To say the first half of 2020 has been interesting from a competition law enforcement perspective is an understatement. Competition enforcement agencies around the world continue to grapple with COVID-19-related misleading advertising and product claims; assess competitor collaborations formed to respond to the COVID-19 crisis; and conduct criminal investigations and deal with civil matters, including merger reviews that commenced prior to or during the COVID-19 pandemic. Canada’s Competition Bureau (the Bureau) is no exception, as staff quickly transitioned in mid-March to working remotely, accommodated existing merger filing timelines to the extent possible, and adjusted certain procedures to facilitate parties’ compliance with Canada’s merger review regime.
On March 18, 2020, the Commissioner of Competition (the Commissioner) issued an open letter to the Competition Law Section of the Canadian Bar Association indicating that the remote working environment in Canada is posing considerable challenges for timely market contacts (meaning discussion with customers, suppliers and/or competitors impacted by transactions under review), which in turn could impact the Bureau’s ability to meet its service standards for merger review. The Commissioner encouraged parties to contact Bureau case teams and management as early as possible on complex matters and throughout the course of a review.
In our experience, the Bureau has worked as expeditiously as possible to complete merger reviews while recognizing that certain timelines that may have been achievable several months ago simply are not possible and require adjustment, particularly in the case of complex matters.
There has been a significant downturn in the number of mergers reviewed in recent months:
While the first few months of 2020 saw an increase in the number of completed merger reviews as compared to the prior year, there has been a significant reduction in volume since April, presumably due to the COVID-19 pandemic. In addition, the majority of the transactions for which the Bureau completed its review in May or June 2020 received advance ruling certificates rather than no action letters. This indicates that the reviewed transactions involved very limited (if any) competitive overlap between the merging parties, as advance ruling certificates are only issued in transactions that are very simple from a competitive effects perspective.
In the last few months, the Bureau has also provided meaningful guidance on its approach to substantive merger issues in several recent reviews. From the application of the efficiencies defence and a debrief on the Bureau’s first experience with its model timing agreement, to revisiting the failing firm analysis for the first time in several years, to the issuance of a report to the Minister of Transport detailing competition concerns arising from Air Canada’s proposed acquisition of Transat, these transactions each raise unique substantive competition law issues. Most recently, the Commissioner entered into a consent agreement regarding a merger in the animal health products sector. In addition, in late 2019 the Commissioner filed an application with the Competition Tribunal (the Tribunal) to challenge Parrish & Heimbecker’s acquisition of a grain elevator in Verdin, Manitoba – the challenge is ongoing. Below we provide an overview of the Bureau’s approach in each of these mergers.
Efficiencies defence & model timing agreement – CN’s acquisition of H&R Transport Limited
On May 9, 2019, Canadian National Railway Company (CN) announced that it had reached an agreement to acquire certain intermodal shipping assets of H&R Transport Limited (H&R). The transaction was not subject to statutory notification under the Competition Act (the Act). While the Bureau’s review was concluded in late 2019, the Bureau released a backgrounder regarding its review of the transaction in April 2020, aligning with the release of its model timing agreement for mergers where the merging parties ask the Bureau to consider claimed efficiencies likely to result from the transaction. Ultimately, the Bureau concluded that, while the transaction was likely to result in a substantial lessening or prevention of competition, the claimed efficiencies outweighed the anti-competitive effects. Therefore, the Bureau closed its investigation of the transaction.
CN and H&R both provide intermodal transportation services, with H&R focused on the provision of refrigerated intermodal services. Intermodal transportation involves the transportation of goods in containers using multiple modes of transport, such as truck and rail. As a rail service provider, CN directly provides retail customers with intermodal services in competition with intermodal providers such as H&R, and CN also supplies third-party wholesale customers such as H&R with rail services.
