Canada: Competition Bureau Issues Draft of Revised Merger Enforcement Guidelines

The Competition Bureau (the "Bureau") recently released for public comment a revised version of its Merger Enforcement Guidelines ("MEGs"), the document that explains in significant detail how the Bureau analyses proposed mergers under the Competition Act (the "Act"). The deadline for submitting comments on the draft revised MEGs is June 1. The Bureau plans to publish the finalized version of the revised MEGs this summer.

Generally, the draft revised MEGs reflect developments in the law, primarily decisions of the Competition Tribunal (the "Tribunal"), that have occurred since the publication of the current MEGs in 1991. The draft revised MEGs contain numerous references to Tribunal decisions. Clearly, an overhaul has been long overdue.

In many areas, the draft revised MEGs follow the approach set out in the 1992 U.S. Merger Guidelines, which reflects the ongoing trend towards convergence and consistency in merger review, which is particularly important in cross-border transactions.

The draft revised MEGs are organized on a thematic basis that generally reflects the Bureau's approach to merger review. This is an improvement over the current MEGs, which tend to address issues in the order they are set out in the Act.

Among other things, the draft revised MEGs amend the current MEGs as follows:

The draft revised MEGs provide additional guidance as to what constitutes a merger. Under the Act, the definition of "merger" is broad enough to cover any manner in which control over, or a significant interest in, the whole or a part of a business of another person is acquired or established. The current MEGs provided that the acquisition of as little as 10% of the voting interests of an entity may constitute ownership of a significant interest. The draft revised MEGs make clear that qualitatively, a significant interest is one that enables the acquiror to materially influence the economic behaviour (i.e. decisions relating to pricing, purchasing, distribution, marketing or investment) of a business. Under the draft revised MEGs, the concept of control is expanded to include de facto control (control in fact with 50% or less of the votes) as a means of acquiring or establishing control over a business for merger review purposes.

The draft revised MEGs provide that market definition will be based on substitutability and focus on demand responses to price changes. The Bureau will examine the willingness and ability of buyers to switch to other products. Supply responses will be considered later in the analysis, in conjunction with the identification of market participants and potential expansion or entry into the market.

The draft revised MEGs state that the Bureau may examine changes in the Herfindahl-Hirschman Index ("HHI") to inform it on the relative change in market concentration before and after a merger. The HHI, which is calculated by summing the squares of the individual market shares of all market participants, is relied upon by many other jurisdictions, including the U.S., as the principal measure of market concentration and structure. The Bureau has historically relied on the concentration ratio of the market shares of the four largest firms in the market (the "CR4") as its principal measure, and it will continue to rely on the CR4 for the purpose of determining the safe harbour threshold relating to coordinated behaviour (i.e. the post-merger CR4 would not exceed 65% and the market share of the merged entity would not exceed 10%). However, the draft revised MEGs acknowledge that the HHI "may provide useful information about changes in the market structure."

The draft revised MEGs explain in significant detail how a proposed merger may lessen or prevent competition by making it easier for market participants to engage in coordinated behaviour. In this regard, the draft revised MEGs state that "in addition to market concentration and barriers to entry, the Bureau will examine whether other market conditions exist that may facilitate the ability of firms to individually recognize mutually beneficial terms of coordination, detect deviations from coordinated behaviour, and impose credible punishments." Essentially, the Bureau will identify the constraints on coordinated behaviour that exist premerger and assess whether the proposed merger would reduce or eliminate those constraints. This addition to the MEGs would be particularly helpful because, due to the relatively concentrated nature of the Canadian economy, many mergers exceed the safe harbour threshold relating to coordinated behaviour.

The draft revised MEGs contain a new section on countervailing buyer power. It explains that buyers may be able to constrain the exercise of market power (i.e. a profitable increase of price above competitive levels) by immediately switching to other suppliers, vertically integrating their operations into the upstream market, or sponsoring the entry of new suppliers into the market.

The section on efficiencies has been substantially revised in a manner that is consistent with the Federal Court of Appeal's decision in the Superior Propane case. Essentially, the anti-competitive effects of a proposed merger will be balanced against the efficiencies that would result from it. The draft revised MEGs stated that "the effects to be considered are not limited to resource allocation effects and include all the anti-competitive effects that are likely to arise from a merger, having regard to all of the objectives of the Act." The Bureau will assess "all relevant price effects and non-price effects, including: effects on allocative, productive, and dynamic efficiencies; redistributive effects; effects on service, quality and product choice; impacts on the opportunities for Canadian participation in world markets; and, impacts on the opportunities for small and medium sized enterprises to participate in the Canadian economy."

It should be noted that the new section on efficiencies could be outdated before the draft revised MEGs are finalized. Bill C-249, which in the opinion of many competition law experts would effectively remove the "efficiencies defence" from the Act, has been passed by the House of Commons and is presently under review by the Senate Committee on Trade, Banking and Commerce.

The draft revised MEGs are a long overdue harmonizing and updating effort by the Bureau. Gowlings would be pleased to work with clients who wish to comment on the proposed changes. The full text of the draft revised MEGs is available at

http://competition.ic.gc.ca/epic/internet/incb-bc.nsf/vwapj/ct02818e.pdf/$FILE/ct02818e.pdf

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.