account pricing, the target would have handed a competitor a permanent advantage in the two markets where they actually compete, for nothing.

The tell

A diligence request list written for a financial buyer, used by a strategic one. The list does not know who is holding it, and nothing in it flags that item 34 is fine in nine markets and dangerous in two.

One question before the list goes out settles it: do we compete with this target anywhere? If yes, the list needs a competition review before it is sent. If no, s.45 has no application and ordinary confidentiality machinery is enough — which is why the identical list is unremarkable in one deal and a problem in the next. Note also that agreeing not to solicit or hire each other’s employees is a separate offence under s.45(1.1): see what a buyer and a seller may agree about pay and hiring.

Takeaways

• • Section 45(1) is an offence of agreeing to fix prices, allocate markets or restrict output. Exchanging information is not one of the three.
• • The Bureau’s Competitor Collaboration Guidelines put information sharing under s.90.1 and acquisitions under the merger provisions, not s.45(1).
• • It matters because of s.45(3): a court may infer the agreement from circumstantial evidence, and an unrestricted exchange is that evidence.
• • The real s.45(1) offence is coordinating before closing. Section 45(2) carries imprisonment for up to 14 years or a fine in the court’s discretion, or both.
• • Restraints inside the purchase agreement rely on the s.45(4) ancillary restraints defence, which the party must establish. Keep them narrow and tied to the transaction.
• • The remedy is a process control — clean team, aggregation, external review, forward-looking data withheld — dated before the exchange, not a longer NDA.

Sources

• • Competition Act, R.S.C. 1985, c. C-34, s.45 — s.45(1) the three prohibited subject matters; s.45(1.1) the separate employment offence; s.45(2) penalty; s.45(3) inference from circumstantial evidence; s.45(4) ancillary restraints defence; s.45(8) definition of competitor.
• • Competition Act, s.90.1 — the civil agreements provision, which reaches agreements between competitors that substantially lessen or prevent competition.
• • Competition Bureau — Competitor Collaboration Guidelines — the Bureau’s enforcement position on distinguishing s.45 from s.90.1 and the merger provisions, and its worked information-sharing example. This is the Bureau’s administrative position, not the statute.
• • Treadstone Law — using a data room when selling a business — staged disclosure and data-room control. It addresses confidentiality between vendor and buyer; it does not address the parties’ own exposure under the Competition Act, which is the mechanic here.
• • Treadstone Law — confidentiality during a business sale — the contractual layer that sits alongside, and does not substitute for, the clean-team protocol.
• • No merger-review or notification analysis is offered here; thresholds are a separate question. Deal size, request counts and costs are an anonymised composite.