On January 22, 2015, the Supreme Court of Canada (SCC) issued a groundbreaking decision in the area of merger efficiencies in Tervita Corp. v. Canada (Commissioner of Competition), allowing the appeal of Tervita Corporation (Tervita) and overturning the holdings of the Federal Court of Appeal (FCA) and the Competition Tribunal (Tribunal). In its decision, the SCC agreed with the Commissioner of Competition (Commissioner) that the merger was likely to result in a prevention of competition but found that the efficiencies generated by the merger offset any proven anti-competitive effects.
This represents the first SCC decision relating to the mergers provisions of the Canadian Competition Act (Act) in almost 20 years, and it will have significant implications for parties seeking to rely on the efficiencies defence in section 96 of the Act.
IMPORTANCE FOR MERGER PLANNING
Parties contemplating a transaction should note the following:
- Merging parties need to consider whether the efficiencies defence may apply to their proposed transaction in light of this new paradigm, as more strategic mergers could be approved in the future
- The SCC decision places a clear onus on the Commissioner to quantify anti-competitive effects
- It will be critical to develop and provide quantitative and qualitative evidence of the efficiency gains generated by the merger and to consider whether the Commissioner is likely to be able to adequately and properly quantify potential anti-competitive effects.
In 2011, the Commissioner brought an application challenging the completed acquisition by Tervita (formerly CCS Corporation) of Complete Environmental Inc. (Complete) and its Babkirk hazardous waste landfill site. The Tribunal found that the transaction had prevented competition substantially because Complete or another purchaser would likely have begun operating Babkirk as a secure landfill site in competition with Tervita if the transaction had not occurred. Moreover, the Tribunal rejected the efficiency defence put forward by Tervita on the basis that the efficiency gains were not likely to offset the anti-competitive effects of the transaction. On appeal, the FCA upheld the Tribunal’s determination that the transaction would likely prevent competition substantially and rejected the efficiency defence on the grounds that any efficiency gains were marginal and insignificant. Tervita appealed this decision to the SCC.
PREVENTION OF COMPETITION
The SCC clarified that in assessing whether a potential competitor would have likely entered the market “but for” the transaction, the time-frame for assessing entry must be discernible and there must be evidence of when the entrant is realistically expected to enter the market in the absence of the merger. Moreover, the further into the future that the Tribunal must look, the more difficult it will be to show that a prevention of competition is “likely.” In this case, the SCC agreed that there was abundant evidence for the Tribunal to find that the transaction resulted in a likely prevention of competition.
Section 96 of the Act provides a defence to mergers that are otherwise likely to lessen or prevent competition where the efficiencies from the merger are likely to be greater than and offset the merger’s anti-competitive effects. In its decision, the SCC:
- Clarified that the Commissioner bears the burden of proving all quantifiable anti-competitive effects of a merger, and any effects that are realistically measurable cannot be considered on a qualitative basis if no quantitative evidence is provided
- Noted that there is no minimum threshold of efficiency gains that must be found in order for the efficiency defence to apply
- Drew a distinction between quantitative and qualitative effects, and set out a two-step inquiry first comparing quantitative factors and then comparing qualitative factors.
Because the Commissioner had failed to provide measurements of the quantifiable anti-competitive effects, the SCC found that the Commissioner had failed to meet her burden to prove the quantifiable anti-competitive effects of the merger. Since no quantitative or qualitative effects of the merger were proven, the SCC found that the efficiency gains proven to result from the merger were “greater than and offset” any anti-competitive effects of the merger.