As discussed in more detail in our prior blog post titled “Competition Bureau Recommendations to Strengthen the Competition Act”, in a continuing effort to ensure that Canada has an effective and impactful competition law framework, Senator Howard Wetston invited interested stakeholders to participate in a consultation to promote additional dialogue on the path forward for Canadian competition law. As part of this consultation, Senator Wetston received comments from more than 25 stakeholders, including a detailed submission from the Competition Bureau (the “Bureau”).
The Bureau’s submission includes 35 wide-ranging recommendations that, if implemented, would fundamentally reshape competition policy in Canada. To help businesses better understand the impact of these recommendations, we’re releasing a series of five blog posts discussing the recommendations on a topic-by-topic basis. This is the first blog post in the series, which is focussed on merger review in Canada.
As set out in the appendix to this blog post, the Bureau’s submission includes seven recommendations regarding merger review in Canada. These recommendations are proposing fundamental changes to the merger review process, including introducing structural presumptions; eliminating the efficiencies defence; requiring that remedies restore competition to pre-merger levels; and extending the limitation period from one year to three years. The Bureau has also indicated that the Competition Act (the “Act”) needs to be amended to better address acquisitions of emerging competitive threats; include a more workable standard for injunctions; and close several perceived loopholes in Canada’s pre-merger notification regime.
- Structural Presumptions
Subsection 92(2) of the Act states that the Competition Tribunal (the “Tribunal”) “shall not find that a merger or proposed merger prevents or lessens, or is likely to prevent or lessen, competition substantially solely on the basis of evidence of concentration or market share”. Instead, the Bureau is required to prove that a merger is likely to harm competition by, for example, leading evidence on anticipated price effects, barriers to entry and the extent of remaining competition.
According to the Bureau, “[t]he requirement to prove that a concentrative merger is likely to harm competition is not an efficient use of judicial, business, or public sector resources”. In order to address this concern, the Bureau has recommended that “[s]tructural presumptions … be enacted to simplify merger cases by shifting the burden onto the merging parties to prove why a concentrative merger would not substantially lessen or prevent competition”. The Bureau does not indicate what it would consider to be a “concentrative merger”.
In its submission, the Bureau notes that the US has been making use of burden-shifting “structural presumptions” since the US Supreme Court’s Philadelphia National Bank decision in 1963. The Bureau also suggests that such presumptions are “logical” and “[follow] the economic conclusion that mergers in highly concentrated markets are more likely to be anti-competitive”.
While the United States House Judiciary Subcommittee on Antitrust, Commercial and Administrative Law has stated that “codifying the structural presumption would help promote the efficient allocation of agency resources and increase the likelihood that anticompetitive mergers are blocked”, others have questioned the benefit and utility of structural presumptions. For example, US Circuit Judge Douglas Ginsburg of the US Court of Appeals for the DC Circuit has stated (pay wall) as follows:
I think presumptions in antitrust do not have a glorious history. They’ve proven to be I think counterproductive in general and an invitation to error…. If you look at industrial organization economics today based on its empirical basis, you would see that there is really no justification for any market share presumption. There simply isn’t an adequate or meaningful correlation between market share and anticompetitive outcomes. [emphasis added]
Similarly, Deborah Feinstein, a former director of the US Federal Trade Commission, has questioned (pay wall) the level of cost savings that will be realized through the use of “structural presumptions: “So much of the fights we have had have been about market definition. One doesn’t get to market shares and … presumptions and burden shifting until we have defined the market, and that is really much of where the ballgame is in most of these cases.”
Among other concerns with “structural presumptions” is that they would likely increase uncertainty for both the Bureau and the merging parties, particularly in the case of contested merger proceedings. For example, in many cases the merging parties and the Bureau will not agree on market definition, with the result that they will not necessarily know at the outset of a proceeding whether the case involves a “concentrative merger” and whether the burden has shifted to the merging parties. In the context of contested proceedings, a finding regarding market definition would not be known until after the Tribunal has weighed in, something that may take many months.
- Efficiencies Defence
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.
According to the Bureau’s submission, the efficiencies defence raises four important problems. In particular, it (a) permits mergers that are harmful to Canadians; (b) is inconsistent with international best practice; (c) is difficult – if not impossible – to implement properly, particularly in highly innovative markets; and (d) suffers from a misguided original policy intent. In light of these concerns, the Bureau has recommended that the efficiencies defence be eliminated and that efficiencies be treated as a factor when considering the effects of mergers. Such treatment would, according to the Bureau, “permit a more flexible and modern approach to efficiencies analysis” and “avoid immunizing anti-competitive mergers simply because private benefits may subjectively outweigh the tangible and provable anti-competitive effects of a merger”.
