It has been quite some time since the Supreme Court of Canada considered the merger provisions contained in the Competition Act. On January 22, 2015, the SCC issued its decision in Tervita v. Canada (Commissioner of Competition), overturning the decision of the Federal Court of Appeal that had required Tervita to divest its interest in Babkirk Landfill Services Inc., a company it had acquired in 2011. The Court agreed with the Commissioner of Competition's position that the merger was likely to prevent competition substantially. However, the Court concluded that the efficiencies defence in s. 96 of the Act had been made out, in large part because the Commissioner had not met her burden of proving quantitative anti-competitive effects to offset the efficiency gains established by the merging parties.
The case involves the operation of secure landfills in northeastern British Columbia for the disposal of hazardous waste generated by oil and gas operations in that region. Landfills are regulated and operators require permits. The provincial government had issued four permits for the region: two were held by Tervita (including through predecessor companies) for two operating facilities; one was held by a First Nations community, but not in connection with an operating facility; and one was held by Babkirk. Babkirk had operated its site as a hazardous waste landfill but application had been made to operate a bioremediation facility at the same site. The owners of Babkirk put the facility up for sale. Tervita made an offer after an initial accepted offer had fallen through due to lack of financing. Based on the size of the transaction, the merger was not notifiable under the Competition Act. Although the merger was not notifiable, the Commissioner of Competition, upon receipt of a complaint from an unsuccessful bidder for the Babkirk business, opposed the transaction on the basis that it would prevent competition for secure landfill services in northeastern BC.
The case provides some clarity on the approach that should be taken to assess whether a potential competitor would have entered a market. More significantly, the case addresses the efficiencies defence under s. 96 of the Act. It explains the onus on the Commissioner to quantify all anti-competitive effects that can be quantified, so that they can be weighed against the asserted efficiencies. The judgment also establishes that merging parties putting forward an efficiencies argument in a proposed merger will need to develop the quantitative and qualitative evidence of the positive effects of the merger that will offset any anti-competitive effects of the merger.
The outcome of the case was highly fact dependent; in particular, the majority judgment turned on the finding that the Commissioner had not presented evidence of the quantifiable effects of the anti-competitive results of the merger.
While fact-dependent, there are some key take-aways from the decision:
The Court confirmed that the Competition Bureau may assess a merger under s. 92 on the basis that it will prevent future competition. Such assessment is made using a 'but for' analysis that addresses on a quantifiable basis what the competitive market would look like if the merger did not take, or had not taken, place. The assumption under the 'prevention' branch of merger analysis is that a dominant player in a market will acquire an entity to stop competition from entering the market.
Prevention of competition analysis is forward-looking and the Competition Bureau must look at a discernable time-frame in which competition might reasonably have been expected to occur which would affect the existing market power of the merged entity. The longer that time-frame, however, the less predictive it is and therefore the less likely such competition is to occur. Such time-frames may vary from industry to industry depending upon factors such as barriers to entry, regulatory requirements, and the pace of change in a particular product or service delivery model. The Commissioner must review whether, 'but for' the merger, a potential competitor would not only enter the relevant market, but would have the ability to impact the market power of the merging parties or either of them.
Prevention of competition analysis is necessarily predictive. However, there must be some reasonable basis upon which the determination of the parties' own behaviour can be evaluated – the analysis should not be based on pure speculation on the part of the Tribunal. Such evidence would come from the merging parties' own plans and evaluation of market conditions and must establish on a balance of probabilities that it is more likely than not that the merger would result in a substantial prevention of competition. It should be noted that the Tribunal accepted somewhat speculative theories about the potential failure of a certain business strategy.
Where the efficiencies defence is raised by the merging parties, an assessment of the efficiency gains of the merger resulting from the integration of resources of the merging entities must be found to outweigh the anti-competitive effects of the merger for it to succeed.
The Commissioner of Competition has the burden of demonstrating the anti-competitive effects of the merger. In the absence of such evidence, the merging parties' evidence of efficiencies will be given weight, and the anti-competitive effects of the merger will be given zero weight, with the effect being that, on balance, the merger will create efficiencies that outweigh any anti-competitive effects. While the Court found in this case that the Commissioner had not established her case and therefore this decision may have limited utility to future contested mergers, there are certain key principles that arise from the Court's assessment of the efficiencies defence:
- The Commissioner must quantify all quantifiable anti-competitive effects of the merger. Estimates of quantifiable effects may be made, but they must be presented based on evidence that can be reviewed, weighed and challenged by the merging parties.
- Non-quantifiable anti-competitive effects, such as the impact of the merger on product quality or service responsiveness, may be presented, but will generally carry less weight.
- Quantifiable anti-competitive effects that are not supported by evidence will not be considered in the weighting given to qualitative effects by default.
There is no minimum threshold for the establishment of efficiencies by the merging parties; the efficiencies may be marginal but the defence will still succeed if the marginal efficiencies outweigh the anti-competitive effects established by the Commissioner. Therefore, the Court set a low bar for the potential success of the efficiencies defence.
Based on the outcome of the decision, parties who have any concern that a proposed merger will result in a potential determination of a substantial lessening of competition under s. 92 might more readily consider using the efficiencies defence, particularly if they believe that the Commissioner could have difficulty establishing quantifiable anti-competitive effects of the merger.
Shortly after the decision was released, the current Commissioner of Competition issued a statement that, "The Bureau will consider the guidance provided on efficiencies and any changes to our analysis and information gathering that may be required during merger review." (italics added). Going forward, the Commissioner may ask for significantly more information in respect of his review in any merger where the efficiencies defence might be raised.
The majority of the Court noted that while Parliament may have intended that there be a minimum threshold that merging parties had to meet in terms of efficiency gains resulting from the merger, the language of the statute did not set any such threshold. Accordingly, amendments to s. 96 might also be on the horizon.
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.