Canada: 2006 Year in Review: Mergers

Alderwoods Group and Service Corporation International

The Commissioner of Competition ("Commissioner") decided not to challenge the amalgamation of Alderwoods Group Inc. ("Alderwoods") with a wholly owned subsidiary of Service Corporation International ("SCI"). SCI was the largest provider of "death care services" in North America, while Alderwoods was the second largest. In Canada, the parties competed with family-owned local competitors, funeral home chains and another large publicly held company. Three product/service markets were identified in connection with this amalgamation:

• funeral products and services ("FPS") (which includes products such as caskets, burial vaults, cremation receptacles, and services such as embalming and the provision of memorial ceremonies);
• cremation services ("CS"); and
• burial services ("BS").

The geographic markets were identified as local areas in Ontario and British Columbia. No "substantial prevention or lessening of competition" ("SPLC") was found with respect to CS and BS, as the parties did not engage in such services in Ontario, and there was an acceptable level of capacity from competing firms in British Columbia. Estimated post-merger market shares for FPS for certain local markets in these provinces exceeded the 35% threshold specified in the Bureau’s Merger Enforcement Guidelines ("Merger Guidelines"). Indeed, in four local geographic markets, the market shares of the merged entity exceeded 60%. Notwithstanding this finding, forthcoming legislative changes in Ontario and recent market developments in British Columbia mitigated the impact the transaction would have on the relevant FPS markets. The legislative changes in Ontario (anticipated to fully take effect in Spring 2008) will permit cemeteries to offer funeral services from on-site funeral homes; this essentially enables the merged entity’s competitors to provide a packaged service that the merged entity cannot, namely funeral services with burial services at one location. Meanwhile, in British Columbia, SCI’s wholly owned Canadian subsidiary lost a long-term supply contract with the largest memorial society in Canada. Based on these considerations, the Bureau determined that the proposed amalgamation would not likely result in the SPLC. However, the Bureau took the unusual step of informing the parties that it would reconsider their case within twoyears to examine the effect of the legislative changes in Ontario and market developments in British Columbia that guided its initial finding.

The proposed acquisition of Arcelor SA ("Arcelor") by Mittal Steel Company NV ("Mittal") was not found to result in an SPLC. Mittal is the world’s largest steel company, while Arcelor is the second largest. Arcelor controls Dofasco Inc., a leading Canadian steel producer. The Bureau focused on the product market for coated cold-rolled steel, due to the substantial associated post-merger market share for that product in North America. For the purposes of its analysis, coated cold-rolled steel was differentiated into two separate products, namely exposed automotive steel ("EAS") and packaging (such as aerosol cans, paint cans, and containers for food) made from tin mill products ("TMP"). In reaching its decision, despite the finding that there exist high barriers to entry in the relevant product markets, the Bureau determined that a sufficient number of competitors would remain upon completion of the proposed merger. Additionally, the Bureau considered the following factors: the significant countervailing buying power of the automotive sector (which is the primary market for EAS) that would inhibit price increases above competitive levels; the countervailing power of TMP customers; and the unlikelihood that competing steel producers will coordinate their behaviour, having regard to the bid market characteristics of the steel industry and the asymmetric cost-structures and varying levels of vertical integration of steel producers.

A consent agreement was entered into by PaperlinX Canada Ltd. ("PaperlinX") in connection with its proposed acquisition of assets from Cascades Resources. PaperlinX is a full-line merchant ("FLM") owned by PaperlinX Ltd., an international paper merchant distributor based in Australia. Cascades Resources Fine Papers Group Inc. ("Cascades") owned Cascades Resources, another FLM, which sold and distributed fine paper in Canada for Cascades. In its review of the transaction, the Bureau focused on the distribution of fine paper to printing firms in regional markets. In regional Canadian FLM markets, the Bureau found economic barriers to entry. Upstream issues were also identified. In particular, new or expanding distributors would, post-merger, likely face challenges finding a consistent supply of fine paper given pre-existing relationships. With respect to remaining competition, only one other FLM would be left in each of British Columbia, Alberta, and Saskatchewan. Additionally, concern was expressed about structural elements in the Canadian paper distribution market that contributed to the potential for coordinated activities, which included significant barriers to entry, relatively few FLMs in western Canada, a degree of transparency in pricing, the incidence of frequent purchases by many small printers, and competition among FLMs in multiple markets.