The Bureau concluded that due to price and time differentials, the market for intermodal transportation services is distinct from that of over-the-road transportation services (i.e., intermodal transport is less expensive but takes longer). The Bureau also found that truckload or full shipments are distinct from less-than truckload shipments, and that the demand for refrigerated intermodal shipments is distinct from that for non-refrigerated shipments. Accordingly, the Bureau concluded that the relevant product market was the supply of full truckload refrigerated intermodal services.
The Bureau found that CN’s acquisition of H&R was likely to result in a substantial lessening or prevention of competition across eight origin-destination pairs, noting the closeness of competition between H&R and CN/TransX (CN had also recently acquired The TransX Group of Companies which, among other things, provided intermodal transportation services), the limited number of competing suppliers (one of which is CP, the only other upstream provider of rail services in Canada), market shares in excess of 50%, and high barriers to entry given that CN and CP are both vertically integrated suppliers of intermodal transportation services.
However, the merging parties asked the Bureau to consider whether the efficiencies defence set out in section 96 of the Act applied to the transaction. Unique to Canada, section 96 provides for an efficiencies defence where a merger has been found to likely result in a substantial lessening or prevention of competition. Specifically, section 96 creates a trade‑off framework in which efficiency gains that are likely to be brought about by a merger are evaluated against the anti‑competitive effects that are likely to result from that merger. Under section 96, the Tribunal may not make an order where it finds that a merger is likely to bring about gains in efficiency that will be greater than, and will offset, the anti-competitive effects of the merger and that the efficiency gains would not likely be attained if an order were made. The Bureau considered the efficiencies claimed by CN, which related to the elimination of overhead costs and duplicative facilities, IT systems and software licences. While the Bureau disagreed with the quantification of certain claimed efficiencies, the Bureau concluded that the efficiency gains from the transaction outweighed its anti-competitive effects.
Notably, the Bureau’s review of the transaction was the first to make use of the Bureau’s model timing agreement for mergers involving efficiencies claims, which had been released in draft form for comment in July 2019. The model timing agreement provides timelines for key discussions between the parties and the Bureau, the production of documents and data by the parties, and also provides for oral examinations of the parties by the Bureau. The Bureau is required to provide the parties with an estimate of deadweight loss in each market of concern, as well as an estimate of the efficiencies that the Bureau believed were substantiated as likely to be lost in the event of a remedy. Where merging parties request that the Bureau consider efficiencies and enter into the model timing agreement, the Bureau’s review will take significantly longer than the merger review timelines set out in the Act. However, it must be remembered that the vast majority of merger reviews do not involve a detailed assessment of efficiencies, as the Bureau generally considers efficiencies claims in only a handful of mergers in any given year.
Failing firm analysis – American Iron & Metal Company Inc./Total Metal Recovery (TMR) Inc. transaction
In April 2020 the Bureau announced it had closed a three-month review of American Iron & Metal Company Inc.’s (AIM) acquisition of Total Metal Recovery (TMR) Inc. (TMR), declining to take further action on the basis that TMR was a failing firm whose assets were likely to exit the market in the absence of the merger. Prior to the merger, AIM and TMR were the two largest scrap metal processors in the province of Québec. The Bureau became aware of the non-notifiable transaction in early November 2019, and on December 17, 2019, AIM and the Bureau entered into a Consent Preservation Agreement pursuant to which AIM was required to preserve and maintain the assets of TMR for a period of 60 days following the closing of the transaction on December 20, 2019. The Bureau sought and obtained court orders to compel the production of information from AIM, TMR and a third party that had expressed interest in purchasing TMR.
Under the Act, the fact that a target business is likely failing does not provide a defence for an otherwise anti-competitive merger; rather, the loss of competition is not attributed to the merger if imminent failure is probable and, in the absence of the merger, the firm’s assets are likely to exit the market because no competitive alternatives exist. The Bureau’s Merger Enforcement Guidelines state that a firm is considered failing or likely to fail only if it is or is likely to become insolvent, or has initiated or is likely to initiate (or is petitioned or likely to be petitioned) into bankruptcy or receivership. The Bureau engaged a financial expert to assess TMR’s financials and concluded that TMR was insolvent and had a high likelihood of a bankruptcy filing in the immediate future.
