The Commissioner of Competition has challenged a merger in which the largest hazardous waste landfill operator in north-eastern British Columbia acquired a company that had just received regulatory approval to build a competing landfill. We will begin by examining the specific case, and then turn to a discussion of general point of interest to be drawn from the case.
Overview of Case
The incumbent, CCS Corporation, operates two secure hazardous waste landfills in the Ft. St. John/Ft. Nelson area of British Columbia. CCS acquired Complete Environmental Inc., which in early 2010 had obtained a permit to operate a secure landfill near one of CCS’ landfills. Complete has not started to build the landfill as yet (it will take approximately a year to complete). According to the Commissioner’s application, CCS’ internal documents indicate that CCS was concerned that the development of the new landfill would lead to lower tipping prices and possibly a “price war”.
The Respondents have 30 days to file responses (it is conceivable that the Respondents could file a single joint response). They could challenge the market definitions suggested by the Commissioner (e.g., they could contest the fairly narrow product and geographic markets advanced by the Commissioner). In addition, they could challenge the bedrock contention that, but for the merger, Complete’s landfill would be built out and operated as a viable competitor to CCS. As well, since landfill operations involve significant economies of scale, one would expect the Respondents to raise the “efficiencies defence” and claim that the transaction generates efficiencies that are greater than and offset any lessening or prevention of competition proved by the Commissioner. Note however, that this type of efficiencies claim would be somewhat unusual – typically, parties argue that the consolidation of existing operations would generate efficiencies that would otherwise be unavailable if the merger is blocked. Here, the parties will have to argue that the blocking of the merger will create inefficiencies at all of the landfills.
Finally, one aspect of the requested remedy has a dubious legal basis. In addition to seeking dissolution or divestiture (discussed below), the Application seeks an order requiring the Respondents to notify the Commissioner of any future proposed merger for a period of five years, even where the merger is not notifiable under the Competition Act. Unfortunately for the Commissioner, section 92 of the Act does not give the Tribunal the power to make this kind of order without the consent of the Respondents (the Competition Tribunal is limited to ordering dissolution or divestiture only). It is difficult to see why the Respondents would consent to this additional onerous term if the case proceeds on a contested basis.
Points of Interest
This case is interesting to the general business community for a number of reasons, including:
- It is a “prevent” case – CCS and Complete have never competed; Complete was poised to enter the market once it built the landfill. The merger foreclosed this emerging competition. This case picks up on the language in section 92 of the Competition Act, which allows the Competition Tribunal to block a merger that substantially “prevents” competition. Assuming that the Commissioner is able to demonstrate the facts as alleged by the Application, the acquisition of a significant poised competitor to the dominant firm in a market is exactly the situation that the “substantial prevention” language of the Act is designed to catch.
- It involves the challenge of a non-notifiable merger – It is important to remember that the Commissioner has the authority to challenge any “merger” (which is broadly defined in the Act as “the acquisition of control over or a significant interest in all or part of a business”). Where concerns about the competitive effects of a proposed transaction could come to the Bureau’s attention (whether through voluntary disclosure by the parties or complaints from customers or competitors) the parties should exercise extreme care in structuring, documenting and discussing the proposed transaction (if they are as clear as the Application suggests, the CCS internal documents described above could prove to be quite problematic for the Respondents).
- It seeks dissolution as the primary remedy – The normal remedy in a merger case is divestiture; i.e., the purchaser must sell all or part of the acquired business on terms set out in a divestiture order. Dissolution unwinds the merger. As a matter of general principle, dissolution should only be ordered where divestiture would be ineffective (e.g., where it is unlikely that a suitable purchaser will emerge to acquire the divested assets). As yet, the material filed by the Commissioner gives no indication of why divestiture is not acceptable (indeed, divestiture is put forward as an alternative remedy).
The ultimate choice of remedy becomes very important in situations where the seller does not wish to continue to operate the business (i.e. it is looking to exit the business and cash out). In those situations, the seller typically wants the risk of competition law challenge to fall entirely on the purchaser. Going forward, it will be important for a seller to ensure that the purchase agreement contains terms that protect its interest in the event of a dissolution order.
- It is the first merger case in a long time where the Commissioner accepted undertakings – The parties had voluntarily notified the Bureau about the merger prior to closing and had co-operated with the Bureau’s investigation. The Commissioner then agreed to permit the transaction to close on the strength of the purchaser’s written undertaking that it would preserve the acquired assets until the application is determined.
Voluntary notification of a non-notifiable merger makes strategic sense in a limited set of circumstances. In many other cases, it is better to follow the proverb and “let sleeping dogs lie” – especially since the Commissioner now only has a year following closing within which to challenge a transaction under the merger provisions. We have taken both approaches in the past. Because we were not involved in this transaction, we cannot comment on the parties’ choice to voluntarily notify; we assume that the decision made good legal and business sense to the parties.
The willingness to accept an undertaking seems to represent a policy change at the Bureau. For a number of years, the Bureau refused to accept written undertakings, and insisted on formal Tribunal orders. For instance, in cases like this, the parties would have negotiated and filed a “hold separate” order with the Competition Tribunal.
If this is the case, we welcome this development. Tribunal proceedings are enormously expensive; taking informal steps like this saves time and money for everyone, and should be pursued where possible.