For the first time in a decade, an appellate court has considered a contested merger in Canada. On February 25, 2013, the Federal Court of Appeal (“FCA”) upheld the order of the Competition Tribunal (the “Tribunal”) requiring Tervita (formerly known as CCS Corporation) to divest the Babkirk hazardous waste landfill site that it obtained through its acquisition of Complete Environmental Inc. (“Complete”).1
Although the transaction fell well below the pre-merger notification thresholds in the Competition Act2(the “Act”), the Commissioner of Competition (the “Commissioner”) applied to the Tribunal pursuant to section 92 of the Act, which grants jurisdiction to the Tribunal to intervene where “a merger or proposed merger prevents or lessens, or is likely to prevent or lessen, competition substantially”.
The FCA considered whether the Tribunal’s decision was justified, and in so doing:
- afforded the Tribunal significant deference, noting that the economic and commercial matters at issue were at the heart of the Tribunal’s mandate under the Act;
- endorsed a forward-looking approach to merger review and afforded the Tribunal deference with respect to its findings in this regard;
- outlined the proper, general timeframe for assessing the prevention of competition; and
- clarified the proper methodology for applying the “efficiencies defence” under the Act.
Tervita, a waste management services company in Western Canada, owned and operated the only two secure landfills for hazardous waste in northeastern British Columbia. These landfills were designed to permanently dispose of hazardous waste, such as waste generated as a consequence of oil and natural gas drilling.
Babkirk Land Services Inc. (“BLS”) was a wholly-owned subsidiary of Complete. BLS operated certain lands in northeastern British Columbia. These lands were accessible to oil and natural gas exploration companies seeking to dispose of hazardous waste, and included a hazardous waste landfill known as the Babkirk Site. Complete held a permit from the British Columbia Ministry of the Environment to operate a secure landfill at the Babkirk Site.
In January 2011, Tervita acquired Complete, which comprised BLS and the Babkirk Site. This transaction fell well below the pre-merger notification thresholds under the Ac3. Prior to the transaction closing, the Commissioner informed the parties that she opposed the acquisition on the ground that it was likely to “prevent competition substantially in secure landfill services” in northeastern British Columbia. Shortly after the transaction closed, the Commissioner applied to the Tribunal pursuant to section 92 of the Act. The Commissioner sought an order requiring that the transaction be dissolved or, in the alternative, that Tervita divest itself of Complete or BLS.4
In May 2012, the Tribunal granted the Commissioner’s application, finding that the merger would lead to a substantial prevention of competition for the disposal of hazardous waste in northeastern British Columbia. The Tribunal refused to dissolve the transaction but ordered Tervita to affect the divestiture of the assets or shares of BLS. Tervita appealed the Tribunal’s Decision to the FCA.5
- The FCA’s Analysis and Guidance on Contested Mergers
The Tribunal Should be Afforded Deference
The FCA commented on the proper standard of review for Tribunal decisions, concluding that courts should afford the Tribunal deference. The FCA noted that the “Tribunal holds expertise in the economic and commercial issues which are at the heart of its mandate under the Competition Act.” It went on to explain that:
[b]ecause an appellate court may encounter difficulties in fully understanding the economic and commercial aspects of the Tribunal’s decision, it must defer to its findings of fact and of mixed law and fact on these issues.6
The Timeframe for Assessing the Prevention of Competition
The FCA endorsed a forward-looking approach to a merger review and afforded the Tribunal deference with its findings in this regard:
Contrary to most trial courts, which are essentially concerned with ascertaining the facts relating to past events, the Tribunal’s role under sections 92 and 96 of the Competition Act requires it to project into the future various events in order to ascertain their potential economic and commercial impacts. The role of the Tribunal is thus to identify and remedy market problems that have not yet occurred. This is a daunting exercise steeped in economic theory and requiring a deep understanding of the economic and commercial factors at issue.7
The FCA concluded that when assessing whether there is a substantial prevention of competition (as opposed to a substantial lessening of competition), the Tribunal may look into the future to ascertain whether a potential new entrant has been precluded from participating in the relevant market. However, the Tribunal must only consider entry into the market that would have occurred within a “reasonable period of time”.8
The FCA provided guidelines on how to assess what constitutes a “reasonable period of time”. First, there must be a “clear and discernable [sic] timeframe” for market entry. However, a precisely calibrated determination is not necessary. Second, the timeframe for market entry should normally fall within the temporal dimension of the barriers to entry into the market at issue. In other words, the timeframe should be based on the lead time required for a new entrant to enter into a particular market.9
