It is widely recognized and accepted that vertical mergers are generally pro-competitive or benign. For example, the Competition Bureau (the “Bureau”) has stated in its Merger Enforcement Guidelines (the “MEGs”) that vertical mergers “may not entail the loss of competition between the merging firms in a relevant market” and “frequently create significant efficiencies”, such as efficiencies related to quality improvements, increased innovation, the creation of maverick firms and the elimination of double-marginalization (or double markups in price by cutting out the middle-person in a supply chain). That being said, as is evident from the Bureau’s recent review of the proposed joint venture between Federated Co-operatives Limited (“FCL”) and Blair’s Family of Companies (“Blair’s”) (the “Proposed Transaction”), vertical mergers can raise competition concerns in some circumstances, such as where they result in a competing firm being foreclosed from the market.

What Are Vertical Mergers?

A horizontal merger is a merger between firms that supply competing products. By contrast, vertical mergers involve firms that produce products at different levels of a supply chain (e.g., a merger between a supplier and a customer). Vertical mergers do not reduce competition on its face since there is no competition between the goods or services of the merging firms.

The Proposed Transaction

Each of FCL and Blair’s is involved in the agricultural business in Western Canada. In particular, FCL operates a wholesaling, manufacturing, marketing and administrative co-operative owned by more than 160 independent retail co-operatives ( the “Local-Co-ops”), which in turn own and operate ag-retailers in communities throughout Western Canada. Blair’s is a full service ag-retailer that, among other things, operates seven ag-retail locations in Saskatchewan. These retail locations supply growers with various crop inputs, such as fertilizer, crop protection products, seeds, animal nutrition products and related services (e.g., agronomy services).

On February 3, 2021, FCL and Blair’s announced that they had agreed to enter a joint venture. The joint venture would be majority owned by FCL and it would acquire Blair’s  seven ag-retail locations.

Review of the Proposed Transaction

Following its review, the Bureau concluded that the Proposed Transaction would likely substantially lessen competition in the retailing of crop inputs in Lipton, Saskatchewan, resulting in higher prices and lower service quality for local growers. In order to address these concerns, FCL and Blair’s entered into a consent agreement with the Commissioner of Competition (the “Commissioner”), pursuant to which they agreed to sell Blair’s retail location in Lipton, along with two nearby anhydrous ammonia facilities.

Significantly, as discussed in more detail in the Position Statement issued by the Bureau, the alleged anti-competitive effects of concern arose from the vertical relationship between the parties: with FCL acting as a wholesale supplier to the Local Co-op ag-retailers which compete with Blair’s ag-retail business. In particular, the Bureau examined whether the Proposed Transaction would create incentives for both FCL’s Local Co-Ops and Blair’s retail locations to raise prices or lower quality in the supply of crop inputs in the any relevant geographic area.

The Bureau considered both qualitative and quantitative evidence as part of its investigation, and notably put a lot of weight on the parties own documents with respect to its analysis of the vertical relationship between the parties and the likely competitive effects of the Proposed Transaction.

Approach to Vertical Mergers

Vertical mergers may harm competition if the merged firm is able to limit or eliminate rival firms’ access to inputs or markets, thereby reducing or eliminating rival firms’ ability or incentive to compete. The ability to affect rivals in this manner is referred to as “foreclosure”. As discussed in more detail in the MEGs, foreclosure may be partial or complete and may involve inputs or customers.

Specifically, in the case of vertical mergers, the Bureau considers four main categories of foreclosure:

  • total input foreclosure, which occurs when the merged firm refuses to supply an input to rival manufacturers that compete with it in the downstream market;
  • partial input foreclosure, which occurs when the merged firm increases the price it charges to supply an input to rival manufacturers that compete with it in the downstream market;
  • total customer foreclosure, which occurs when the merged firm refuses to purchase inputs from an upstream rival; and
  • partial customer foreclosure, which occurs when the merged firm is a distributor and can disadvantage upstream rivals in the distribution/resale of their products.

