On October 6, 2011, the Competition Bureau released its revised Merger Enforcement Guidelines (the Revised MEGs). The Revised MEGs provide updated guidance in certain areas; however, they do not significantly change the Bureau’s substantive approach to merger review. For example, the Revised MEGs continue to use the hypothetical monopolist test to define product markets, and maintain the 35% market share safe harbour threshold below which transactions generally will not be challenged. Notably, the Revised MEGs de-emphasize market definition, eliminate the two-year time horizon for potential entry into the market, and now contain a section addressing monopsony (i.e., buyer) power. The Revised MEGs also include an expanded and updated discussion of competitive effects, minority interests and interlocking directorates, countervailing power, non-horizontal mergers and efficiencies.
The analytical framework outlined in the Revised MEGs may also be useful in assessing competitor collaborations under section 90.1 of the Competition Act (a new civil provision addressing agreements between competitors that are likely to result in a substantial lessening or prevention of competition).
By way of background, the MEGs originally were issued in 1991 and were last updated in 2004. In September 2010, the Bureau announced a public consultation to consider the merits of revising the 2004 MEGs. The stated purpose of the consultation was to assess whether the MEGs accurately reflect current practice at the Bureau, the content of current merger guidelines in the other jurisdictions, and other legal and economic developments. In February 2011, the Bureau announced that it would be making “moderate” changes to the MEGs and released a draft for public consultation in June 2011.
The Revised MEGs include changes on such topics as:
Similar to the revised Horizontal Merger Guidelines in the United States, the Revised MEGs clarify that merger review is an iterative rather than linear process and while market definition is generally undertaken by the Bureau, it is not the required first step, nor is it a mandatory step in the Bureau’s analysis. This is a significant departure from established Canadian case law which requires that the relevant market be defined. The Revised MEGs explain that market definition is an analytical tool rather than an end in itself, and that there are other tools available for determining the competitive effects of a merger. For example, the Bureau may look to qualitative evidence such as ordinary-course documents created by the merging parties or first-hand observations of the industry by market participants, as well as quantitative evidence such as statistical analyses of price, quantity, costs or other data to assess the likely impact of a merger.
The discussion of competitive effects arising from a merger has been revised to focus on how to assess the competitive effects where the merging parties operate in homogenous product industries, differentiated product industries, and bidding/bargaining markets. Notably, the Revised MEGs reference the use of the diversion ratio (i.e., the fraction of sales lost by one merging party to another party when that one merging party raises the price of its product) to measure the closeness of competition between merging parties’ differentiated products. The expanded discussion of bidding markets is helpful, particularly an acknowledgement that a merger is unlikely to result in a substantial prevention or lessening of competition where there are many bidders or potential suppliers that are similarly situated vis-a-vis the merging parties.
Minority Interests and Interlocking Directorates
The Revised MEGs provide further details on the Bureau’s treatment of minority interests and interlocking directorates. “Merger” is defined broadly in the Competition Act and includes the acquisition of a “significant interest”, which may include the acquisition of a minority interest, for example. While the Bureau’s interpretation of “significant interest” has not changed, the Revised MEGs set out a broader array of the factors which the Bureau considers when determining whether a minority interest or other arrangement results in the acquisition of a “significant interest”. Details regarding the Bureau’s substantive review of minority interests and interlocking directorates and when such arrangements may have anti-competitive effects are also included.
The Revised MEGs eliminate the two-year timeframe for potential entry into the market when the Bureau is assessing whether such new entry will constrain the merging parties from exercising market power. Instead, entry will be assessed in terms of whether it is likely to occur “in a reasonable period of time” and “quickly enough” so that competition is not likely to be substantially harmed.
Countervailing and Monopsony Power
The Bureau provides additional guidance on the circumstances in which customers of merging parties may be able to exercise countervailing power so as to constrain the merging parties’ ability to exercise market power post-merger. Significantly, the Revised MEGs state that the Bureau does not presume that a customer has countervailing power simply because of its size. The Revised MEGs also include a new part addressing monopsony power, that is, where a merger enhances the ability of the merging parties – as purchasers – to decrease prices below competitive levels post-merger.
The Revised MEGs set out a useful, expanded discussion of non-horizontal mergers, i.e., vertical or conglomerate mergers. While acknowledging that non-horizontal mergers are less likely to harm competition and often create significant efficiencies, the Revised MEGs nonetheless outline circumstances in which non-horizontal mergers may reduce competition, focussing on the ability to limit or eliminate competitors’ access to inputs or markets (i.e., foreclosure).
The Revised MEGs provide an updated discussion of the “efficiencies defence” which supersedes the Bureau’s 2009 Bulletin on Efficiencies in Merger Review. In principle (but rarely in practice) efficiencies may serve as a complete defence to an otherwise anti-competitive merger. Accordingly, the revisions emphasize heavily the onus on the merging parties to present “detailed and comprehensive information that substantiates the precise nature, magnitude, likelihood and timeliness of their alleged efficiency gains”. The Revised MEGs also indicate that the Bureau may not take an efficiencies defence into account unless it is presented in a timely fashion. This will place a premium on conducting an efficiencies analysis early on in those transactions where it could matter to the outcome of the Bureau’s analysis.