On February 25, 2013, the Federal Court of Appeal (FCA) released its decision upholding the Competition Tribunal's Order requiring that Tervita Corporation (formerly known as CCS Corporation) divest the Babkirk hazardous waste landfill site in northeastern British Columbia following its acquisition of Complete Environmental Inc. The decision provides guidelines for determining a reasonable period of time for likely market entry in a "prevent" case, as well as clearer guidance on what is "in" and what is "out" for a section 96 efficiencies defense. It also marks a rare challenge to a closed, and non-notifiable transaction.
Background
In February 2010, Complete received regulatory approval to open the Babkirk landfill. Construction had not yet commenced when Tervita acquired the site from Complete. At the time of the transaction, Tervita operated the only two operational secure landfills for hazardous waste in British Columbia. The Commissioner of Competition therefore alleged that the transaction substantially prevented competition in hazardous waste landfill in northeastern B.C.
The $6 million acquisition closed in January 2011. Both the assets and the revenues of the target were well below the pre-merger notification thresholds in the Competition Act; however, in Canada the Commissioner has jurisdiction to challenge even non-notifiable transactions within one year of closing. On January 4, 2011, the Commissioner applied to the Tribunal for an order either to dissolve (i.e., unwind) the transaction between Tervita and Complete's shareholders, or for Tervita to divest itself of Complete or Complete's wholly–owned subsidiary, Babkirk Land Services on the grounds that it had substantially prevented competition.
Tervita argued that Complete had originally intended to run the site as a bioremediation business for neighbouring oil and gas companies, and not as a hazardous waste landfill, such that the required likely competition with Tervita was not made out. It also argued that expected efficiencies would be greater than and would offset any likely anti-competitive effects.
On May 29, 2012, the Tribunal ruled in favour of the Commissioner, finding that Tervita's acquisition of Complete had likely substantially prevented competition in the market for the supply of landfill services for solid hazardous oil and gas waste in northeastern British Columbia.
To make this determination, the Tribunal questioned the viability of Complete's bioremediation business, finding it likely that, within one year, the business would have failed and Complete would have either sold the site to a Tervita competitor or continued to operate it as a hazardous waste landfill site - in competition with Tervita. Either outcome would have resulted in direct competition with Tervita. As such, the Tribunal held that the merger had prevented the likely entry of a competitor. The Tribunal ordered that Tervita divest the shares or assets of Complete or of its subsidiary that held the landfill permits, Babkirk.
As noted in our previous blog post, CCS, Complete, and Babkirk filed a notice of appeal at the FCA on June 26, 2012.
They argued that the Tribunal had erred by looking beyond the date of the merger in its assessment of likely entry, and that it had speculated as to future events. They also argued that the Tribunal had erred in its analysis of the section 96 efficiencies defense.
Decision
Reasonable time period for market entry
The FCA affirmed that the likelihood of entry should be determined within a reasonable period of time following the merger. Entry need not necessarily have been poised to occur as of the date of the merger. The FCA held that the reasonable time period for assessing the likelihood of entry will vary from case to case and will depend on the nature of the business under consideration, but provided the following guidelines:
- there must be a clear and discernible timeframe for market entry; and
- market entry should normally occur within the temporal dimension of barriers to entry for that business.
The FCA also affirmed that the burden of proving that the target was a poised entrant, such that its acquisition substantially prevented competition, rested solely with the Commissioner.
"Efficiencies" defense clarified
Section 96 of the Act provides that where a merger otherwise results in a prevention or lessening of competition, the Tribunal may not make an order if the respondents can establish that the gains in efficiency resulting from the merger are greater than and offset its anti-competitive effects.
The FCA agreed with the Tribunal that section 96 of the Act requires a balancing of both quantitative and qualitative gains in efficiency against both quantitative and qualitative effects of any prevention or lessening of competition resulting or likely to result from a merger. However, it clarified that when quantifying efficiency gains and anti-competitive effects of a merger, the analysis must be as "objective as is reasonably possible, and where an objective determination cannot be made, it must be reasonable." An objective analysis entails that a quantification of both gains in efficiency and anti-competitive effects must be carried out whenever it is reasonably possible to do so.
The FCA's approach to quantification is in contrast to the Tribunal's "subjective balancing" methodology, rejected by the FCA, which allowed for quantitative effects that had not been quantified to be given qualitative weight in certain circumstances.
Having disagreed with the Tribunal's efficiency analysis, the FCA then conducted its own analysis using the evidence presented at trial. Although the FCA was unable to objectively weigh the quantifiable efficiency gains against anti-competitive effects because the Commissioner had not quantified such anti-competitive effects, it found that the gains in efficiencies resulting from the merger were "marginal to the point of being negligible" and could not reasonably have been considered to outweigh its anti-competitive effects. The FCA therefore dismissed the appeal and upheld the Tribunal's Order.
Conclusion
The Tervita case is significant, as it demonstrates that the Commissioner is willing to challenge small, non-notifiable transactions when necessary. Furthermore, the FCA's decision provides guidance regarding the analysis of "prevent" cases under Canadian law, and underscores the importance of properly assessing both the anti-competitive effects and the efficiency gains in contested merger cases.
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.
