On January 22, 2015, the Supreme Court of Canada ("SCC") issued its first decision under the merger review provisions of the Competition Act ("Act") in nearly twenty years (See SCC decision here and BLG Alert dated January 23, 2014 here). In a 6-1 ruling, the SCC overturned decisions by the Competition Tribunal ("Tribunal") and the Federal Court of Appeal ("FCA") and provided additional clarity on the application of the efficiencies defence, an important, though previously rarely used part of the merger regime. The efficiencies defence is found in section 96 of the Act ("Section 96") and provides a defence to a challenge of an otherwise anti-competitive merger where the merger or proposed merger has brought about or is likely to bring about offsetting gains in efficiency. The SCC's decision will increase the burden on the Competition Bureau ("Bureau") to challenge efficiency claims, as it now must spend significant time and effort to quantify the anti-competitive effects of such transactions. This will likely result in an approach that reinforces the role of efficiencies in merger reviews, which will benefit merger parties.
The SCC's discussion of the "prevention" branch of Section 92 of the Act ("Section 92") may also raise questions for the oil and gas industry, particularly for midstream asset owners (pipelines, tanks, processing) and service companies. The SCC noted that the concern under the "prevention" branch of Section 92 is that a firm with market power will use a merger to preserve its market power and to prevent competition that could otherwise arise in a contestible market. This analysis requires looking to the market condition that would otherwise have existed (if not for the merger) to assess whether a potential competitor would have entered the market and the effect that might have had on the competitive environment (for example, would prices have dropped). Service firms with specialized technology operating in a discrete geographic region may need to be sensitive to a merger that appears to preserve its market power by preventing new entrants or increased competition. The SCC also noted that the timeline for evaluating whether market power would have been eroded by a new potential competitor in that notional market will be extended if the market contains significant barriers to entry. Considering the high barriers to entry in the midstream sector and the potential for a merger of incumbents to preserve market power and prevent competition that could have otherwise occurred, midstreamers in concentrated markets (such as processors in close proximity) will have to cautious in evaluating a potential merger. While the Tervita case demonstrates that efficiencies arising from a merger may offset the prevention of competition that is otherwise associated with it, finding and quantifying the efficiencies will be of particular importance for midstream and service companies in more concentrated markets.
This case should also remind parties contemplating a merger that even if the financial thresholds are not exceeded, thus triggering a formal notification obligation, the Competition Bureau may challenge the merger if it believes there is likely to be a substantial lessening or prevention of competition as a result. For example, if there will be a resulting high market share (greater than 35%) for a particular product or service flowing from a merger, the parties should consider seeking Competition Bureau approval in advance even if the financial thresholds triggering a notification are not exceeded.
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