In contrast to the concerns expressed by the Bureau, others have expressed support for Canada’s approach to merger review generally and the efficiencies defence specifically. For example, as noted in an article by Michael Trebilcock and Ralph Winter, “[c]ommentators have often claimed that Canada’s competition legislation is among the most economically sophisticated in the world [largely] based on the explicit recognition given to efficiency as an overall criterion in the Competition Act … and as a specific criterion in the treatment of mergers”. In addition, both the Report of the Advisory Panel on Efficiencies (2005) and the Compete to Win – Final Report (2008) recommended that the efficiencies defence be retained “because in rare but important cases, a trade-off between efficiency gains and a substantial lessening or prevention of competition may be justified”.
There is significant value to retaining the efficiencies defence. Among other things, it provides an effective method to evaluate transactions on a case-by-case basis to determine whether the expected efficiencies outweigh the potential anti-competitive effects. Moreover, as noted by the Competition Law and Foreign Investment Review Section of the Canadian Bar Association in its submission to Senator Wetston, “[e]fficiencies can lead to significant benefits for our economy by generating cost savings, increased economies of scale and innovation”. These and other important benefits could be lost if efficiencies were only considered as a factor in the merger review process rather than as a stand-alone legal defence.
- Merger Remedies
The Tribunal is able to order remedies where it finds that a merger prevents or lessens, or is likely to prevent or lessen, competition substantially. These remedies may include, among other things, prohibition of a proposed merger, dissolution of a completed merger or the divestiture of assets or shares.
With respect to the scope of the remedy that can be ordered, the Supreme Court of Canada has indicated the following: (a) “[t]he evil to which the drafters of the Competition Act addressed themselves is substantial lessening of competition” (emphasis added); (b) it “hardly needs arguing that the appropriate remedy for a substantial lessening of competition is to restore competition to the point at which it can no longer be said to be substantially less than it was before the merger”; and (c) the “least intrusive of the possible effective remedies” should be ordered.
The Bureau has taken issue with the current approach to remedies, noting that “a merger remedy can leave a marketplace in a state where competition is still lessened or prevented to a degree”, as long as the degree is not considered substantial. This means that “merging parties can resolve anti-competitive mergers through remedies that still reduce competition in already concentrated markets”. In order to address these concerns, the Bureau has recommended that “the [merger remedy] standard [established in the case law] be revisited to ensure that remedies preserve the pre-merger state of competition”.
Revisiting the merger remedy standard would not only involve challenging appellate jurisprudence in Canada, but also established international principles, such as the International Competition Network’s recommended practice of “[requiring] the least intrusive [effective] remedy while permitting, if possible, the realization of the merger’s efficiencies”.
- Limitation Period
Section 97 of the Act prevents the Commissioner of Competition (the “Commissioner”) from challenging a merger more than one year after it has been substantially completed. The Bureau is of the view that this limitation period is too short and should be extended to three years. In this regard, the Bureau has stated, among other things, that a longer limitation period would (a) “better allow the Bureau to detect and review merger transactions that are not subject to mandatory pre-merger notification” and (b) “enhance the Bureau’s ability to protect competition by monitoring industry developments and acting against any harmful effects of a merger when marketplace events necessitate such action” – something the Bureau has suggested is particularly relevant “in circumstances where markets may evolve quickly”.
The duration of this limitation period is not without legislative history. As part of the 2009 amendments to the Act, the limitation period was reduced from three years to one year. Shortly after these amendments came into effect, the Bureau issued a short guide wherein it acknowledged, among other things, that “[t]he amendments will increase the predictability, efficiency and effectiveness of the enforcement and administration of the Competition Act for both business and the Competition Bureau” (emphasis added). Notwithstanding that prior view, the Bureau’s current view is that “[a]n extension of the … limitation period need not reduce certainty for merging parties” because “[t]he vast majority of merger reviews in Canada result in the issuance of either a ‘No-Action Letter’ or an Advance Ruling Certificate in advance of the merger closing”.
- Acquisition of Emerging Competitive Threats
In Canada, remedies are only available when the Commissioner can identify, on a balance of probabilities, “concrete market opportunities” that an emerging competitor is likely to exploit. According to the Bureau, “[t]his can be difficult – if not impossible – when a business is still developing the products that would challenge other competitors” – something that “casts doubt on the practicality of effectively addressing killer acquisitions in Canada”.
In light of these concerns, the Bureau has stated that “[t]he standards established from analysis of more traditional industries are not suitable for assessing acquisitions of emerging competitors in the digital economy” and that “[a] more workable standard would provide additional flexibility to protect the competitive process”.
The Bureau has not explicitly recommended a standard or probabilities threshold for assessing acquisitions of emerging competitors in the digital economy. Presumably, the Bureau will weigh in with a recommendation if such an amendment is under consideration. However, it bears noting that the Bureau does refer to the probabilities thresholds proposed in other jurisdictions, including Australia (a “possibility” that an emerging competitor could become an effective competitor to existing incumbents “that is not remote”), the UK (a “realistic prospect” “that competition will be substantially lessened) and the US (an “appreciable risk” that business conduct could “materially” lessen competition). Each of these probabilities thresholds is lower than the “likely to cause a substantial lessening or prevention of competition” (emphasis added) threshold currently utilized in Canada, and would lower the legal burden that the Commissioner must meet to challenge acquisitions of emerging competitors in the digital economy.