Once the Bureau determines that a firm is likely to fail, the Bureau examines the likelihood of various counterfactual scenarios (i.e., restructuring, acquisition by competitively preferable purchaser and liquidation) and the likely competition that would exist in such scenarios. With respect to a potential restructuring of TMR, the Bureau determined that further attempts (e.g., narrowing scope of operations, employee cost savings or aligning with a strategic partner) would not have prevented TMR’s failure nor enabled it to survive as a meaningful competitor. Similarly, the Bureau determined that liquidation of TMR’s individual assets would not have been a determining factor in facilitating entry and was not likely to result in a materially higher level of competition than if the merger did not occur.
The Bureau determined that while a thorough search for potential alternative purchasers had been conducted, no such purchaser existed. The Bureau noted that merging parties who claim that a thorough search for alternate buyers has been conducted will need to support such claims with documentary evidence. To the extent that one or more alternate buyers expressed interest, documents and information must be provided to demonstrate the steps taken by the failing firm and the alternate buyer in relation to negotiations and attempts to finalize a transaction. The Bureau may also seek information to determine how competitive that alternate buyer would be if they purchased the failing firm.
Air Canada’s proposed acquisition of Transat A.T. Inc.
By way of background, where a transaction involving a federal transportation undertaking is subject to mandatory pre-merger notification under the Act, the Minister of Transport (the Minister) must also be notified under the Canada Transportation Act. If the Minister is of the opinion that the transaction raises public interest issues, the Minister may direct the Canadian Transportation Agency (the Agency) or appoint another person to undertake a public interest assessment of the transaction, which triggers a series of steps summarized as follows:
- The Minister’s decision to direct a public interest assessment triggers the Commissioner’s obligation to deliver a report to the Minister and the parties on the competition law implications of the transaction. Notably, the regime does not contemplate that the Commissioner undertake an efficiencies analysis for purposes of advising as to whether the efficiency defence of section 96 of the Act might save an otherwise anti-competitive merger.
- The Agency or other person subsequently reports to the Minister on the public interest issues after having undertaken a comprehensive assessment including seeking the views of stakeholders (e.g., passengers, customers, suppliers, the public, other levels of government, etc.).
- After receiving the reports from the Agency or other person and the Commissioner, the Minister considers overlaps between concerns related to the public interest and those related to competition law and will then request that the parties address any public interest concerns with the Minister and address any competition concerns with the Commissioner. After doing so, the parties may inform the Minister or the Commissioner of any measures or commitments they are prepared to undertake to address their respective concerns.
- If, on the recommendation of the Minister, the Governor in Council (being the federal Cabinet) is satisfied that it is in the public interest to approve the transaction, taking into account any revisions proposed by the parties and any measures they are prepared to undertake, Cabinet may approve the transaction and specify any necessary terms and conditions.
- Importantly, where a transaction has been approved under the Canada Transportation Act, the Tribunal cannot make an order under the merger provisions of the Act. Accordingly, when the Minister commences a public interest review of a transaction under the Canada Transportation Act, the Commissioner is required to report on the competitive effects of the transaction but the Commissioner cannot challenge the transaction; instead, competition matters are considered alongside other public interest issues.
On June 27, 2019, Air Canada and Transat, two of Canada’s four largest airlines and primary integrated tour operators, announced a proposed combination. The transaction was notified to the Bureau and the Minister on July 17, 2019, and on August 26, the Minister directed Transport Canada to commence a public interest review. A public consultation period ran from November 4, 2019 to January 17, 2020.