When examining the likely foreclosure effects of a vertical merger, the Bureau considers three inter‑related questions, namely (1) whether the merged firm has the ability to harm rivals; (2) whether the merged firm has the incentive (i.e., whether it is profitable) to do so; and (3) whether the merged firm’s actions would be sufficient to prevent or lessen competition substantially.

The Bureau also considers whether a vertical merger could increase the likelihood of coordinated interaction among firms, either at the upstream or downstream level. Vertical integration can facilitate coordinated behaviour by firms in the upstream market by making it easier to monitor the prices rivals charge upstream and control the competition in the market. On the other hand, vertical mergers can also facilitate coordinated behaviour by firms in a downstream market by increasing transparency (e.g., by enabling firms to observe increased purchases of inputs) or by providing additional ways to discourage or punish deviations (e.g., by limiting the supply of inputs).

While not set out explicitly in the Position Statement, in assessing whether the Proposed Transaction would create incentives for FCL and Blair’s retail locations to raise prices or lower quality in the supply of crop inputs in the Lipton area, both input foreclosure and as well as downstream coordinated effects theories of harm may have been considered by the Bureau.

Implications

This recent transaction highlights the Bureau’s continued focus on potentially anti-competitive vertical mergers – a trend that is also apparent in other jurisdictions around the world, including the United States. As such, the nature and extent of any existing or potential vertical relationships between the merging parties continues to be an important consideration in any competition-related risk assessment.

Separately, it is worth noting that the parties were able to reach a settlement prior to full compliance with the Supplementary Information Request that had been issued by the Commissioner. While in our experience this is rare, it provides a helpful precedent that merging parties will be able to point to in the future.

If you have questions about the merger provisions in the Competition Act, you can reach out to any member of Fasken’s Competition, Marketing & Foreign Investment group. Our group has significant experience advising clients on all aspects of Canadian competition law.

The information and guidance provided in this blog post does not constitute legal advice and should not be relied on as such. If legal advice is required, please contact a member Fasken’s Competition, Marketing & Foreign Investment group.

 

 

 

On September 20, 2021, Canadians will head to the polls to elect a new House of Commons. All of Canada’s major political parties have released political platforms which outline their plans to revise and, at least in their view, improve Canadian competition law and policy. Depending on which party is ultimately elected (and whether they win a majority), competition law in Canada may see some significant changes, including more serious penalties for existing offences and reviewable practices, as well as a few new ones.

Continue Reading How will the outcome of the 2021 Federal Election impact Competition Law in Canada?

On August 16, 2021, the Competition Tribunal (the “Tribunal”) dismissed the Commissioner of Competition’s (the “Commissioner”) request for interim relief in connection with the recently-completed merger of SECURE Energy Services Inc. (“Secure”) and Tervita Corporation (“Tevita”) (the “Transaction”). In summary, in its decision made public on August 23, 2021, the Tribunal found that the Commissioner had failed to provide clear and non-speculative evidence quantifying the harm likely to arise from the Transaction, as required by the “balance of convenience” aspect of the applicable test.

Background

On March 9, 2021, Secure and Tervita announced a transaction to combine their respective midstream infrastructure and environmental solutions businesses.

On June 29, 2021, the Commissioner filed a Notice of Application pursuant to section 92 of the Competition Act (the “Act”) alleging that the Transaction would result in a substantial prevention or lessening of competition in various markets in British Columbia (the “Section 92 Application”).

At the same time he filed the Section 92 Application, the Commissioner also filed a Notice of Application for Interim Order pursuant to section 104 of Act for an order preventing the merging parties from proceeding with the Transaction until the Section 92 Application is finally disposed of (the “Section 104 Application”).

Finally, because the applicable waiting period had expired and the merging parties had advised the Commissioner that they intended to close the Transaction shortly after midnight on July 2, 2021, the Commissioner requested an interim order preventing the parties from closing the Transaction until the Section 104 Application was heard. As discussed in a prior blog post, the Commissioner’s application for what would have amounted to “interim interim” relief was denied by both the Tribunal and the Federal Court of Appeal on the basis that the Tribunal does not have the jurisdiction to issue such relief, with the result that the Transaction closed as planned.

