The Competition Tribunal recently ruled that the acquisition of Complete Environmental Inc. (Complete) by CCS Corporation (CCS) would lead to a substantial prevention of competition in the market for the disposal of hazardous waste in northeastern British Columbia. In order to mitigate the negative competitive effects of the merger, the Tribunal has ordered CCS to divest the Babkirk hazardous waste landfill site. The details of the Tribunal's Reasons For Order and Order (the Order) were publicly released on June 15, 2012.
The Tribunal's decision reinforces three key premises:
- as in cases involving a merger between two existing competitors, the existence of barriers to entry is a critical factor in assessing whether a merger between an existing firm and its prospective competitor is likely to prevent competition substantially;
- the efficiencies defence is available only in cases where the efficiencies from the merger (the extent of which must be proven by the merging parties) are likely to be greater than and offset any anticompetitive effects of the merger, which must be quantified by the Commissioner in her case in chief; and
- while dissolution is an available remedy for completed mergers, it will not be accepted by the Tribunal if it is found to be intrusive, overbroad and unlikely to ensure timely entry.
On January 26, 2011, the Commissioner of Competition brought an application challenging the completed acquisition by CCS of Complete and its proposed Babkirk hazardous waste landfill site. The Commissioner's application alleged that Complete was poised to enter the market for the disposal of hazardous waste served by CCS. Please see our January 2011 Blakes Bulletin for more information on the facts of this case.
This matter marks the first merger challenge since 2005 and is significant in part because the transaction was not notifiable and had already been completed. Regardless of whether a merger triggers a pre-merger notification requirement under the Competition Act (Act), mergers may be challenged by the Commissioner for up to one year after their completion. This case highlights the Bureau's increased focus on identifying and reviewing non-notifiable transactions, even where there might not be a significant national impact.
Prevention of Competition
Because CCS operated the only two secure landfills for hazardous waste in northeastern British Columbia, the Tribunal concluded that CCS is a monopolist in a market where effective entry would be substantially delayed due to the length of time required for site selection, regulatory approvals and construction of a secure landfill, as well as the risk and uncertainty associated with new entry and sunk costs that are unrecoverable in the event of failure.
The Tribunal took an analytical approach to assessing whether the merger prevented competition substantially and, to this end, made reference to a number of CCS' internal documents. A selection of these documents outlined the potential consequences that would result from an independent Babkirk hazardous waste landfill site opening in competition with CCS, including a potential price war and the likelihood of a substantial price drop in the geographic market at issue. The Tribunal determined that these statements supported the proposition that the merger likely prevented competition substantially.
The Act provides an express efficiencies defence to anticompetitive mergers, which applies to cases where the efficiencies from the merger are likely to be greater than and offset any effects of the prevention or lessening of competition. The Commissioner bears the burden of proving the extent of the quantifiable and qualitative anticompetitive effects of the merger, while the respondents bear the burden on the ultimate issue, namely that the cognizable efficiencies would be likely to offset those effects.
The Tribunal acknowledged the Commissioner's assertion that the Act and jurisprudence do not dictate how she must meet her burden, but affirmed that in future cases, the Commissioner will be expected to provide, in her case in chief, estimates of market elasticity and the merged entity's own-price elasticity of demand. Where such data cannot be obtained, the Commissioner will be required, at a minimum, to provide supported rough estimates of those effects.
Although the Commissioner failed to meet her burden of quantifying the effects in this case, the Tribunal found that CCS was not prejudiced by that failure because it also failed to prove the "offset" element of the defence. The Tribunal noted that the terms "greater than" and "offset" each contemplate both quantifiable and qualitative efficiencies. It found that other qualitative factors –e.g., competition between CCS and an independent Babkirk would have led to important non-price benefits to waste generators in the form of "value propositions" that would have provided customers with a lower total cost for waste services, and lower tipping fees would have induced waste generators to more actively clean up legacy sites – resulted in anticompetitive effects that could not be offset by merger efficiencies proven by CCS.
The case is also notable because the Commissioner sought dissolution rather than divestiture as the primary remedy and, in this regard, named the shareholders of Complete as defendants. On November 3, 2011, the Tribunal dismissed a motion for summary disposition filed by the vendor shareholders, which confirmed that dissolution is an available remedy for completed transactions.
The Tribunal ultimately decided that dissolution was intrusive, overbroad in this case and would not lead to a timely opening of the Babkirk facility. This was due, in part, to its conclusions that dissolution would cause hardship to the vendor shareholders and would negatively impact Complete's other businesses, owing to changes in equipment and personnel following the sale of Babkirk. The Tribunal determined that the vendor shareholders did not intend to operate the Babkirk landfill site and that the Commissioner thus failed to prove her case against them and the reason for which she named them as parties to the proceeding. She was found liable for their costs in this regard.
The Tribunal concluded that divestiture was an available and effective remedy, and would ensure a timely sale of Babkirk. Moreover, divestiture assures certainty of the timing of the sale and an approved purchaser that will ultimately be more likely to effectively compete in the market.
Importance for Merger Planning
The Tribunal's decision underscores a number of considerations that parties contemplating a transaction should keep in mind, including the following:
- Regardless of whether a merger triggers a premerger notification requirement under Part IX of the Act, mergers may be challenged by the Bureau for up to one year after their completion. As such, substantive due diligence is critical in mergers between competitors and between suppliers and customers, even in circumstances where formal advance notice need not be given to the Bureau.
- While it remains to be seen in what circumstances the Tribunal will be willing to order dissolution, its confirmation that dissolution is an available remedy for completed mergers should cause parties to think creatively about the allocation of post-closing antitrust risk, particularly for mergers that are not notifiable under the Act.
- Parties to a merger should be aware of the importance of documents in the Bureau's review of mergers, as a review of the parties' internal documents can affect both the length and outcome of the Bureau's assessment of the transaction and the Tribunal's decision.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.