On June 27, 2011, Canada’s Competition Bureau released "modestly revised" Merger Enforcement Guidelines (MEGs) for public comment. The release is the latest step in a consultation process that began in September 2010 and is expected to be completed in late September 2011. The current revisions are intended to ensure the MEGs reflect current Bureau practices, recent case law, and updated economic thinking in the area. This update highlights the principal proposed changes and identifies their importance to potential merging parties.

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Background

The MEGs, which establish the analytical framework for the Bureau’s review of proposed mergers, were first issued in 1991 and were revised in 2004.  The Competition Bureau issued a discussion paper in September 2010 to solicit the views of stakeholders on whether the MEGs should be revised and, if so, the extent of those revisions (see our earlier bulletin Merger developments at the Canadian Competition Bureau). Following consultations across Canada and with foreign antitrust agencies, as well as extensive internal evaluation of the current MEGs to determine whether they reflected actual agency practice in reviewing mergers, the Bureau announced in February that it would undertake “moderate revisions” of the MEGs.

Principal proposed changes

The main changes proposed to the MEGs would not, if adopted, represent a significant shift in enforcement.  Rather, the changes seek to offer greater clarity about the Bureau’s enforcement approach and, in certain cases, merely consolidate advice provided elsewhere into the document.

  • Market definition:  Long a starting point of merger analysis, the draft MEGs make clear that it is not necessary to start by defining relevant markets, and in certain cases doing so may not even be necessary.  This shift, if adopted, will provide additional flexibility to the Bureau in the manner in which it analyzes a proposed merger and mirrors changes adopted in the United States in 2010.
  • Unilateral effects:  The Bureau has expanded its treatment of the economic theory behind a unilateral effects case (i.e., one where concerns arise regarding the potential market power of the merged entity acting on its own) and clarified that even if the products of the merging parties are not the first and second choices of a large number of buyers, there can still be unilateral effects concerns.
  • Partial interests and interlocking directorships: The Competition Act defines a merger as the acquisition or establishment of control over, or a significant interest in, the whole or part of a business of a competitor, supplier, customer or other person.  The draft MEGs expand upon the existing explanation of what constitutes a significant interest, which is the ability to materially influence the economic behaviour of a business, and includes a list of factors relevant to evaluating influence.  The draft also outlines how the Bureau will assess whether a partial interest or interlocking directorship could result in a substantial lessening or prevention of competition.
  • Buyer power:  When customers of the merged entity have countervailing power, it can help constrain the exercise of market power by the merged entity and prevent a substantial lessening or prevention of competition.  The draft MEGs expand upon the current discussion of this topic and clarify that parties must submit a credible theory about the potential exercise of countervailing power.  The draft MEGs also incorporate the Bureau’s position on monopsony power and clarify that output restrictions are not a necessary precondition to a finding of monopsony power.
  • Vertical mergers:  A vertical merger involves parties at different levels of the supply chain, as compared to a horizontal merger, which involves competitors at the same level. In vertical mergers, the Bureau has clarified that its focus will be on potential foreclosure of access to inputs or markets by the merged entity, and that it will examine whether the merged entity has the ability to harm its rivals, the incentive to do so, and the impact the foreclosure has on competition.

The revised MEGs are intended to be a one-stop shop for the Bureau’s merger review framework, thus the incorporation of previously disparate policy statements is a helpful development.  The substantive changes do not represent a marked shift in enforcement policy, but do seem designed to afford the Bureau additional flexibility in constructing its theory of the case by drawing on a range of economic tools.  They also make clear the type of evidence that the Bureau will expect merging parties to present in order to successfully argue that a merger will not substantially lessen or prevent competition.

The deadline for comments on the draft MEGs is August 31, 2011. Subject to the extent of comments received, the Bureau expects to release the final MEGs in late September 2011.