In an order dated November 3, 2011, the Competition Tribunal confirmed the availability of dissolution as a potential remedy to address the anti-competitive effects of a completed merger. While it remains to be seen whether there are circumstances in which dissolution of a completed transaction will actually be ordered, confirmation that dissolution is a potential remedy should cause vendors to think carefully about how antitrust risk is allocated, particularly for transactions that are not subject to mandatory pre-closing review under the Competition Act.
Background – The Commissioner's Challenge to the Completed Merger
In January 2011, the Commissioner of Competition filed an application to challenge CCS Corporation's (CCS) completed acquisition of Complete Environmental Inc.1 (Complete). CCS owns two hazardous waste landfills in northeast British Columbia. As a result of the acquisition, CCS acquired Complete's interest in Babkirk Land Services Inc., which owns a proposed secure landfill site in northeast British Columbia. While this $6.1 million transaction was not subject to mandatory notification under the Competition Act, the parties had advised the Bureau on a voluntary basis prior to closing.2
The Commissioner's application alleges that Complete was poised to enter the market served by CCS. Accordingly, the case is focussed on the prevention of competition (rather than the lessening of competition). The Commissioner claims that but for the merger, oil and gas companies in northeast British Columbia who must dispose of certain hazardous waste materials at a secure landfill would have enjoyed the competitive benefits that would have resulted from Complete's entry.
Significantly, the Commissioner is seeking dissolution of the transaction and, only in the alternative, a divestiture. (Note that while CCS did not enter into a hold separate arrangement with the Commissioner, it undertook to preserve the landfill until the Commissioner's application is determined.)
Although explicitly provided for in the merger remedy section of the Competition Act, dissolution is rarely sought. Vendors generally bear little antitrust risk once closing has occurred. In this case, dissolution would result in CCS returning its recently acquired interests in Complete (and indirectly Babkirk) to the vendors and, as noted in the vendors' Tribunal filings, may require the vendors to refund the purchase price to CCS. In this regard, the vendors claimed that dissolution would be punitive. Mr. Watson, one of the vendors, filed an affidavit which stated, in part, that financial hardship would result from dissolution. Mr. Watson further attested that the Commissioner permitted the parties to close the transaction without requiring the vendors to preserve or hold the proceeds of the transaction separate, nor was such a condition requested when the Commissioner filed her application.
The Vendors' Motion for Summary Judgment – There is No Genuine Basis for the Tribunal to Order Dissolution
In late October, the vendors brought a motion to dismiss the Commissioner's application as against them by challenging the Commissioner's right to seek dissolution of the transaction. The vendors (as well as CCS) claimed that should the Commissioner prove her case, the most appropriate and least intrusive remedy would be a divestiture. As the vendors no longer hold an interest in Complete (or Babkirk) and therefore would not be involved in the process should a divestiture be ordered, they claimed they ought to be released from the proceedings.
The vendors argued that dissolution is an over-reaching remedy because it would involve the return of operations that are not part of the allegedly problematic activity. Accordingly, dissolution would go beyond what is necessary to restore competition to a point where there is no substantial prevention of competition. The vendors also argued that if the merger is dissolved they would seek to dispose of the business again, and therefore the more efficient remedy would be to order the divestiture of the Babkirk site. Moreover, since the acquisition, CCS has disposed of certain Complete assets and to order dissolution may result in difficult accounting and reconciliation calculations.
The Commissioner's Response – The Issue of Dissolution Cannot Be Decided Without Hearing Evidence
In response, the Commissioner argued that there are genuine factual issues for trial on the issue of dissolution, specifically:
- the state of the vendors' financing plans and their ability to make the site operational;
- the availability of potential purchasers for the site and the likelihood that such purchasers would place a bid; and
- the reliability of Mr. Watson's claim of financial hardship.
The Commissioner stated that to exclude a potential remedy before hearing and weighing the evidence would be an improper use of the Tribunal's summary disposition power. The Commissioner further claimed that the motion is a waste of resources and significantly prejudicial to the Commissioner given that it was only filed approximately two weeks prior to the scheduled hearing of the substantive application.
The Tribunal's Decision – Dissolution Raises Genuine Issues for Tribunal Hearing
Justice Simpson found that the vendors failed to demonstrate that there is no genuine basis for the Commissioner to seek dissolution. Thus, whether there is no genuine basis for a dissolution remedy will be the test on any such motion in the future.
While a proposed remedy of dissolution raises complex issues, Justice Simpson determined that a summary judgment motion is not the appropriate forum to evaluate these issues. Justice Simpson agreed with the Commissioner that divestiture is only a realistic remedy where the assets to be divested can be sold to a purchaser in a timely manner, and found that, to date, the respondents have not brought forward evidence that such a sale could occur.
Justice Simpson further held that the Commissioner is not required to explicitly allege that dissolution is the only effective remedy. Rather, the Commissioner is entitled to propose alternative remedies and, if the Tribunal finds a transaction is likely to result in a substantial lessening or prevention of competition, it is the Tribunal's decision as to which remedy would be most appropriate.
The Commissioner was also awarded her costs.
Implications for Parties to Transactions
The Tribunal's order, while not surprising, nonetheless confirms that dissolution is an available remedy for completed transactions. Vendors should keep this in mind when negotiating the regulatory risk in their commercial agreements, even where the transaction does not require notification under the Competition Act.
1. Commissioner of Competition v. CCS Corporation, Complete Environmental Inc., Babkirk Land Services Inc., Karen Louise Baker, Ronald John Baker, Kenneth Scott Watson, Randy John Wolsey, and Thomas Craig Wolsey, see Case Details here (CT-2011-02).
2. Completed, non-notifiable mergers are rarely challenged in Canada. The CCS/Complete case is a reminder of the possibility that this can occur.
Michelle Lally's practice has a particular emphasis on mergers & acquisitions and competitor collaborations. Kaeleigh Kuzma's practice involves analyzing the competitive implications of mergers, strategic alliances and joint ventures.
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