Canada’s big change to merger review
Canada’s merger review regime has undergone a fundamental shift. There is little doubt that Canada’s emerging industrial policy, which is focused on increasing productivity and efficiency, will increase concentration levels in several sectors of the economy. This policy cannot be easily reconciled with recent amendments to the Competition Act that will make it more difficult to proceed with mergers. The amendments include a legal test that presumes that mergers are anti-competitive where the post-merger levels of concentration and market share exceed the prescribed amount.
These amendments replaced the balanced approach to merger review where structural factors such as measures of concentration and market share could not be solely relied on to assess whether a merger substantially prevents or lessens competition. This approach was based on concerns that their connection with market power, being the ability to profitably increase prices or reduce consumer choice, is unclear and on the negative consequences of over-enforcement triggered by a narrow structural approach.
The Competition Bureau had also published detailed guidelines that rely on many other factors that would be considered in assessing whether mergers would likely substantially prevent or lessen competition. The Competition Tribunal and the courts endorsed this approach, while noting that the Bureau’s guidelines are not legally binding.
Successive Commissioners of Competition often complained about the balanced approach, preferring a more consumer-oriented approach to merger review. These complaints ignore the obvious point. The Competition Tribunal has always considered the interests of consumers. Indeed, the likely impact of a merger on prices and product choices is central to the analysis. Moreover, the Tribunal is an independent tribunal whose decisions are subject to appellate review. In some cases, the Tribunal and the courts upheld the Commissioner’s position. In others, they rejected it. For example, the Tribunal and the Federal Court of Appeal readily dismissed the Commissioner’s application to prohibit Rogers acquisition of Shaw.
What is the case for the amendments? Surprisingly, little evidence or analysis has been forthcoming to support the view that consumers require more protection. There is also a world-class study by John Baldwin using a unique StatCan dataset demonstrating that measures of market share and concentration are not reliable indicators of competitive intensity in the economy.
Merger Review in the U.S. and EU: A Comparison
Ironically, the market-share and concentration amendments appear to be modeled on United States anti-trust law with its overriding focus on consumer protection. In the United States, the presumption is the result of judicial interpretation and is contained in its merger enforcement agencies’ guidelines as opposed to the legislation. A subtle but important distinction. In the United States, it is a matter of enforcement policy. Other factors can be considered in the assessment whereas, in Canada, it is now a statutory presumption. Once the threshold is reached, other factors are irrelevant unless the parties can overcome the presumption.
Interestingly, while the European Union’s competition policy was initially rigidly focused on consumer protection, the new draft merger guidelines of its competition commission have adopted a balanced approach to competition policy which includes long-term economic development including efficiency, not unlike the former Canadian approach. The European Commission’s draft guidelines note that market share and concentration do not necessarily capture the intensity of competition in the overall market because competition may still be vigorous. Accordingly, Europe typically assesses market shares alongside other indicators of market power and competitive interaction. How the Commission will deal with efficiency considerations in particular cases remain to be seen.
In Canada, the presumption will have several impacts. First, it will likely result in fewer mergers. Mergers that were approved a short time ago will now be challenged. Indeed, the current Commissioner trumpeted the positive impact of the amendments last November stating that Competition Bureau is seeing fewer problematic mergers.
Second, it places a premium on the definition of the product and geographic markets, namely the availability of substitutes in the relevant product and geographic area, whether local, regional, national or international. The Competition Bureau now has an incentive to define markets more narrowly, thereby increasing market share and concentration above the prescribed amount.
Third, because the original purpose clause has been retained, the Competition Tribunal will play an enhanced role in weighing the sometimes-conflicting goals of protecting competition per se with the goals of economic efficiency and adaptability.
These impacts will have a role in the Commissioner’s challenge to Keyera’s acquisition of Plains-Midstream. According to the Commissioner the merger is presumed to be anti-competitive because the merger of their respective fractionation and storage businesses in the midstream processing of NGL’s at their facilities in Fort Saskatchewan, Alberta exceeds the maximum thresholds for concentration and market share. In their responses, Keyera and Plains dispute this characterization. In their view, the Commissioner’s definition of the product and geographic markets is too narrow. The thresholds therefore do not apply. Accordingly, the Competition Tribunal will determine the issues at a hearing that will likely take place within the next six to nine months.
More broadly, what is the future of the amendments? Who knows? What is clear however, is that the amendments would never have been passed in their current form with the renewed industrial –policy focus on productivity and efficiency. Alas, timing is everything.
John Rook, K.C. and Larry Schwartz
