On August 11, 2011 the Competition Bureau (Bureau) released a summary of an internal study on the efficacy of remedies obtained under the merger provisions of the Competition Act. The study examined the efficacy of the Bureau’s policies and procedures on merger remedies for the years 1995-2005. In particular, the survey focused on 23 merger cases in which different remedial measures were implemented over the ten-year period. The Bureau interviewed different stakeholders in the merger review process, including merged entities, customers and purchasers of divested assets, as well as third parties affected by the remedy. The study utilized 135 interviews, approximately 50% of which were responses from customers.
The Competition Act allows for the Commissioner of Competition to make an application to the Competition Tribunal preventing a merging entity, alone or in combination with others, from having the ability to exercise market power as a result of its merger. The Commissioner can challenge the merger under section 92 of the Act, or seek to resolve the competition concerns by negotiating remedies with the merging parties. In practise, very few merger cases in Canada are litigated. Accordingly all of the remedies examined had been agreed with the parties. The Bureau’s 2006 Bulletin on Merger Remedies specifies four types of remedial measures used by the Bureau and the Tribunal to address mergers that have, or are likely to have, detrimental effects on competition. The study, which will be used to validate and refine certain aspects of the Bureau’s practice, describes key observations on the four principal remedies currently used by the Bureau, including: structural remedies, quasi-structural remedies, combination remedies, and stand-alone behavioural remedies. For purposes of the public summary of the report, however (details of the complete study must remain confidential pursuant to the confidentiality provisions of section 29 of the Competition Act), results have been summarized for structural, and for all other categories.
Structural remedies are by far the most common remedial measures used by the Bureau when negotiating the terms of a proposed merger. Of the 23 merger cases reviewed in its study, 20 involved some form of divestiture where a merging entity’s assets were sold to new market participants. The study found that divestitures had been completed in all but two cases. Interviewees reported that the divestitures had generally been effective in achieving their objective of eliminating the anti-competitive effects of the merger.
In the two cases where divestitures had not been completed, participants in the Bureau’s study pointed towards several possible explanations. First, certain assets designated for divestiture were not perceived by interviewees as being attractive to buyers, partly due to economic conditions. Second, divestiture orders included minimum pricing provisions that did not accord with the market value of the assets. Third, foreign ownership restrictions limit the pool of potential buyers in some industries. Change of control provisions or the need to obtain third party consents to the assignment of contractual rights (e.g. intellectual property licences), can also complicate divestitures involving such rights. Importantly, respondents in the Bureau’s survey noted that successful divestitures were more likely to occur when purchasers were financially stable and had prior industry experience.
The Bureau’s study also commented on the length of sale periods for divested assets. Typically, consent agreements provide for an initial sale period during which the purchaser can attempt a sale, followed by a trustee sale period (which occurs if there is no sale during the initial period) during which a trustee appointed by the Bureau will take charge of the sale process. Initial sales periods ranged from 3 to 24 months while trustee sale periods ranged from 3 to 12 months. The study found that longer sales periods frequently resulted in a degradation of assets, a concern which is discussed in greater detail below.
The study also examined the use of “crown jewels” provisions. In cases where a divestiture does not occur within a specified initial sales period, additional assets can be added to the divestiture package in order to make it more attractive to purchasers. The Bureau noted that of the five cases in its study which involved crown jewels provisions, none had been triggered.
As noted, the Bureau’s study identified a number of problems that arose during the sale period, prior to the divestiture of assets. Concerns were raised about the degradation of assets, failure to keep the business to be divested at arm’s length from the purchaser, lack of investment in the assets, an exodus of key personnel from the business, divulging of confidential information to purchasers interested in the business, as well as a failure to maintain customer/supplier relations during the sale period. The Bureau noted that there was no discernible trend in the approach to asset maintenance during the interim period. Rather, maintenance obligations were imposed on a case- by-case basis, suggesting that the divestiture remedy continues to be a very fact-sensitive task in which the Bureau considers, inter alia, the types of assets and their viability, the timeline of divestiture, and the independence of the proposed purchaser. For more information on specific divestiture guidelines, see the Bureau’s Bulletin on Merger Remedies.
Quasi-Structural and Behavioural Remedies
Quasi-structural remedies include strategies designed to reduce barriers to entry or to provide access to essential facilities, infrastructure, or technology, and generally facilitate entry or expansion into the market place. They include things such as compulsory licensing, removal of non-competition clauses, the imposition of non-discriminatory access to facilities or property, and the removal of quotas, tariffs and other regulatory barriers.
In its study, the Bureau noted that quasi-structural remedies had been far less effective when structural divestitures were not also implemented. In cases where behavioural commitments were made, a lack of oversight by a monitor was felt to have contributed to the ineffectiveness of this remedy. Moreover, the success of purchasers was often contingent on the availability of and access to downstream services which could be arranged through long-term supply agreements. Parties also expressed a frustration with formal arbitration procedures when they were put into place due to the ongoing business relationships between third parties and the merged entity. Finally, in cases where a business was operated independently as a stand-alone enterprise there was concern about continued information sharing between the merged entity and the supposedly independent business.
Standalone behavioural remedies are seldom used by the Bureau since it is difficult to create remedial measures that adequately replicate competitive market forces. Furthermore, the Bureau’s view is that it is difficult to design such remedies, make them workable, and continue to enforce them. The Bureau’s survey found that in circumstances where it has imperfect information about future entry in a market, the terms of a standalone behavioural remedy are critical. The study also found that without underlying structural reforms in a market prior to the expiration of a behavioural remedy, a merged firm will have the opportunity to continue to exercise market power. Overall, market participants were less enthusiastic about standalone behavioural remedies noting that they do not address the underlying issue of a merged firm’s ability to exercise market power. That said, while not discussed in the study, we do note that behavioural remedies have been agreed to in several recent cases, either in combination with divestitures or on a stand-alone basis , particularly where the anti-competitive concerns were vertical in nature.
Merger Remedies Going Forward
The Bureau sees the remedies study as confirming the effectiveness of its existing policies and procedures relating to the design and implementation of merger remedies. The Bureau intends to use the knowledge gained from its survey to update its Bulletin on Merger Remedies as well as the standard consent agreement that it uses as the basis for negotiations over remedies with parties during the merger review process. The study likely also will inform the Bureau’s approach to structural, quasi-structural, and standalone behavioural remedies used to prevent the substantial lessening of competition in the merger context.