On May 21, 2020, the Competition Bureau (the “Bureau”) released its Model Timing Agreement for Merger Reviews involving Efficiencies (the “Model Timing Agreement”), which includes guidance intended to inform businesses and their advisors of the Bureau’s approach to the analysis of efficiencies claims, the circumstances in which the Bureau will consider efficiencies claims and the timelines applicable to the Bureau’s review of efficiencies claims (the “Bulletin”). While the need for the Model Timing Agreement is debatable, the Bulletin does provide helpful guidance for the small subset of mergers in which the efficiencies defence is ultimately invoked.
This blog post discusses several key aspects of the Bulletin, including the efficiencies defence, the Model Timing Agreement and the types of information that merging parties will need to produce to substantiate their efficiencies claims. It also identifies and describes ten key takeaways for businesses going forward.
By way of background, the Competition Act (the “Act”) provides the Competition Tribunal (the “Tribunal”) with broad powers to remedy mergers that are likely to result in a substantial prevention or lessening of competition (an “SPLC”). Specifically, the Tribunal can, in the case of a completed merger, order dissolution of the merger or disposal of assets and shares, or, in the case of a proposed merger, order the parties not to proceed with the merger or part of the merger. In addition, the Tribunal can, with the consent of the Commissioner of Competition (the “Commissioner”) and the merging parties, order the parties to take any other action.
Section 96 of the Act, commonly known as the efficiencies defence, provides that the Tribunal cannot make a remedial order where it finds that the efficiencies likely to arise from a merger are greater than, and will offset, the anti-competitive effects of the merger. As noted in the Bulletin, “[t]his trade-off analysis involves a cost benefit analysis that assesses whether the alleged efficiency gains from the merger owing to the integration of resources outweigh the anti-competitive effects that result from the decrease in or elimination of competition that arises due to the merger”. The trade-off analysis is typically a complex process that involves the review of significant amounts of documents and data from the merging parties as well as detailed discussions among the Bureau, the merging parties, their counsel and their experts.
The Bureau has noted that, in its experience, merging parties have generally not provided efficiencies-related information or submissions at an early stage of a review. Instead, they “have waited for the Bureau to reach a definitive conclusion that the merger is likely to result in an SPLC before providing detailed information regarding efficiencies”, with the result that the analysis of efficiencies claims has been shifted late into the Bureau’s review of the transaction – a time “when the Bureau’s resources are focused on assessing the anti-competitive effects of a merger in order to make a determination of whether enforcement action is required”.
Model Timing Agreement
As noted in the Bureau’s News Release, the Model Timing Agreement “establishes timed stages for parties to engage with the Bureau, including the production of information and evidence regarding their efficiencies claims”. The timeframes contemplated by the Model Timing Agreement are set out below – although they can be amended by the parties on consent. However, the merging parties cannot close their transaction while the Bureau’s review is ongoing.
In the absence of the parties entering into a timing agreement that the Bureau deems acceptable, the Commissioner has indicated that he will not be willing to exercise his discretion to consider the efficiencies defence as part of the merger review process.
Information Required to Test Efficiencies Claim
Although the evidence and information required to assess merging parties’ efficiencies claims will vary from case-to-case, the Bulletin indicates that the Bureau will generally require (a) information on the merging parties’ operations and assets; (b) plans for the merging parties’ businesses in the absence of the merger; (c) analysis and planning documents relating to the implementation of the merger; (d) analysis of merger efficiencies; and (e) information from past comparable integrations. The Bulletin notes that this “evidence and information … should be provided on a with prejudice basis and be sufficiently detailed to enable the Bureau to ascertain the nature, magnitude, likelihood and timeliness of the asserted gains, and to credit (or not) the basis on which the claims are being made”.
Following the review of the merging parties’ efficiencies claims and supporting information, the Bureau will likely have further questions for the merging parties. In order to ensure that accurate and complete responses to these questions are provided, the Model Timing Agreement provides for the examination of representatives of the merging parties under oath. In addition to engaging with the merging parties and their experts, the Bureau may also use its own outside experts, including industry, economic or accounting experts, to advise on potential efficiencies arising from the merger.
There are a number of key takeaways for businesses arising from the Model Timing Agreement, the Bulletin and the historic use of the efficiencies defence.
First, the efficiencies defence is invoked in only a small subset of the mergers reviewed by the Bureau. For example, based on publically available information, the Bureau has either decided not to challenge or to seek reduced remedies based on the efficiencies defence in respect of only five mergers since 2016, including Superior Plus Corp.’s proposed acquisition of Canexus Corporation (which was subsequently blocked by the U.S. regulators), Superior Plus LP’s acquisition of Canwest Propane, Chemtrade Logistics Income Fund’s acquisition of Canexus Corporation, Calm Air’s merger with First Air and, most recently, Canadian National Railway Company’s acquisition of H&R Transport Limited. As such, the Model Timing Agreement will likely have very limited application.