After obtaining orders under section 11 of the Competition Act, and conducting its review, the Bureau concluded that the transaction would likely give rise to an SPLC in the distribution of fine paper by FLMs to commercial printers in western regional markets in Canada. A consent agreement was entered into, whereby PaperlinX committed to divest all Cascades’s assets relating to the FLM business in British Columbia and Alberta. PaperlinX was required to enter into a hold-separate agreement, and an independent manager was appointed by the Commissioner to run the divested business, pending the completion of the divestiture. To ensure compliance with the consent agreement, an independent monitor was appointed to oversee the independent manager of the divested business and PaperlinX. To address concerns about access to supply, the consent agreement required that PaperlinX continue to arrange for the supply of fine paper to the divested business until it was sold. PaperlinX was also prohibited from interfering with the supply of fine paper to the eventual purchaser of the divested business. Finally, Cascades agreed to supply the divested business with its fine paper products both before and after the divestiture. The agreement was ultimately registered with the Competition Tribunal.

The Commissioner did not find sufficient grounds to initiate proceedings before the Competition Tribunal to challenge RONA Incorporated’s ("RONA") acquisition of a 51% stake in the operating businesses of Matériaux Coupal Inc. The relevant geographic market was determined to be parts of Montreal and some surrounding areas. There was no finding of a likely SPLC for roof truss and joist product markets; but there were concerns about sales of lumber and building materials to home contractors in the Granby region, where market shares approached 50% and only one other competitor existed. Another concern involved RONA’s leverage in the upstream lumber and building materials supply market. In this regard, the Bureau considered the possibility that RONA could obtain favourable terms that result in the eventual exclusion of competitors, particularly if excessive growth in its purchasing volumes continued. Although the Bureau issued a no-action letter to the parties, the power to revisit the transaction within the three-year limitation period was reserved.

The GlaxoSmithKline Inc. ("GSK") acquisition of ID Biomedical Corporation ("IDB") was determined by the Bureau not to result in an SPLC. IDB was a Canadian-based integrated biotechnology company that markets vaccines, including those for influenza; there was no product overlap between GSK and IDB. In Canada, most influenza vaccines are bought through public health care systems. IDB supplied 75% of Canada’s public influenza vaccine needs, which is still secured through long-term contracts. The change in ownership resulting from the acquisition would not alter the current competitive environment for the long-term supply of vaccines to public health bodies. Competitive tendering for new supply arrangements will not occur until 2008 and 2011. There was also no finding of an SPLC in the small private market for influenza vaccines.

The Commissioner elected not to challenge the acquisition of Maytag Corp. ("Maytag") by Whirlpool Corp. ("Whirlpool"). Whirlpool was the largest global manufacturer of appliances in North America, and its Canadian subsidiary sells, markets and distributes U.S. products in Canada. Maytag’s Canadian subsidiary operated similarly, with products imported from its U.S. parent. As the post-merger Canadian market share (based on brand, not manufacturing) for washers and dryers exceeded the 35% threshold set out in the Merger Guidelines, the Bureau focused its investigation on these product markets. It found that major retailers would, post-merger, continue to have relatively strong bargaining positions and purchasing power. This strength stemmed, in large part, from leverage retailers had over manufacturers, exercised by controlling the placement and exposure of brands within their stores. The Bureau concluded that post-merger competition would continue at acceptable levels because of growth in the large retailer market and a corresponding support for offshore brand name manufacturers, which have made significant inroads in the Canadian market.

The Commissioner decided not to challenge Boston Scientific Corporation’s ("Boston Scientific") acquisition of Guidant Corporation ("Guidant"). This decision was made after Bureau considered a United States Federal Trade Commission consent order signed by Boston Scientific and certain commitments made by Boston Scientific to the European Commission. The consent order incorporated a divestiture agreement, whereby Boston Scientific undertook to divest Guidant’s vascular intervention and endovascular businesses (including related intellectual property) to Abbott Laboratories. In addition, the order required Abbott Laboratories to relinquish voting rights to a minority equity position it held in Boston Scientific, and divest that equity position within a specified period. The divestures and commitments secured in these other jurisdictions were adequate to satisfy the Commissioner that no competitive concerns would arise in the applicable Canadian medical devices markets.

The Bureau did not find a likely SPLC in connection with Quebecor Media Inc.’s ("QM") acquisition of Sogides Ltée ("Sogides"). QM is a publisher and distributor of print media, and a television/cable broadcaster. Sogides is a large publisher and distributor of French-language trade books in Quebec. The relevant product market was determined to be French-language trade books. In making its decision, the Bureau found that barriers to entry for publishers and distributors of French-language trade books were relatively low. Furthermore, competition in the relevant market was fairly robust, such that a unilateral price increase by the merged entity would likely result in a loss of market share. Notably, approval of the deal was conditional on the parties entering into a consent agreement designed to address an interest the president of Sogides had in Gestion Renaud-Bray Inc. ("GRB"), which was a competitor that operated bookstores owned by QM’s Archambault Group Inc. ("Archambault"). The agreement required the president of Sogides to resign from GRB’s board of directors to guard against the exchange of information between Archambault and GRB.