On March 27, 2020, the Commissioner issued his report regarding the transaction. Notably, the report indicates that the Commissioner’s views are “based upon a forward-looking analysis using data and information collected for the period up to and including February 2020,” and therefore exclude the effects of the COVID‑19 pandemic:
The Commissioner notes the current environment of disruption due to the COVID‑19 virus pandemic. At the time of writing, the impact of these events on the Canadian airline industry is uncertain but appears to be potentially significant for at least the near term. The ultimate impact of these events may be relevant to the Commissioner's views regarding the likely substantial prevention or lessening of competition related to the Proposed Transaction set out in this report, but it is impossible to know the extent and duration of any impact at this time.
The Commissioner’s report concluded that based on an analysis of facts and information prevailing pre-COVID-19, the transaction is likely to result in substantial anti-competitive effects through the elimination of rivalry between the parties in the areas of overlap between their networks. Specifically, concerns were raised with respect to the provision of air passenger services or vacation packages on 83 routes between Canada and Europe, Mexico, Central America, the Caribbean, Florida and South America. It was noted that Air Canada and Transat are the only two carriers offering non-stop flights on 22 of these 83 routes.
The Bureau found that entry or expansion by competitors was unlikely to constrain the exercise of market power on these routes, concluding that barriers to entry or expansion in the relevant markets are generally high, and that no single carrier or combination of competitors is poised to replace Transat. Moreover, the Bureau noted that potential entrants face challenges related to the availability of slots and infrastructure at airports in Canada and in Europe. The Bureau also noted that foreign-based airlines may also face significant costs and obstacles in attracting Canadian customers and establishing themselves in Canada. The Bureau expressed concerns that after closing, the combined entity would hold a majority position at airports in Eastern Canada and may receive preferential allocation of infrastructure and other operational advantages. Lastly, the Bureau noted that obtaining access to feed traffic is also a factor in efficient entry on a number of transatlantic routes, and securing competitive hotel offerings would likely represent a barrier to entry for certain sun destinations.
On May 1, 2020, Transport Canada provided its public interest assessment to the Minister. This report has not been made public. There is no legislated timeline for the Minister to make his recommendation to Cabinet or for Cabinet make a final decision. At the time of writing, there is no indication of anticipated timing of the Minister’s recommendation or Cabinet’s decision, nor an indication of what the recommendation or decision will be.
In addition, on May 25, 2020, the European Commission announced it was opening an in-depth investigation of the transaction to assess whether it would negatively affect competition and lead to higher prices, reduced quality or less choice for transatlantic flights. The European Commission has concerns with respect to 33 city pairs between Europe and Canada, including 29 pairs where both companies offer direct services and four where one company flies direct and the other flies indirect via one of its hubs.
On June 11, 2020, Transat announced that if the required approvals are obtained and the conditions are met, it is expected that the arrangement will be completed during the fourth quarter of 2020. Under the arrangement agreement, the deadline for obtaining the regulatory approvals cannot be extended beyond December 27, 2020.
As many industries (and in particular travel and leisure) have suffered a significant downturn in recent months that may continue for an extended period of time, it is unclear how to best assess and measure anti-competitive effects in the future when the historical data and information collected by the Bureau largely covers a timeframe where competitive dynamics looked vastly different from those occurring today and into the near-term future. It may be that in cases where it is extremely difficult to assess anti-competitive effects, the Bureau will decline to seek a remedy and instead choose to monitor an industry and take action on a post-closing basis if necessary.
Recent consent agreement – Elanco Animal Health Incorporated’s acquisition of Bayer Animal Health
On July 14, 2020, the Bureau announced that the Commissioner had entered into a consent agreement with Elanco Animal Health Incorporated to resolve its concerns relating to Elanco’s proposed acquisition of the Bayer Animal Health business unit from Bayer AG. The consent agreement addresses the Bureau’s concerns that the transaction would result in a substantial lessening or prevention of competition in Canadian markets of low dose canine otitis treatments, feline dewormers that include tapeworm coverage, and poultry insecticides that include darkling beetle coverage.