The Section 104 Application was heard by the Tribunal on August 4, 2021. During this hearing, the Commissioner verbally amended the Section 104 Application to request an order requiring certain identified facilities formerly owned by Tervita to be “held separately and operated independently” from Secure. It is unclear from the public record why the Commissioner’s amended relief was limited to select facilities when the Section 92 Application sought a full block of the Transaction, which seems more consistent with a full hold separate of the acquired business.

Test for Section 104 Order

In exercising its discretion to issue an interim order under section 104 of the Act, the Tribunal is directed to consider “the principles ordinarily considered by superior courts when granting interlocutory or injunctive relief”. In this regard, the Tribunal has consistently applied the tripartite test for injunctive relief set out by the Supreme Court of Canada (the “SCC”) in RJR-MacDonald. Accordingly, the Tribunal may issue an interim order under this provision if the Commissioner proves the following on a balance of probabilities: (a) there is a serious issue to be tried; (b) irreparable harm would ensue if an interim order is not granted; and (c) the balance of  convenience favours granting the interim order.

Competition Tribunal Decision

As acknowledged by the Tribunal, the Commissioner’s application raised “important issues with respect to each of the three parts of the tripartite test that have not previously been addressed” in the context of a fully contested proceeding. Several of these issues are summarized below.

(a)       The Applicable Test

Because the Transaction had closed and certain steps had already been taken to integrate the parties’ businesses, Secure submitted that the tripartite test set out in RJR-MacDonald did not apply. Rather, Secure argued that the Tribunal should apply the more stringent test applicable to requests for mandatory or positive relief, which, consistent with the SCC’s decision in Canadian Broadcasting Corp., would require the Commissioner to demonstrate a “strong prima facie case” rather than a “serious issue to be tried”.

While the Tribunal agreed that this stricter test would ordinarily apply to situations where the Commissioner seeks relief under section 104 of the Act that is largely mandatory in nature, it did not consider it appropriate to do so “in the very particular circumstances of this case”.

(b)       Serious Issue to be Tried

Consistent with prior jurisprudence, the Tribunal acknowledged that the threshold to determine whether there is a serious issue to be tried is a low one. In brief, the Tribunal must simply be satisfied that the issues raised are neither vexatious nor frivolous. Not surprisingly, the Tribunal quickly found that the Commissioner had met this standard, as the Section 104 Application raised issues with respect to, among other things, relevant market definition, the effectiveness of remaining competition and the application of the efficiencies defence.

(c)        Irreparable Harm

The Commissioner’s submissions with respect to harm focused on the harm that is currently occurring (and would continue to occur) pending the determination of the Section 92 Application, and notably did not include evidence suggesting that, in the absence of injunctive relief, there would not be an effective remedy available to restore competition to the requisite level. In contrast, Secure argued that the interim effects on competition are not relevant as a matter of law in an application under section 104.

The Tribunal disagreed with Secure, finding that adverse interim price and non-price effects on customers can constitute irreparable harm for the purposes of an application under section 104 of the Act. The Tribunal noted that this finding is consistent with both its prior decision in Parkland (which stated that such harm was “irreparable” as, among other things, the Tribunal has no jurisdiction to award damages under the merger provisions of the Act) and the scheme of the Act (including the purpose clause and sections 92, 100, 104 and 123).

Secure also argued that, even if interim effects were to be included in the analysis, there would be no irreparable harm as Secure’s internal “Integration Guidance” to its management team stated that there were to be no price increases to customers. The Tribunal rejected this argument, stating that it “cannot rely on a merged entity to benevolently refrain from exercising any increased market power that results from a merger” as it is “the ability to exercise increased market power that must be addressed in applications under section 104 (and indeed 92)”.

Ultimately, the Tribunal found that the Commissioner had provided clear and non-speculative evidence from which it could be reasonably and logically inferred, on a balance of probabilities, that the alleged irreparable harm would occur. In reaching this conclusion, the Tribunal was mindful that the onus of demonstrating irreparable harm to the public interest is less for a public authority such as the Commissioner than it is for a private applicant.

