By Julius Melnitzer | May 12, 2021
This is the first article in a three-part series.
Unemployment rates and merger and acquisition activity (M&A) in Canada are both on the rise. But they’re poor bedfellows, at least as far as Canada’s jobless are concerned.
Because Canada’s merger review laws are nothing less than a deterrent to job growth. Indeed, the culprit, known as the “efficiencies” defence in anti-trust law, downright discourages employment gains.
Here’s how it works. Generally speaking, the Competition Bureau will block mergers that have anti-competitive effects. But the Competition Act prohibits the regulator from preventing a merger producing efficiencies greater than the transaction’s anti-competitive effects. In 2015, the Supreme Court of Canada gave teeth to the defence by declaring that it “gives primacy to economic efficiency”.
Generally, that translates into cutting costs. And reducing the labour force is among the most common ways to do so.
“One of the primary efficiencies in economic terms is getting more output with less input, and that certainly includes cutting the workforce,” says Cal Goldman, formerly Canada’s Competition Commissioner (1986-89) and now a Toronto-based competition practitioner at The Law Office of Calvin Goldman, Q.C. “In the merger review process, then, job losses are seen as a positive, not a negative, because they count only as a factor that boosts the efficiencies defence.”
In other words, if merging firms can show that the new entity can be more efficient because, among other things, it will require fewer employees, their combination can’t be stopped even though it may be anticompetitive.
“Employment issues don’t really fit in the Competition Act’s legal framework, nor do they have a place in enforcement policy and practice,” says Neil Campbell, a competition law partner at McMillan LLP in Toronto.
So what we have is a merger review system that can result in fewer jobs and less competition. On its face, that isn’t pretty. But what does it mean in our present economic circumstances?
As the pandemic raged on, the economy lost 207,000 jobs in April. The unemployment rate rose to 8.1 percent, up from 7.5 percent in March. And the 8.1 percent didn’t include Canadians who wanted to work but didn’t search for a job. Had they been included, the rate would have been 10.5 percent.
To be sure, there are signs of recovery. But as Glen Hodgson, a senior fellow at the C.D. Howe Institute pointed out in an op-ed in the The Globe and Mail in January, there’s also “growing evidence” of damage.
“Long-term unemployment – lasting 27 weeks or longer – has increased sharply and now represents more than one-quarter of those unemployed, with a growing risk of many discouraged workers dropping out of the work force,” Hodgson wrote.
To make matters worse, the April jobless numbers appeared even as statistics showed that Canadian companies were involved in 1,168 deals valued at US$115 billion in the first quarter of this year, up 167 percent from the same period in 2020. It’s a global trend: worldwide Q1 deal value was up 93 percent over last year. Backlogged 2020 deals, the proliferation of COVID-19 vaccines, and inexpensive capital has led some observers to forecast a 25-year high for M&A activity.
What’s emerging, then, is a perfect storm for the jobless: because Canada’s competition laws – like competition laws in most developed countries – do not factor in the negative impact of mergers on the employment landscape, it’s arguable that the livelier the M&A environment, the greater the dampener on job growth.
Making matters worse is the “failing firms” scenario in the anti-trust context. Currently, the Competition Bureau must block acquisition of a distressed firm if allowing the merger to proceed will give rise to more substantial lessening of competition than blocking the merger. That includes consideration of whether the liquidation that might result from a blocked merger would produce a higher level of competition than if the merger did proceed.
What’s interesting here, again, is that job losses are not a factor in the regulator’s evaluation process (except in determining whether a firm is “failing”). In other words, when the Competition Bureau considers whether to block a failing firm’s merger because of its anti-competitive effect, it cannot take into account the job losses that might arise on liquidation or the extent to which the merger might save some of these jobs. Ironically, jobs are relevant only if the parties try to rescue the merger by demonstrating that the “efficiencies”, including job losses, outweigh the anti-competitive effect.
From a historical perspective, failing firm cases have been few and far between in the competition context. And even the economic onslaught of the pandemic hasn’t given rise to as many distressed companies as originally anticipated. But that may change.
“With so much government support around, the pandemic hasn’t generated the number of business failures you might expect,” Campbell says. “But the general consensus is that we’re going to see more when that support starts to taper off.”
Given the extenuating economic circumstances, Goldman, who co-chairs the American Bar Association’s Future of Competition Law Standard Task Force, believes it’s time for a change.
“With so many Canadians in dire financial straits, we should be looking at the pros and cons of adding and including the effect of job losses on the Canadian public interest in our competition law policy,” he says.
And Goldman’s not the only one who’s thinking that way.
In Part II of this series, LegalWriter.net looks at the forces behind the push for change, and the options they propose.
Julius Melnitzer is a Toronto-based legal affairs writer, ghostwriter, writing coach and media trainer. Readers can reach him at [email protected] or https://legalwriter.net/contact.