Section 104 of the Act allows the Tribunal to issue any interim order that it considers appropriate, including an order preventing the merging parties from closing a proposed transaction. 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”. Accordingly, the Tribunal may issue an interim order under this provision if the Commissioner proves each of 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.
According to the Bureau, recent decisions call into question the practicality of this provision. In particular, the Bureau has noted that these decisions seem to leave the Bureau only three weeks in which to: (a) receive, organize, and review the large volumes of business records and data needed to assess the likely effects of the merger; (b) disseminate that information to experts and have them provide reports on the likely effect of the merger; (c) incorporate that information into its own analysis; and (d) be in a position to file injunction materials with the Tribunal, including “witness statements, econometric modelling, expert reports, and other detailed forms of evidence”. Moreover, after the Bureau files such an application, the Tribunal has only a week to adjudicate the application before the merging parties are in a position to close the transaction. This process places a significant burden on all parties involved and, in the Bureau’s view, places the Commissioner in a position where he “may be unable to protect Canadian consumers against [foreseeable] anti-competitive effects … because the case law has erected a formidable standard that the Commissioner must overcome”.
In light of the above, the Bureau has recommended that the “standards [necessary to file, hear, determine, and obtain interim injunctions] should be reviewed in order to ensure that there is a workable avenue to protect competition on an interim basis”. The Bureau did not include a proposed approach to injunctions in its submission. Presumably, the Bureau will weigh in with a recommendation if such an amendment is under consideration.
Interestingly, since the Bureau’s recommendations were submitted, the Federal Court of Appeal released a decision finding that the Tribunal has the jurisdiction to grant “interim interim” relief to delay a proposed merger until an application for “interim” relief (i.e., injunctive relief) can be heard and decided. It remains to been seen whether the Federal Court of Appeal’s decision will alleviate (at least to some extent) the Bureau’s concerns regarding the practicality of seeking injunctive relief.
Separately, the Tribunal recognized in its decision in Secure Energy Services that a “part of the solution [to the concerns raised by the Bureau] could be to reduce the amount of information that is sought in a [supplementary information request] … that then needs to be assessed within a very short period of time”. As a practical matter, more targeted information requests would alleviate undue burden for the Bureau and the merging parties in the merger review process.
- Perceived Gaps in the Pre-Merger Notification Regime
According to the Bureau’s submission, the current pre-merger notification regime is constrained by several significant issues. In its view, this regime (a) lacks an anti-avoidance provision, which can allow merging parties to avoid notifying by “gaming” the system; (b) ignores some transactions involving foreign businesses that can have negative effects on Canadians; and (c) contains many technical loopholes that make it more difficult for the Bureau to detect and effectively investigate all mergers affecting Canada. The Bureau has suggested that these issues “increase the risk that [it] will … not be made aware of problematic mergers” and that the technical loopholes “should be closed to ensure that [it] maintains the ability to detect and review economically significant mergers affecting Canada”.
Ultimately, if the Bureau is successful in having these issues addressed, it will likely result in a greater number of transactions being subject to the pre-merger notification provisions in the Act.
If you have questions about the merger provisions in the Competition Act or the recommendations in the Competition Bureau’s submission, 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.
Merger Review Recommendations
Recommendation 2.1 (Efficiencies exception): The Act may permit anti-competitive mergers when the private benefits of merging outweigh the broader economic harm of the merger. The efficiencies exception should be eliminated, and instead efficiencies should be considered as a factor when considering the effects of mergers.
Recommendation 2.2 (Competition test): The requirement to prove that a concentrative merger is likely to harm competition is not an efficient use of judicial, business, or public sector resources. Structural presumptions should be enacted to simplify merger cases by shifting the burden onto the merging parties to prove why a concentrative merger would not substantially lessen or prevent competition.
Recommendation 2.3 (Prevent standard): The standards established from analysis of more traditional industries are not suitable for assessing acquisitions of emerging competitors in the digital economy. A more workable standard would provide additional flexibility to protect the competitive process.
Recommendation 2.4 (Remedial standard): The remedy standard established in the case law does not restore competition to pre-merger levels, allowing merging parties to accumulate market power and harm the economy. The standard should be revisited to ensure that remedies preserve the pre-merger state of competition.
Recommendation 2.5 (Injunctions): The ability to temporarily pause the completion of a merger pending the outcome of proceedings before the Tribunal is subject to legal standards that are impractical. These standards should be reviewed in order to ensure that there is a workable avenue to protect competition on an interim basis.
Recommendation 2.6 (Limitation period): The Act provides the Commissioner with only a short time to challenge a merger. The limitation period in section 97 should be extended to three years.
Recommendation 2.7 (Notification): Some mergers can escape detection by the Bureau due to loopholes in the Act. These loopholes in pre-merger notification requirements should be closed to ensure that the Bureau maintains the ability to detect and review economically significant mergers affecting Canada.