Johnson & Johnson (J&J) entered into a consent agreement with the Commissioner in connection with its share and asset purchase of the Consumer Healthcare Business of Pfizer Inc. ("Pfizer") after the Commissioner concluded that J&J’s acquisition was likely to give rise to an SPLC in the supply of zinc oxide based diaper rash treatment products in Canada. Pursuant to the agreement, J&J was required to divest of the Zincofax Business ("Zincofax") – which was responsible for the supply of the zinc oxide based diaper rash treatment products for Pfizer – and maintain the competitive viability of Zincofax by continuing its operations pending completion of the divestiture. If J&J cannot complete the divestiture within the specified initial sale period, a trustee will be appointed to sell the Zincofax business.

In September 2006, the Bureau published its Information Bulletin on Merger Remedies in Canada ("Remedies Bulletin", available online: http://www.competitionbureau.gc.ca/PDFs/Mergers_Remedies_PDF_EN1.pdf), which articulates the Bureau’s current policy on merger remedies.

The following represents some of the highlights of the Remedies Bulletin.

1. Objectives of Remedial Action

Merger remedies are designed to eliminate the SPLC posed by a merger or proposed merger. Where necessary, the Bureau may require a remedy to go beyond what is needed to restore competition to an acceptable level. Remedial action can be pursued either through an order obtained under section 92 of the Competition Act or a consent agreement with the merging parties.

When a merger is likely to give rise to an SPLC, the Bureau will generally first attempt to negotiate a remedy without resorting to litigation; although it will litigate where necessary. Importantly, the Bureau is prepared to limit the scope of litigation to the contentious parts of a merger. In those instances, the Bureau will typically require the parties to hold separate the assets and businesses that may be required to be divested or otherwise be the subject of an order.

2. Structural Remedies

The Bureau prefers structural merger remedies, particularly divestitures. It has identified the following criteria for assessing the effectiveness of a proposed divestiture: (a) the asset chosen for sale must be both viable and sufficient to eliminate the SPLC; (b) the divestiture must be completed in a timely manner; and (c) there must be an independent buyer that has the ability and intention to be an effective competitor.

3. Quasi-Structural Remedies

As an addition or alternative to a divestiture, "quasi-structural" remedies may be sought to reduce barriers to entry, provide access to key infrastructure or technologies, or otherwise promote the entry or expansion of competitors. Examples of such remedies include the licensing of intellectual property, or elimination of non-competition clauses or restrictive covenants in contracts.

4. Combination Remedies

A combination of structural and behavioural remedies may be appropriate in some cases, particularly where the behavioural remedies complement a core structural remedy. Some behavioural remedies that can be used in association with structural remedies include: entering into short-term supply arrangements with the buyer of the divested assets; providing assistance to a buyer or licensee to facilitate personnel training in complex technologies; or waiving restrictive contract terms that lock in customers for lengthy durations of time.

5. Standalone Behavioural Remedies

Standalone behavioural remedies will seldom be entertained due to the following shortcomings identified by the Bureau: they can prevent a merged entity from efficiently reacting to changing market conditions or restrain it from participating in pro-competitive activities; setting their appropriate duration is often difficult; terms associated with such remedies are not as clear or certain as those associated with structural remedies; and, they are more costly to administer and difficult to enforce. Still, the Bureau has used standalone behavioural remedies in the past; for example, it negotiated a complex behavioural remedy for Canadian National Railway's acquisition of British Columbia Rail.

6. Trustee Provisions

In most cases, the vendor will not participate in the trustee divestiture process. The trustee has authority to control the process, including complete access to personnel, books, records and facilities related to the asset for sale. Furthermore, unless otherwise approved by the Bureau, a vendor is precluded from contacting prospective buyers. In the execution of its duties, the trustee must use commercially reasonable efforts to negotiate terms and conditions, subject only to approval by the Bureau. A vendor’s ability to challenge the terms and conditions obtained by a trustee is limited to instances where malfeasance, gross negligence or acts of bad faith have occurred.

7. Confidentiality

When divestitures reach the trustee stage, the duration of the trustee period, and any "no minimum price" and/or "crown jewel" provisions become public; otherwise, the Bureau generally agrees to keep these matters confidential during the initial sale period. Public disclosure of these terms will be made upon the completion of a negotiated divestiture or in multi-jurisdictional cases where remedies are coordinated with other agencies and public disclosure has been made in those jurisdictions.

