New Canadian Merger Enforcement Guidelines that explain the Competition Bureau’s approach to analysing mergers have just been released. The new MEGs reflect substantial convergence with the U.S. and recently amended European guidelines, including new references to the potential use of the Herfindahl-Hirschman Index (HHI) used in the U.S. in some aspects of merger analysis. Parties to multi-jurisdictional mergers should benefit from this move toward convergence to the extent that it signals a more consistent analytical approach across jurisdictions. The key changes in the new MEGs are highlighted below:
Less Safety in Safe Harbours.
The new MEGs retain the same safe harbours: (i) unilateral exercise of market power – 35%; and (ii) co-ordinated exercise of market power – four firm concentration ratio of 65% or merged entity share of less than 10%. However, the previous MEGs provided that high market share or concentration is a "necessary condition" to finding that a merger is likely to prevent or lessen competition substantially. This qualification has been removed from the new MEGs providing less comfort regarding the safety of mergers below the safe harbours.
The new MEGs also open the door to use of the ... HHI ... calculations noting that "the Bureau may examine changes in the HHI to observe the relative change in concentration before and after a merger", although it is made clear that HHI levels will not be used as a safe harbour threshold.
Narrower Approach to Market Definition.
The new MEGs now focus explicitly on demand-side substitution to define relevant markets. Supply-side responses are relevant only to determining the participants in, or potential entrants into, a market.
Greater Scrutiny of Possible Co-ordinated Effects.
The new MEGs include an expanded discussion of "co-ordinated effects", suggesting that mergers in highly concentrated markets may receive greater Bureau scrutiny. The new MEGs also indicate that a merger that removes or constrains (e.g., by raising rivals’ costs) a "maverick" that constrained effective co-ordination may raise issues. However, there are two necessary conditions for a merger to give rise to a substantial lessening or prevention of competition through co-ordinated effects: (i) market concentration; and (ii) barriers to entry.
Less Certainty Regarding the Anti-competitive Threshold.
In assessing whether a merger is likely to result in a substantial lessening or prevention of competition, the MEGs look at whether the merger will allow the merged entity to materially influence price. The 1991 MEGs were widely interpreted to suggest that the Bureau applied a numerical threshold of a 5% price increase as material. The new MEGs clearly state that the Bureau does not apply such a numerical threshold, and looks only to market-specific factors that might have a constraining influence on price following the merger.
Express Recognition of Countervailing Buyer Power.
The relevance of the countervailing power of buyers to constrain the exercise of market power is now expressly recognised in the new MEGs. However, countervailing buyer power may not be sufficient to prevent the exercise of market power in a market characterised by price discrimination.
Greater Scrutiny of Mergers that May Prevent Competition.
The new MEGs include a more substantive discussion of the circumstances in which a merger may result in a prevention of competition, citing several examples including the acquisition of an increasingly vigorous competitor or potential entrant, a pre-emptive acquisition, and an acquisition that prevents the pro-competitive effects of new capacity.
The new MEGs reflect the law as laid down in the Superior Propane case. That case (which Blakes successfully argued) permits mergers, even if they are anti-competitive, where the net economic welfare of Canada is improved because the merger generates cost savings. Consistent with Superior Propane, the new MEGs do not require the merging parties to establish that the claimed efficiencies will be passed on to consumers, but allow a broad-based inquiry that endeavours to weigh all claimed efficiency gains against all alleged anti-competitive effects. A key question is whether the Bureau will apply the defence in tough merger cases or whether it will refer such matters to the Tribunal for adjudication. The new MEGs are broad enough to permit the Bureau to apply the defence - actual enforcement practice remains to be seen.
The new MEGs express recognition of the relevance of dynamic efficiencies represents a significant step forward relative to the micro-economic approach employed in the prior MEGs (and most other traditional antitrust and competition law analysis).
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