(d)       Balance of Convenience

This stage of the assessment requires the Tribunal to consider “which of the two parties will suffer the greater harm from the granting or refusal of an interlocutory injunction, pending a decision on the merits”. In this regard, while the Tribunal found that Secure had “provided clear and non-speculative evidence regarding the general extent of the harm that it will suffer if the relief requested by the Commissioner is granted”, the Commissioner failed to quantify the harm likely to arise from the Transaction. This ultimately proved to be fatal to Commissioner’s Section 104 Application.

Significantly, the Tribunal stated as follows:

… in a merger case where the respondent provides clear and non-speculative evidence of the extent of harm that it would suffer if the relief sought by the Commissioner is granted, the Commissioner must provide at least some “rough” or initial sense of the irreparable harm he alleges would result if that relief is not granted.

Moreover, the Tribunal stated that, particularly in the case where, as here, the Bureau has extensive information from previous cases upon which he can build, these “rough estimates” should be supported by: (i) the range of price effects that are likely to result from the merger; (ii) a range of plausible elasticities; (iii) a “ballpark” estimate of the deadweight loss; and (iv), where applicable, a basic sense of the extent to which non-price effects are likely to result from the merger. The Tribunal emphasized that this requirement “minimizes the degree of subjective judgment necessary in the analysis and enables the Tribunal to make the most objective assessment possible in the circumstances”. Where the Commissioner requires more time to prepare such rough estimates, the Tribunal noted that interim relief under section 100 of the Act may be available.

Implications

The Tribunal’s decision has a number of implications for merging parties going forward, including the following:

  • Importance of Efficiencies: Efficiencies have an important role to play under both sections 96 and 104 of the Act. Parties to efficiency-motivated mergers would be well advised to consider and prioritize the assessment and quantification of efficiencies at an early stage if they anticipate a lengthy review by the Competition Bureau.
  • Timing for Consideration of Efficiencies: As discussed in more detail in a prior blog post, the Competition Bureau’s Model Timing Agreement for Merger Reviews involving Efficiencies includes a relatively lengthy timeline for the Bureau to assess efficiencies claims. The Tribunal’s decision raises important questions regarding the utility of this timing agreement.
  • Increased Reliance of Section 100: Given the need for the Commissioner to quantify harm at an earlier stage – including in the context of a section 104 application – the Commissioner’s historic reluctance to bring section 100 applications may change. Specifically, the Commissioner may opt to file an application under section 100, followed very shortly thereafter by applications under sections 92 and 104 of the Act.
  • Less Reliance on Interim Relief: Alternatively, given the Commissioner’s heightened evidentiary burden for interim relief, the Commissioner may see fit to concentrate his efforts on the main section 92 application, relying on his jurisdiction to challenge a transaction up to one year post-closing.

Separately, although the Commissioner has previously acknowledged that “the efficiencies defence is a reality in Canadian competition law”, he has also suggested that it may be time to amend the Act to remove this uniquely Canadian defence. It is possible that the Commissioner will use this decision as further supporting his push for amendments to the Act.

If you have questions about the merger provisions in the Competition Act, you can reach out to any member of Fasken’s Competition, Marketing & Foreign Investment group. Our group has significant experience advising clients on all aspects of Canadian competition law.

The information and guidance provided in this blog post does not constitute legal advice and should not be relied on as such. If legal advice is required, please contact a member Fasken’s Competition, Marketing & Foreign Investment group.

The Association of Canadian Advertisers (ACA), the Canadian Beverage Association (CBA), Food, Health & Consumer Products of Canada (FHCP) and Restaurants Canada recently published the Code for the Responsible Advertising of Food and Beverage Products to Children (the “Code”). The Code, and its accompanying Guide for the Responsible Advertising of Food and Beverage Products to Children (the “Guide”) expand upon the legislative and self-regulatory regimes that already exist in Canada by setting out the conditions governing responsible advertising of food and beverages to children. They recognize that children are a special audience and that particular care must be taken in developing advertising for children.

