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. 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 gains in efficiency. The SCC’s decision will significantly 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 as a threshold issue. This will likely result in an approach that reinforces the role of efficiencies in merger reviews, which will benefit merger parties.
Although the Bureau will ultimately have a more difficult burden in challenging efficiency claims following the SCC’s decision, parties to these transactions should also be aware that it will also likely result in more information being requested from parties early in the merger review process, in order to aid in the Bureau’s calculations of quantifiable anti-competitive effects. For the same reason, it may also lead the Bureau to make greater use of its ability to request or even compel information from third parties to allow for the calculation of, for example, price elasticity of demand and deadweight loss.
II. The SCC Decision
Tervita Corporation (“Tervita”) is a private energy and environmental waste company which provides waste management services to upstream oil and gas producers in Western Canada. On January 7, 2011, Tervita acquired Complete Environmental Inc. (“Complete”), including a British Columbia government-issued permit to develop a secure landfill for solid hazardous waste from oil and gas operations (the “Babkirk Site”). Tervita already owned and operated the only two operational solid hazardous waste sites in the area. Although the size of the transaction was well below the Bureau’s merger notification thresholds, the Commissioner of Competition (“Commissioner”) at the time used her right to challenge any transaction within one year of closing and challenged the merger, as in her view it was likely to prevent the emergence of the only foreseeable future competitor in the market for solid hazardous waste generated by oil and gas producers. The Commissioner’s argument was accepted by the Tribunal and the FCA and a divestiture was ordered.
The SCC reversed the prior decisions and quashed the Commissioner’s application. The SCC agreed that the merger was likely to substantially prevent competition, yet dismissed the application because it found that Tervita successfully invoked Section 96. The majority of the Court held that the Commissioner did not meet her onus of proving the quantifiable anti-competitive effects of the merger. Therefore, the SCC gave the anti-competitive effects zero weight. As Tervita proved there were efficiencies resulting from the transaction, the SCC concluded that Section 96 was made out.
In its decision, the SCC set out the appropriate framework to determine two important parts of the merger review analysis: (a) when a merger will prevent future competition; and (b) when a merger or proposed merger has brought about or is likely to bring about gains in efficiency such that Section 96 applies.
A. Prevention Of Competition
The SCC confirmed that the correct test to use when analysing whether a merger gives rise to a substantial prevention of competition is the “but for” test. This test looks to the market condition in the absence of the merger to assess the competitive landscape that would likely exist if there was no merger. To do so, it is necessary to (i) identify the potential competitor; (ii) assess whether “but for” the merger that potential competitor would be likely to enter the market; and then (iii) to determine whether its effect on the market would likely be substantial.
B. Section 96
Section 96 requires an analysis of whether the efficiency gains of the merger outweigh the anti-competitive effects. The burden is on the Commissioner to prove the anti-competitive effects, while the merging parties bear the onus of proving the efficiency gains. The SCC, in noting that the Tribunal should consider all available quantitative and qualitative evidence, placed a clear onus on the Commissioner to quantify all quantifiable anti- competitive effects. This ensures procedural fairness is provided to the merging parties, as they will know the case that they will have to meet to invoke Section 96.
The SCC confirmed that even marginal efficiency gains are sufficient for Section 96 to be invoked and require a balancing of efficiencies versus anti-competitive effects. Ultimately, the balancing test mandates a flexible but objectively reasonable approach by which the Tribunal must determine both quantitative and qualitative aspects of the merger, and then weigh and balance those aspects. To accomplish this, the SCC suggests that the test may be framed as a two-step inquiry: (i) compare the quantitative efficiencies of the merger against the quantitative anti-competitive effects; and (ii) compare the qualitative efficiencies of the merger against the qualitative anti-competitive effects. Typically, where the quantitative anti-competitive effects outweigh the quantitative efficiencies, no further review will be needed. If the second step is employed, the determination will involve whether the total efficiencies offset the total anti-competitive effects.
It is important to note that the SCC held that not all economic efficiencies should be taken into account. “Order implementation efficiencies”, which are those brought about only because the competitor would be delayed in implementing those efficiencies due to legal proceedings associated with a divestiture, will not be considered under Section 96. However, “early-mover efficiencies”, which are those brought about because a merging party would be able to bring those efficiencies into being faster than would be the case “but for” the merger, are cognizable.
III. Key Implications & Practical Guidance
- When considering a merger, parties should endeavour to quantify any gains in efficiency, no matter how marginal, as early on as possible. To rely on Section 96, the merging parties are required to show that efficiencies have or are likely to result from the merger. These efficiencies will then be weighed against the anti-competitive effects of the merger, put forward by the Commissioner. Even a marginal gain in efficiency resulting from a merger or proposed merger may tip the scale in favour of allowing the merger. For transactions that may result in a significant review, it will be important to quantify the efficiency gains early in the process.
- Qualitative efficiencies are also important. Although quantitative considerations will be determinative where the anti-competitive effects outweigh any efficiencies, in other circumstances the inquiry in considering Section 96 includes a balancing of the qualitative efficiencies. Accordingly, when considering a potentially contestable merger, parties should consider any qualitative efficiencies as a result of the transaction. Qualitative efficiencies must be supported by evidence.
- There will be an increased burden on the merging parties during the Bureau’s review process where efficiencies are likely to be a factor. As the Bureau now must quantify the anti-competitive effects of any transaction it challenges, it will likely seek more information from the parties at the outset of the review process. This information could include transactional level data and future strategic plan documents.
- The Bureau may make greater use of its power to collect information from third parties. The Bureau’s calculation of the anti- competitive effects of a transaction will likely require information from non-parties to the transaction. This may result in increased use of voluntary information requests and also court orders to compel the production of pricing and sales information from third parties.