Advocates had argued that the law was crucial as consolidation can be more beneficial than competition, but its value appears to have diminished in the digital economy
April 30, 2019
10:51 AM EDT
With the Competition Bureau poised to release new guidelines on the role of efficiencies in merger reviews, Canada’s unique “efficiencies” defence, which allows the Competition Bureau to clear mergers with likely anti-competitive effects, may be in jeopardy.
The defence, found in the Competition Act, prohibits the Competition Tribunal from preventing a merger producing efficiencies that will be greater than the anti-competitive effects of the transaction. In a landmark 2015 decision, the Supreme Court of Canada gave teeth to the defence by declaring that it “gives primacy to economic efficiency”.
“The court noted that the efficiencies defence, in the context of the relatively small Canadian economy to which international trade is important, is Parliamentary recognition that consolidation can be more beneficial than competition,” says Ken Jull, a competition lawyer who is counsel at Gardiner Roberts LLP in Toronto.
Within a year of the Supreme Court decision, which involved a merger in British Columbia’s landfill industry, the Bureau approved the proposed acquisition of Canexus Corporation by Superior Plus Corporation on the basis of the anticipated efficiencies created by the merger and despite its anti-competitive effects.
But the deal fell through when the United States Federal Trade Commission, which has no efficiencies defence in its governing legislation, also reviewed the merger and challenged the transaction because of the anti-competitive effects on the North American sodium chlorate market.
Apparently undaunted, the Bureau again cited the efficiencies defence in approving Canexus’ acquisition by Chemtrade Logistics Income Fund in 2017.
But Canada’s former Commissioner of Competition, John Pecman, who completed his five-year term in June 2018 and is now a senior advisor in Fasken Martineau Dumoulin LLP’s Ottawa office, has repeatedly expressed concerns about the defence. All indications are that his successor, Matthew Boswell, shares his views.
“It appears that the Competition Bureau is continuing to lobby for change,” says Anita Banicevic, a competition lawyer in Davies Ward Phillips & Vineberg LLP’s Toronto office. “So the new guidelines could well render the efficiencies defence inefficient.”
As Pecman sees it, the efficiencies defence’s time has come and gone.
“The defence was inserted in the legislation in 1986 based on economic reports that Canada needed some market concentration in some sectors,” he said in an interview. “But it’s a vestige of the past, more of an industrial age philosophy that is losing its relevance in a digital economy where companies’ success are frequently based on efficiencies, particularly network effect efficiencies that focus on demand-side economies of scale.”
The Supreme Court, he adds, has only aggravated the problem by requiring a quantified measurement of both the potential costs savings and harmful effects engendered by a merger.
“On that view, if the efficiencies added up to as little as one dollar more than the harmful effects of a merger, the deal could go ahead,” Pecman says. “That doesn’t make sense, because anti-competitive effects are properly measured by factors other than the impact on prices.”
A turning point in the Bureau’s approach to the defence came in September 2017 when the Bureau reached a consent agreement with Superior Plus LP regarding its proposed acquisition of Canwest Propane from Gibson Energy ULC. Under the terms of the consent agreement, Superior agreed to shed retail propane sites in 12 markets in western Canada, northern Ontario and the Northwest Territories.
The agreement followed on the Bureau’s conclusion that a remedy was required to resolve competition concerns in 12 local markets. That conclusion was driven by an analysis that weighed the competitive effects and efficiencies on a “market-by-market” analysis that differs significantly from a national approach.
“There’s a real tension between an analysis that looks at efficiencies achieved on a national scale and a market-specific assessment,” Jull says. “The law is unclear as to which approach is the correct one.”
Then, just a few months before Pecman left, the Bureau published a draft guideline to analyzing efficiencies in merger reviews. In the consultation that followed, many stakeholders were critical of the document.
“Merging parties should be aware that the Bureau’s proposed approach to efficiencies is out of step in many respects with recent governing jurisprudence,” says Brian Facey, a competition lawyer in Blake, Cassels & Graydon LLP’s Toronto office.
The draft guide, critics said, demonstrated a general aversion to merger efficiencies that was inconsistent with the legislation, focused on the impact of Competition Tribunal orders relating to a merger rather than on the impact of the merger itself, dealt with efficiencies inconsistently, improperly applied a “market-by-market” analysis rather than considering the transaction’s impact as a whole, and failed to reflect the value of an open-trading economy for Canada.
Although the guideline has yet to be finalized, the Bureau’s tone has not abated since Pecman left.
In November 2018, Matthew Chiasson, senior competition law officer at the Bureau, and Paul Johnson, the T.D. MacDonald Chair in Industrial Economics at the Bureau, wrote a paper that questioned the purported rationale behind the efficiencies defence. They concluded that “the Competition Act has a bias towards authorizing anticompetitive mergers in the name of economic efficiency even though such mergers are more likely to reduce efficiency overall”.
Whether and to what extent the Bureau will respond to criticism by revising the draft guidelines remains to be seen.
“The Bureau is presently considering its guidance on efficiencies and we expect to update stakeholders in the coming months,” said Bureau spokesperson Jayme Albert in an e-mail response to questions from Financial Post.