Second, if merging parties anticipate raising the efficiencies defence and would like the Commissioner to consider their efficiencies claims before making an enforcement decision, they will need to enter into a timing agreement. In the absence of a timing agreement acceptable to the Bureau, it seems that efficiencies and, in particular, whether the efficiencies likely to arise from a merger are greater than and offset its anti-competitive effects, will be analyzed for the first time by the Tribunal rather than by the Bureau in advance of any prospective litigation – an outcome that increases costs, uncertainty and timelines for the Bureau and the merging parties.
Third, because the Model Timing Agreement includes terms relating to compliance with supplementary information requests (“SIRs”), it is contemplated that merging parties would enter into a timing agreement prior to the beginning of the second statutory waiting period. In this regard, the Bulletin notes that “[e]ntering into a timing agreement would not be perceived as a concession that a merger will give rise to a SPLC, but rather as a recognition that a matter involves complex competition issues that will require detailed analysis, including the quantification of a range of anti-competitive effects by the Bureau”.
Fourth, while the Model Timing Agreement is intended to “establish a schedule for the expeditious resolution of [proposed transactions]”, it may actually increase the length of the Bureau’s review (at least in certain cases). This is because the Model Timing Agreement contemplates a linear review, in which the Bureau assesses and reaches a conclusion on the competitive impact of the proposed transaction before even considering the merging parties’ efficiencies claims. In fact, the Model Timing Agreement contemplates that efficiencies submissions will generally be provided more than a month after full compliance with SIRs and that the “analysis of efficiencies and the resulting trade-off [will] occur after the end of the second waiting period”. This is in stark contrast to the position taken in the Bureau’s draft Practical Guide to Efficiencies Analysis in Merger Reviews (the “Draft Efficiencies Guide”), which encourages merging parties to provide their initial efficiencies submissions at an early stage in order to “allow the Bureau sufficient opportunity to analyze potential effects and efficiencies concurrently”. This suggests that the Bureau will no longer be willing to consider potential effects and efficiencies simultaneously – even if parties choose to provide an efficiencies submission at an earlier stage.
Fifth, the Model Timing Agreement requires that merging parties provide a significant amount of information to the Bureau to support their efficiencies claims, including making representatives available for examinations under oath – something that was recently done as part of the Bureau’s review of the CN/H&R merger. Preparing for oral examinations will impose a tremendous burden on company representatives, who will need to be prepared to discuss a wide range of issues “on any matter relevant to the claimed efficiencies”.
Sixth, the Bulletin indicates that the Bureau will consider both quantitative and qualitative efficiencies as part of its analysis. However, as reflected in the Tribunal’s decision in CCS Corporation and the Bureau’s Draft Efficiencies Guide, efficiencies will be included in the trade-off analysis only where they (a) result in productive, dynamic or allocative benefits; (b) are likely to be brought about by the merger; (c) do not arise only as a result of a redistribution of income between two or more persons; (d) accrue to Canada or Canadians; and (e) would be lost in the event of the order being sought by the Bureau (referred to as “order specific”) (collectively, the “Five Screens”). Given the complexity of assessing potential efficiencies against the Five Screens and the timelines imposed by the Model Timing Agreement, parties that intend to make efficiencies claims should consider retaining experts at an early stage – including both an accounting expert to quantify the efficiencies likely to arise from the transaction and an economist to quantify the anti-competitive effects against which the efficiencies will be balanced.
Seventh, it appears that the Model Timing Agreement, the associated timeframes and the shift to a linear review are premised on an interpretation that section 96 of the Act involves a market-by-market trade-off analysis. However, this market-by-market approach is inconsistent with the statutory language and governing jurisprudence. For example, in its decision in Superior Propane, the Tribunal stated that “section 96 of the Act applies to the transaction in its entirety” and that “[t]here is no requirement that gains in efficiency in one market or area exceed and offset the effects in that market or area”. This market-by-market approach will likely be challenged in the next efficiencies case that proceeds to the Tribunal.
Eighth, given the timelines contemplated by the Model Timing Agreement, merging parties that intend to raise efficiencies claims will need to ensure that sufficient time is built into transaction timelines. In this regard, it is worth noting that the Bureau took about four months to review the parties’ efficiencies claims in the CN/H&R merger, consistent with the timelines in the then draft model timing agreement.
Ninth, the lengthy timeframes in Model Timing Agreement are not necessarily conducive to encouraging constructive dialogue and cooperation. Rather, the lengthy timeframes may have the opposite result, as merging parties may choose to close their transactions immediately following the expiry of the second 30-day statutory waiting period in order to begin realizing efficiencies as soon as possible instead of agreeing to the Model Timing Agreement.
Finally, the Bulletin notes that “[the Bureau] will continually reassess its process for analyzing efficiencies in merger reviews for whether there is a more effective manner to undertake this analysis” and that “[it] remains open to receiving feedback in relation to the Model Timing Agreement, and will update this guidance as the process continues to evolve”. It will be interesting to follow developments in this regard – particularly if merging parties push back on the lengthy timelines with a view to implementing efficiency-enhancing mergers more quickly.
If you have questions regarding the merger review process, including the potential application of the Model Timing Agreement or the efficiencies defence, you can reach to any member of Fasken’s Antitrust/Competition Marketing 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 Antitrust/Competition Marketing group.