Continue Reading New Industry Standard for Advertising Food and Beverage Products to Children

The Director of Investments recently issued his Investment Canada Act Annual Report for the fiscal year ended March 31, 2020.  During that fiscal year, a total of 1,032 applications for review and notifications were certified under the Investment Canada Act, being an all time high for such filings.  Of these filings, 255 were in respect of proposals to establish new businesses in Canada.  The balance of the filings were in respect of foreign acquisitions of control of existing Canadian businesses.

Continue Reading National Security Reviews Continue to Impact Investments by Non-Canadians

The recent Kobe Mohr v. National Hockey League[1] decision of the Federal Court (the “Decision”) provides important jurisprudential guidance on the application of sections 45 and 48 of the Competition Act (the “Act”).  These provisions prohibit naked anti-competitive conspiracies and conspiracies relating participation in professional sports respectively.

Continue Reading Federal Court Decision Clarifies Scope of Competition Act Conspiracy Provisions

chess pieces

On July 1, 2021, the Competition Tribunal (the “Tribunal”) ruled that it does not have the power to issue “interim, interim orders” in the context of a proposed merger of two companies in the midstream infrastructure and environmental solutions space. Rather, the Tribunal found that, in the case of mergers, interim relief is limited to that expressly provided for by sections 100 and 104 of the Competition Act (the “Act”).

Continue Reading Competition Tribunal Dismisses Request for Interim, Interim Order

In contrast to Canada, South Africa’s competition law has both competition and public interest objectives.  A major focus of the legislation from a public interest perspective is the promotion of historically disadvantaged persons and small business.  This is understandable, given the fact that when the legislation was first enacted in 1998, South Africa was emerging from an apartheid era of concentrated large enterprises and the exclusion of many, particularly historically disadvantaged persons, from the economy.

This focus is apparent in the legislation, with the preamble to the Competition Act (the “Act”) noting that “the economy must be open to greater ownership by a greater number of South Africans”.  The purpose of the Act is also clear, being to “promote and maintain competition” in South Africa in order to achieve several objectives, including “to ensure that small and medium-sized enterprises have an equitable opportunity to participate in the economy; and “to promote a greater spread of ownership, in particular to increase the ownership stakes of historically disadvantaged persons” (“HDIs”).

These objectives were enhanced through amendments to the Act that were passed into law in 2019.  The Department of Trade, Industry and Competition (the “DTIC”), under Minister Patel, has a particular focus on this topic, having recently published a which emphasises the public interest objectives of the Act.

This renewed focus has very recently come to the fore in relation to merger control.  In terms of the Act, mergers (a generic term covering M&A activity) must be notified to the competition authorities if they meet certain thresholds, and those transactions may not be implemented before approval has been obtained.  In assessing whether a transaction should be approved, the competition authorities must consider not only the traditional competition question of whether the transaction is “likely to substantially prevent or lessen competition” by assessing factors such as market concentration and barriers to entry, but also whether there are public interest concerns arising from the transaction.  The competition and public interest assessments are equally important, and it is possible that an otherwise anti-competitive merger could be approved because it is overwhelmingly in the public interest.  Similarly, an unproblematic merger from a competition perspective could be prohibited on public interest grounds.

Until now, no merger has been prohibited solely on public interest grounds.  Instead, conditions have been imposed to ameliorate the negative public interest effects of the merger.  However, following the recent emphasis on public interest, and in particular Black Economic Empowerment (“BEE”) and worker participation, the Competition Commission (the “Commission”) prohibited a merger solely on public interest grounds for the first time on 1 June 2021.