8. International Coordination and Cooperation

In the case of multi-jurisdictional mergers, the Bureau relies upon certain cooperation arrangements or agreements with its foreign counterparts to assist in the exchange of information (including confidential information, where appropriate waivers have been obtained) and/or coordination of investigations and/or merger remedies. Multi-jurisdictional coordination may be particularly useful in the appointment of a single trustee or monitor to oversee the divestiture of worldwide assets. Additionally, coordination may help avoid incompatible remedies across jurisdictions and assist in achieving more effective results.

When deciding whether to pursue specific remedial action in Canada or, in the alternative, rely solely on measures taken in a foreign jurisdiction, the Bureau will, on a case-by-case basis, take a number of considerations into account. In general, however, the Bureau has indicated that it will not likely rely on remedial action taken by foreign competition authorities where a matter raises Canada-specific issues, when the impact in Canada is significant, when an asset to be divested is located in Canada, or when enforcement of the terms of the foreign settlement or order do not adequately protect Canadian interests. Ultimately, the Bureau remains bound to the test for maintaining competition expounded in section 92 of the Competition Act.

In addition to the guidance provided by the Remedies Bulletin, the Bureau has indicated that a Merger Remedies Study aimed at critically analyzing the effectiveness of past remedies is currently underway. This study is expected to be completed sometime in 2007 and should further improve the design and implementation of merger remedies in Canada.

Last year, in the aftermath of the Federal Court of Appeal’s decision in Commissioner v. Superior Propane Inc. and ICG Propane Inc. ("Superior Propane"), the Commissioner of Competition, Sheridan Scott, shed some light on the Bureau’s position on the status of the "efficiencies defence" available under section 96 of the Competition Act. In that section, mergers creating efficiencies that are greater than, and offset, ensuing anti-competitive effects of the merger should be permitted to proceed if those efficiencies would otherwise be lost without the merger. In her September 28, 2006 speech at the Canadian Bar Association Annual Fall Conference on Competition Law held in Gatineau, Quebec (the speech is available online: http://www.competitionbureau.gc.ca/PDFs/SpeechFallCBAConference_06-09-28e.pdf), the Commissioner announced that amendments relating to the efficiencies defence would not likely be forthcoming in the short term. Instead, a commitment was expressed to continue examining how the Commissioner’s mandate under section 96 should be pursued in practice, in view of the current statutory language of that section and recent case law.

Commissioner Scott also clarified that the Bureau will, as indicated in the Merger Guidelines, consider efficiency claims when submitted. More specifically, the Bureau is looking for "robust and thoughtful" submissions, provided early on, offering insight into the parties’ motivations for entering into their transaction and the potential synergies that may result from the merger. Moreover, in a departure from the position adopted by her predecessor, she stated that an assertion of the efficiencies defence will not necessarily lead to proceedings before the Tribunal, where, based on its own independent assessment, the Commissioner is satisfied on the evidence that the test under section 96 has clearly been met; although, Commissioner Scott conceded that such clear cases are relatively rare. Finally, the Bureau will continue consultative efforts with stakeholders in addressing the holding of the Federal Court of Appeal in Superior Propane that efficiencies should only be considered as an exception or defence to a merger found to give rise to an SPLC and not in the determination of whether the merger gives rise to an SPLC.

In early December 2006, the House of Commons Standing Committee on Transport, Infrastructure and Communities completed its review of Bill C-11, which proposes amendments to the Canada Transportation Act ("CTA") that were first introduced by the previous government. Under the current CTA, proposed transactions involving air transportation undertakings that are notifiable under section 114(1) of the Competition Act must also be notified to the Minister of Transport and the Canada Transportation Agency ("Agency"). More importantly, such proposed transactions cannot be lawfully completed without both an Agency determination that the proposed transaction would result in an air transportation undertaking that is "Canadian" (as defined in the CTA) and approval by the Governor-in-Council that the transaction is in the "public interest". Bill C-11, if passed, would extend the CTA’s notification obligations and the requirement for Governor-in-Council approval to transactions covering any federal transportation undertaking (which may include rail, marine, buses, trucks, marine ports, etc.); although, notifications to the Agency and required determinations of whether an undertaking is "Canadian" are not proposed to be extended to transactions that are not air transportation undertakings. Similar to the current CTA, the Bill would also impose criminal sanctions on parties that have not properly notified their transaction or have completed it without the requisite approval of the Governor-in-Council. Bill C-11 is currently at the Report Stage and must still be passed by both Houses of Parliament before receiving Royal Assent and becoming law.

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.