In this case, the discernible timeframe was 30 months, or the amount of time it would take a new entrant to open a new secure landfill. Complete was a “poised entrant”; it already had regulatory approval to operate a secure landfill at the Babkirk Site and was positioned to enter the market early. The FCA agreed with the Tribunal’s finding that, if not for the merger, the Babkirk Site would have opened as a secure landfill and would have been in competition with Tervita’s landfill sites within 21 months. This was consistent with the Tribunal’s finding that substantial prevention of competition had occurred.10
Methodology for Assessing the Efficiencies Defence
The Act provides for an “efficiencies defence” for mergers that otherwise result in a substantial prevention or lessening of competition. It provides that the Tribunal may not make an order where the efficiencies arising from the merger are likely to be greater than and offset its anticompetitive effects.11
The FCA established that the Commissioner bears the burden of proving the extent of the quantitative and qualitative anti-competitive effects of the merger, and to quantify those effects where possible. The respondents bear the burden of demonstrating that the cognizable efficiencies would be likely to offset those anti-competitive effects.12
The Tribunal had attempted to include qualitative factors in its offset analysis, such as non-economic environmental benefits and reduced site clean-up that would result from competition. The FCA disagreed with this “subjective balancing” methodology. It clarified that when assessing whether efficiency gains are greater than and offset the anticompetitive effects of a merger, “the offset analysis must not be based on subjective judgment” but must be “as objective as is reasonably possible, and where an objective determination cannot be made, it must be reasonable.” Expanding on this objective approach, the FCA noted that:
An objective offset analysis means that the quantification of both gains in efficiency and anti-competitive effects must be carried out whenever it is reasonably possible to do so. When precise quantification is not reasonably possible for a given element, a rough estimate is to be preferred to a subjective judgement call. When neither a precise quantification nor a rough estimate is reasonably possible for a given element, then of course there will be a certain degree of discretion in attributing weight to any remaining qualitative gain in efficiency or effect, but this discretion must be curtailed and limited by the principles of reasonableness. In other words, any weight given to the remaining unquantifiable qualitative effects must be reasonable, i.e., it must be supported by the evidence, and the reasoning behind the Tribunal’s weighting must be clearly articulated or otherwise discernible [sic].13
Although there was evidence that the merger would result in some efficiencies, the FCA held that they were negligible. The FCA relied upon the FCA’s decision in Canada (Commissioner of Competition) v. Superior Propane Inc.14, which found that the efficiency defence is not available if the gains in efficiency marginally exceed the anti-competitive effects.15 Further, the FCA held that although the Commissioner had not quantified the anti-competitive effects of the merger, the existence of these effects could not be ignored: “Under an objective and reasonableoffset determination, marginal and insignificant gains in efficiency cannot offset known anti-competitive effects even where the weight to be afforded to such effects is undetermined.”16 Accordingly, the offset analysis favoured the Commissioner’s position.
- Take-Aways from the FCA’s Decision
The FCA’s decision is a helpful reminder of the following:
- Mergers that are below the pre-merger notification thresholds under the Act may nonetheless be reviewed and challenged where they pose substantial competition concerns.
- Anti-competitive effects of mergers need not be confined to the time that the merger occurred. Rather, the Tribunal will consider subsequent impacts that will occur within a “reasonable period of time”. Accordingly, parties need to consider that the Commissioner may challenge their merger if there are reasonable grounds to believe that they could become competitors in the future absent the merger.
- The efficiency defence under the Act can only be relied upon if the efficiencies gained from the merger outweigh and offset its anti-competitive effects. Parties to a merger will need to be able to demonstrate significant and ideally quantifiable efficiencies gained from the merger that outweigh and offset its negative effects.
- The evidentiary record in merger cases is extremely important. The Tribunal relied upon internal documentation from Tervita and Complete to conclude that Complete's bioremediation business would have failed, and that Complete's eventual entry into the landfill market in northeastern British Columbia would have had a material effect on prices. Accordingly, parties to a merger must be mindful that the Commissioner may collect and rely upon the internal documents in the possession and control of parties to a merger to advance its case.
- Vendors cannot assume that remedies arising from a contested merger will not affect them after the transaction closes. Here, the Commissioner sought an order requiring that the transaction be dissolved. In the end, the Commissioner’s alternative relief - a divestiture- was granted. Accordingly, vendors must be mindful of potential competition concerns in a merger.