The transaction in question involved the proposed acquisition of Burger King (South Africa) and Grand Foods Meat Plant (the “Target Firms”) by ECP Africa, part of Emerging Capital Partners, a private equity firm founded in the USA with investments across Africa.  The seller was Grand Parade Investments, a company controlled by HDIs, whereas ECP Africa had no such shareholding.  Although the parties to the merger evidently offered commitments that had public interest benefits, such as increased employment for HDIs, increased employee benefits and investment in capital expenditure, it appears that these commitments were not sufficient to persuade the Commission to approve the merger.  The Commission found that the proposed transaction raised no competition concerns, but that it raised very significant public interest concerns in that it would result in a significant reduction in BEE ownership in the Target Firms – from more than 68% to 0% – and on this basis prohibited the merger.

Predictably, the Commission’s decision has drawn strong criticism.  The transaction would bring much-needed foreign investment into South Africa, and there is a concern that this decision will deter future potential investors.  Some argue that this prohibition hinders rather than assists BEE, as it prevents BEE shareholders from realising their investment and thus freeing capital to HDIs to further invest in the South African economy.  Ironically, this is an observation made by the Competition Tribunal (“Tribunal”) in its so-called Shell/Tepco decision some years ago, when the Commission sought to impose conditions to ensure that BEE was not hindered. The Tribunal cautioned the Commission against supporting HDIs by interfering in the commercial decisions made by such investors, indicating that it may put such investors at an unintended disadvantage.

Even before this decision was issued, there was understandably some scepticism that the competition authorities’ increased focused on public interest objectives might not achieve the desired outcome.  It could legitimately be argued that the more interventionist approach to tip the scales unduly in favour of the government’s developmental objectives would blunt the ability of free markets to kickstart economic growth.  This risks a movement towards single-minded interventionism, at the expense of investment, market-dynamism and international competitiveness.  This decision simply serves to justify the critics’ scepticism.

It is critical that authorities do more than simply pay lip service to the benefits of investment.  Advancement of small firms and transformation should, quite rightly, be prioritised, but with a balanced and holistic appreciation for trade-offs that may result, and with sufficient care to preserve and promote competitiveness. This sentiment is adequately expressed by the Tribunal in the Shell/Tepco merger, where then Chairperson, David Lewis warned that “the competition authorities, however well intentioned, are well advised not to pursue their public interest mandate in an over­zealous manner lest they damage precisely those interests that they ostensibly seek to protect”.

As noted in our prior blog post titled “New Competitor Collaboration Guidelines”, the updated Competitor Collaboration Guidelines (the “CCGs”) issued earlier this month include a new hypothetical example of an illegal “hub and spoke” conspiracy among a mid-stream distributor and the retailers selling its products. As discussed in more detail below, this example suggests that the Competition Bureau (the “Bureau”) intends to take a relatively broad and expansive approach to hub and spoke conspiracies – one that is not entirely supported by existing case law in Canada.

This blog post includes an overview of the conspiracy provisions in the Competition Act (the “Act”), a summary of hub and spoke conspiracies, a discussion of the new example in the CCGs and some practical advice on what businesses can do to minimize the risk of issues arising under the Act.

Overview of Conspiracy Provisions

Section 45 of the Act makes it a criminal offence for competitors or potential competitors to agree to (a) fix, maintain, increase or control the price for the supply of the product; (b) allocate sales, territories, customers or markets for the production or supply of the product; or (c) fix, maintain, control, prevent, lessen or eliminate the production or supply of the product. These types of agreements, which are often referred to a “naked” or “hardcore” cartels, are considered the “supreme evil” of competition law and, as such, are subject to severe criminal penalties. In fact, a person found guilty of an offence under this section may be imprisoned for up to 14 years and/or fined up to $25 million – which are among the most severe penalties anywhere in the world for cartel-related offences.

Summary of Hub and Spoke Conspiracies

A “hub and spoke conspiracy” is a term of art used to describe horizontal conspiracies that include participants who are in a vertical relationship with one or more of the competitor conspirators. As set out in the illustration below, the conspiracy is organized so that one level of a supply chain (e.g., a wholesaler) acts like the “hub” of a wheel. Vertical relationships up or down the supply chain act as the “spokes” and, most importantly, a horizontal agreement among the spokes acts as the “rim” of the wheel. The distinguishing feature of a hub and spoke conspiracy is the participation of the vertically aligned conspirator in the horizontal agreement, which is intended to eliminate competition among the spokes.

