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Mergers and Acquisitions in Canada


Few mergers are contested in proceedings before the Tribunal. Challenge proceedings are similar to complex commercial litigation with oral and documentary discovery, expense, delay and uncertainty, making most transactions commercially unattractive. As such, a decision by the Commissioner to challenge a transaction in proceedings before the Tribunal is usually enough to cause the parties to either abandon it, or enter into negotiations with the Commissioner to make modifications to address anti-competitive effects, which may then become the subject of a consent agreement to be entered as an order of the Tribunal.

Merger Enforcement Guidelines

The Commissioner’s approach to assessing a merger and determining whether to issue a form of clearance (either an advance ruling certificate or a no-action letter) or to challenge it, is set out in the general Merger Enforcement Guidelines (“MEGs”).[[The Bureau is in the course of updating the MEGs and in June 2011 issued for consultation a draft revision.]] The Bureau has also issued specific merger enforcement guidelines applicable to certain industries, such as banks, and has consulted on similar guidelines issued by Transport Canada in respect of mergers in the federal transportation sector, which require separate statutory approval under the Canada Transportation Act[[(S.C. 1996, c.10.)]] and notification under both that statute and the Act. As this example illustrates, it is important to remember that mergers in certain sectors invoke specific guidelines and statutory regimes apart from the Act, and require additional approvals of other federal authorities.

The general MEGs are not binding on the Tribunal or the Commissioner, but they provide assistance in understanding the approach the Commissioner takes when examining and assessing proposed mergers. They are similar to the guidelines issued by the U.S. Department of Justice and the Federal Trade Commission.

Substantial Lessening of Competition

The fundamental principle in the MEGs is that a merger will likely prevent or lessen competition substantially when the parties to the merger are more likely to be in a position to exercise a materially greater degree of market power in a substantial part of the market for two years or more, than if the merger did not proceed. Market power can be exercised unilaterally or interdependently.

Market Definition

The first stage of a merger analysis is to define the relevant market for the purpose of a competitive impact assessment. The MEGs use a hypothetical monopolist test similar to the U.S. Merger Guidelines. A relevant market is defined as the smallest group of products, including at least one product of the merging parties, and the smallest geographic area in which a sole profit-maximizing seller (a “hypothetical monopolist”) would impose and sustain a significant and non-transitory price increase, above levels that would likely exist in the absence of the merger. Generally, the MEGs consider a 5% increase to be significant and a one-year period to be non-transitory.

The consideration of potential competition from new entrants or expansion by smaller firms within the market is considered at a later stage.

Although the hypothetical monopolist approach for defining a relevant market is highly conceptual, in most cases, a preliminary examination is based on more practical considerations. These include functional substitutability, who the merging parties or their customers consider to be competitors, and information contained in prospectuses, financial reports, securities filings, offering memoranda and other similar sources. If data is available and market definition is complex, expert economists may be consulted to assist the parties in defining the market, calculating market shares and concentration, and applying the hypothetical monopolist model.

Safe Harbours

Once a market is defined both in terms of geographical boundaries and product or service, the Bureau, as a starting point, will measure the impact that the merger will likely have on market share and concentration. Generally, where the post-merger market share of the merged entity would be less than 35%, the Commissioner will not likely challenge the merger on the basis of concern related to unilateral exercise of market power.

A merger will not likely be challenged on the basis of concerns relating to the coordinated exercise of market power where, after the merger, the market share accounted for by the four largest firms would be less than 65% or the post-merger market share of the merged firm would be less than 10%. These thresholds are often referred to as “safe harbours” that distinguish between mergers that will not be reviewed closely and will likely receive a clearance, from those that will receive a more detailed analysis of competitive effects.

Where a proposed merger is outside the safe harbours, the Bureau will look at other criteria, the most important being barriers to entry. The consideration of barriers to entry includes tariff and non-tariff barriers to international trade, regulation, intellectual property issues and the extent to which entry involves incurring significant sunk costs.

While transactions that fall below the notifiable thresholds are reviewable under the substantive merger provisions, their relatively low economic significance will be a factor in determining whether the Commissioner will choose to spend the Bureau’s limited resources to challenge the transaction. In addition, relatively low asset values may imply low barriers to entry.

Vertical Mergers

A merger of firms that have a customer/supplier relationship is called a “vertical merger” and may raise concerns when it increases barriers to entry, facilitates coordinated behaviour, or forecloses competitors from access to inputs or distribution channels. While issues arising from vertical mergers are far less common than with horizontal mergers, the parties should be prepared to consider whether there are any vertical issues and address them in their notification submissions to the Bureau.

Efficiencies

Canadian competition law differs from U.S. antitrust law in that the Act expressly provides for an efficiency defense. This prohibits the Tribunal from issuing a remedial order if the parties can establish that the efficiency gains from the merger would be greater than, and would offset the prevention or lessening of, competition that would result from it.

The issues of the types of efficiencies that can be counted and the appropriate welfare standard that should be used to measure anti-competitive effects were recently the subject of lengthy litigation in Commissioner of Competition v. Superior Propane.[[{2003} 3 F.C. 529 (F.C.A.).]] Initially, the Tribunal applied a total surplus standard and found that the efficiency defense prevailed, because the gains in efficiency that would result from the merger of the two largest propane distribution companies in Canada would exceed the dead weight loss (total welfare loss) that would result from the combination of the price increase and the decrease in output that would likely follow the merger. The Tribunal decided that income transfers from consumers to producers should be treated as neutral for the purposes of the consideration of the efficiencies defense.

On appeal, the Federal Court of Appeal decided that the Tribunal had not applied the correct test and that it should have given consideration to the impact of the transfer of wealth from consumers to producers. It sent the case back to the Tribunal for re-determination. The Tribunal reassessed the impact in accordance with the directions from the Court of Appeal, but still concluded that the efficiencies outweighed the effects of the lessening of competition.

The MEGs set out the Bureau’s approach to considering an efficiencies justification to an otherwise anti-competitive merger. The Bureau has also published a Bulletin on efficiencies in merger reviews.

While mergers that are cleared on the basis of the efficiencies defense alone will not be that common, in preparing a submission to the Commissioner to obtain an advance ruling certificate or a no-action letter, efficiencies are relevant and should be addressed if they are an important business motivation for the transaction.

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