The consent agreement contemplates the divestiture of certain canine and feline products; the foregoing of certain of Bayer’s poultry insecticides which will instead remain within a division of Bayer; and a limit on Elanco’s ability to acquire certain poultry insecticides with darkling beetle coverage for a period of time. In particular, the consent agreement prevents Elanco from acquiring, without advance Commissioner approval, Bayer’s retained poultry insecticides for a period of 10 years and prevents Elanco from acquiring a significant interest in any poultry insecticides with darkling beetle coverage for a period of two years without first providing advance notice to the Bureau and observing a prescribed waiting period prior to closing. This ensures that the Bureau is notified of certain future investments in the sector by Elanco on a pre-closing basis even if such investments are not subject to notification under the Act.
Commissioner challenges Parrish & Heimbecker’s grain elevator acquisition
Parrish & Heimbecker, Limited (P&H) completed its acquisition of 10 grain elevators located in Western Canada from Louis Dreyfus Company Canada ULC on December 10, 2019. Nine days later, the Commissioner filed an application with the Tribunal alleging that P&H’s acquisition of a grain elevator in Virden, Manitoba was likely to result in a substantial lessening of competition in certain parts of Manitoba and Saskatchewan. The Commissioner’s application states that Canadian farmers most often sell their wheat and canola to marketers such as P&H who have a local presence through an elevator, transporting their grain to the elevator where it may be cleaned, dried, blended or stored. Elevators post daily prices for purchasing the grain, with such prices taking into account the costs of these services. The Commissioner has claimed that when competing for farmers’ wheat and canola, an elevator regularly pays more than its posted price.
The Commissioner has claimed that, as a result of the acquisition, P&H now controls the only two elevators along a 180-kilometre stretch of the TransCanada highway. The Commissioner’s application points to the two elevators having previously monitored and reacted to each other’s prices, and that in the absence of the acquisition, P&H had plans to increase the capacity at its elevator, which would have further increased the rivalry between the two elevators. The Commissioner alleges that as a result of the acquisition, farmers in the area are left with limited alternatives and P&H will be able to materially raise the price farmers pay for grain handling services in the region, and farmers will be paid less for their wheat and canola. The Commissioner has requested that the Tribunal issue an order requiring P&H to divest one of the two elevators.
In response, P&H has stated that the prices it pays to purchase grain are determined by many non-local factors, and are largely dependent on the global price of the commodity from the international grain market. P&H also noted that it and other grain marketers compete to export Canadian grain to international markets, as well as to ship domestically to Eastern Canada. Accordingly, P&H’s demand for grain is a function of sales to international and domestic customers, and the price it pays farmers for grain is derived from the demand and prices in these markets and its transportation costs. P&H has also claimed that most of the farmers from whom the two elevators purchase grain are located outside of the alleged “corridor” between the two elevators.
In light of the above, P&H has claimed that the relevant geographic market is much broader than that identified by the Commissioner. P&H also disputes the Commissioner’s claim regarding the relevant product market, stating that it is the purchase of wheat or canola and not the provision of grain handling services. P&H has claimed that the acquisition does not result create, enhance or maintain monopsony power (i.e., purchasing power) in any market. Rather, P&H states that it faces vigorous and effective competition from competing elevators and other market participants, such that the control of the two elevators gives it neither the ability nor the incentive to exercise monopsony power. P&H also has claimed that barriers to entry and expansion are low, noting that rival elevators have excess capacity such that they could easily increase their grain purchases and could also easily add grain purchasing capacity. Lastly, P&H has claimed that the efficiencies likely to result from the transaction will be greater than, and will offset, the effects of any alleged substantial lessening or prevention of competition.
The Tribunal hearing is currently scheduled to occur in November 2020.
The Bureau has clearly seen a downturn in the volume of merger activity in Canada, and continues to review mergers within the established timeframes where possible. The Bureau has also issued helpful guidance while the COVID-19 pandemic continues, which may prove very useful when merger activity picks up again. It may be the case that the Bureau is faced with more complex reviews as industries consolidate in part as a reaction to the COVID-19 pandemic, and some mergers may present complicated failing firm analyses or efficiencies claims.