In order to prove a hub and spoke conspiracy, there must be direct or circumstantial evidence of an agreement among the competitors that make up the rim. In this regard, jurisprudence in the United States has made it clear that “rimless” wheels do not give rise to a hub and spoke conspiracy as that term is used in antitrust law. For example, as stated by the United States Court of Appeals for the Ninth Circuit in its decision in Guitar Centre, “what is a wheel without a rim?”

Absent direct evidence of a horizontal agreement, it can be difficult to find sufficient evidence to show a connecting agreement between the horizontal competitors to form the rim. When this is the case, courts generally look for circumstantial evidence – or “plus factors” – that may allow them to infer a horizontal agreement. As discussed in more detail in the United States’ submission to the Organisation for Economic Co-operation and Development on hub and spoke arrangements, these factors include, but are not limited to, the following: (a) the spokes acting against their own self-interest; (b) the spokes knowing about agreements with other spokes and expecting reciprocity; (c) abrupt changes to business practices; (d) bid rigging among the spokes; (e) communication among the spokes; or (f) communications from hubs to spokes regarding other spokes’ intentions.

Example of Hub and Spoke Conspiracy

The CCGs include the following example of a price-fixing hub and spoke conspiracy:

Example 1: Price-fixing agreement

X, Y and Z are firms that compete in respect of the retail sale of gadgets in Canada. They are all supplied gadgets by Company A, a mid-stream distributor, and have traditionally been aggressive competitors who never spoke to one another. Company A advised X that it wanted to increase the price of gadgets and that it had already received the consent of Y who agreed to raise prices by 5% if X raised its prices by 5% too. X agreed with its supplier to increase its price by 5%.

Analysis

This agreement would likely raise concerns under section 45 of the Act. Subsection 45(1) of the Act provides that it is illegal for two or more competitors to agree to fix, maintain, increase or control the price for the supply of a product. It is unnecessary for parties to communicate directly. In this instance, the intermediary’s assurances that Y would be increasing its prices if X did too facilitated the parties’ “meeting of the minds”, as required under subsection 45(1). Further, if Company A then proceeded to have a similar conversation with Z and Z was unaware of X’s participation in the conspiracy but was aware of Y’s participation, Z could be found guilty of conspiring with X and Y, even if it was unaware that company X was party to the conspiracy. Further, Company A may also be guilty of an offence under section 45 for aiding and abetting the conspiracy as described in sections 21 and 22 of the Code, even though Company A does not compete with any of X, Y or Z in the retail market.

The concerns in the above example arise from the existence of certain “plus factors” described in the US jurisprudence. In particular, the concerns are based on (a) communications between the mid-stream distributor (which is the hub) and the retailers (which are the spokes) regarding proposed price increases and (b) the expectation of reciprocity among the retailers. Significantly, the example also suggests that one retailer (in this case Company Z) can be liable for the entire conspiracy, even when it is not aware of all of the other participants to the conspiracy (in this case Companies X and Y). This is a broad and expansive view of the hub and spoke theory – and one that does not appear to be supported by any jurisprudence in Canada.

Implications

Only time will tell if Canadian courts are willing to accept the broad and expansive notion of hub and spoke conspiracies articulated by the Bureau in the CCGs. That being said, because the CCGs describe the general approach of the Bureau in applying section 45 of the Act, businesses would be well advised to take any and all steps to minimize the risk – or even the perception – of such concerns under this theory of harm.

In particular, in addition to avoiding inappropriate communications with competitors, businesses need to be mindful of communications with common upstream suppliers from which they acquire products or services and common downstream customers to whom they supply products or services. For example, businesses should not discuss or share any competitively-sensitive information with competitors, common suppliers or common customers, such as information relating to their current or proposed pricing, marketing plans or business strategies. Similarly, if a business has legitimately obtained competitively-sensitive information from one of its customers or suppliers, it should avoid sharing it with other common customers or suppliers – as doing so could increase the risk of the business being viewed as a “hub”.

In addition, businesses should avoid engaging in any conduct that may be construed as a “plus factor”, such as acting against their own self-interest, making abrupt changes to their business practices or communicating the intentions of one customer with another customer. To the extent that a business does engage in any such conduct, the rationale for doing so should be clearly and unambiguously recorded in relevant business documents, such as meeting minutes or business, marketing or strategic plans.

Given the Bureau’s broad and expansive view of hub and spoke conspiracies, and the significant consequences that can arise from a breach of the cartel provisions in the Act, businesses should consider adopting robust compliance policies or updating their existing policies.

If you have questions about the cartel provisions in the Competition Act and/or compliance policies, you can reach out to any member of Fasken’s Competition, Marketing & Foreign Investment group. Our group has significant experience advising clients on all aspects of Canadian competition law.

The information and guidance provided in this blog post does not constitute legal advice and should not be relied on as such. If legal advice is required, please contact a member Fasken’s Competition, Marketing & Foreign Investment group.

Following its recent announcement of a proposed market inquiry in this sector, the South African Competition Commission (the “Commission”) is continuing its efforts to improve regulatory scrutiny within digital markets.  On 7 May 2021, the Commission published for comments draft amendments to its guidelines for the notification of small mergers (the “Draft Amendments”).

Pursuant to the provisions of the Competition Act, No. 89 of 1998 (as amended) (the “Act”), small mergers are not subject to pre-merger notification because they do not exceed the applicable pre-merger notification thresholds. However, the Commission may, for a period of up to 6 months following the implementation of a small merger, call for the merger to be notified if it is of the opinion that the merger may substantially prevent or lessen competition or that it cannot be justified on public interest grounds.

The existing guidelines require that parties to a small merger who are being investigated or prosecuted for engaging in prohibited practices inform the Commission of their proposed merger.  The Draft Amendments seek to expand the scope of these guidelines as outlined below.

The Commission has increasingly expressed concerns over the insufficient regulation of competition within digital markets, resulting in its recent launch of a market inquiry into online intermediation platforms. The Draft Amendments note that there is an increasing risk that the growth of digital players through the acquisition of new, innovative companies “may have a detrimental impact on innovation, particularly where these digital companies act as gatekeepers in multiple markets.” The Commission has concerns that where these acquisitions are of start up entities with assets and turnover that fall below the merger notification thresholds, they will not require notification and may therefore escape regulatory scrutiny. The Draft Amendments thus seek to clarify instances where small mergers within digital markets will need to be notified.

The Draft Amendments retain the requirement of the existing small merger guidelines that the Commission be informed of a small merger where, at the time of entering into the transaction, any of the firms, or firms within their group, are:

  • subject to an investigation by the Commission under Chapter 2 of the Act (being the chapter dealing with prohibited practices); or
  • respondents to pending proceedings referred by the Commission to the Competition Tribunal under Chapter 2 of the Act.

To address the concerns outlined above, the Draft Guidelines seek to expand the criteria for such notification to include small mergers where either the acquiring firm or target firm, or both, operate within one or more digital markets and one of the following criteria are met:

  • “the consideration exceeds R190 million provided the target firm has activities in South Africa;
  • the consideration for the acquisition of a part of the target firm is less than R190 million but effectively values the target firm at R190 million (for example, the acquisition of a 25% stake at R47.5 million) provided the target firm has activities in South Africa and, as a result of the acquisition, the acquiring firm gains access to commercially sensitive information of the target firm or exerts material influence over the target firm within the meaning of section 12(2)(g) of the Act;
  • at least one of the parties to the transaction has a market share of 35% or more in at least one digital market; or
  • the proposed merger results in a combined post-merger market share at which the merged entity gains or reinforces dominance over the market, as defined by the Act.”

Parties have until 21 June 2021 to submit comments on the Draft Amendments. For more information please contact any member of Fasken’s Competition, Marketing & Foreign Investment group. Our group has significant experience advising clients on all aspects of South African competition law.