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SCC clarifies merger review requirements

Thursday, February 05, 2015 @ 7:00 PM | By Cristin Schmitz

The Supreme Court’s rejuvenation of the efficiencies defence to the prohibition against anti-competitive mergers could spur the Competition Bureau to compel more detailed information from industry rivals who want to merge, lawyers predict.

Justice Marshall Rothstein’s Jan. 22 ruling, in Tervita Corp. v. Canada (Commissioner of Competition) [2015] S.C.J. No. 3, marks the Supreme Court’s first pronouncement in nearly 20 years on the merger review provisions of the Competition Act.

A 6-1 majority allowed the appeal of environmental services company Tervita, and set aside a Competition Tribunal order that required Tervita, owner of two hazardous-waste secure landfills in northeastern B.C., to divest itself of a $6-million company purchased in 2011 which owns the area’s only other secure landfill.

With Justice Andromache Karakatsanis dissenting, the majority held that although the merger’s efficiency gains were “marginal” according to the Competition Tribunal, they outweighed anti-competitive effects which the Commissioner of Competition had failed to quantify. Under s. 96 of the Competition Act, those effects should thus have been accorded “zero” (rather than “undetermined”) weight in the balancing of the merger’s efficiency gains against its anti-competitive impact, Justice Rothstein said.

The Supreme Court therefore held, contrary to the Competition Tribunal and the Federal Court of Appeal below, that Tervita had made out the efficiencies defence in s. 96, and its merger remains intact.

For the first time, the court set out the test, under s. 92 of the Competition Act, for determining when the results of a merger will be deemed to substantially prevent competition (as distinct from “lessening” competition, under the other branch of s. 92). Justice Rothstein also set out the correct approach to the s. 96 efficiency defence when a merger is found to substantially lessen or prevent competition.

The Supreme Court “has breathed new life” into s. 96, said Tervita’s counsel Linda Plumpton, of Toronto’s Torys LLP. She said merger parties will be more apt to consider s. 96 defences in the future as a result.

“If you looked at the frequency with which the defence had been accepted as a basis for a merger to be permitted, that was relatively infrequent,” she said, adding that “the relevance of the case is largely in the clarity that the court has provided…for merging parties and for the commissioner in determining what their respective obligations are, both in making out the defence and, on the part of the commissioner, in quantifying and establishing what the [anti-competitive] effects of a merger are.”

Section 96 provides that mergers which substantially lessen or prevent competition may proceed if the merging parties show that on the balance of probabilities the efficiencies gained are greater than and offset the decrease in or absence of competition in the relevant geographic and product market.

However, the Supreme Court stressed that s. 96 also places an evidentiary burden on the commissioner to quantify the anti-competitive effects of the merger to the full extent that such effects are capable of being quantified.

Since the commissioner failed to do this in Tervita’s case, the merged companies were placed “in the impossible position of having to demonstrate that the efficiency gains exceed and offset an amount that is undetermined,” Justice Rothstein reasoned. “Under this approach, requiring the merging parties to prove the remaining elements of the defence on a balance of probabilities becomes an unfair exercise as they do not know the case they have to meet.”

The majority went on to expressly disapprove the Federal Court of Appeal’s opinion that an anti-competitive merger cannot be approved under s. 96 if it resulted in only marginal or insignificant gains in efficiency.

Commissioner of Competition John Pecman welcomed Tervita, saying in a statement it provides clarity to the merger review process. “The bureau will consider the guidance provided on efficiencies, and any changes to our analysis and information gathering that may be required during merger review,” he said.

Competition lawyer Navin Joneja of Toronto’s Blakes said the court provided useful guidance.

“When you get down into the guts of an in-depth competition review, I think what it will mean for merging parties is that they can plan in a way where they can potentially rely on the efficiencies defence in the right circumstances, but it also means that they will probably have to produce more information to the Competition Bureau.

“The bureau will now be obligated to request information that relates to quantifying anti-competitive effects — and quantifying efficiencies — maybe more seriously, and in a broader way than it previously had been.”

Unlike some commentators, Tom Curry of Toronto’s Lenczner Slaght said he doesn’t anticipate Tervita will stimulate more mergers.

“I think that, properly understood, it’s really a matter of the court endorsing what the commissioner had argued was the correct approach, and simply concluding that, on the evidentiary record before the tribunal, the commissioner hadn’t discharged [the evidentiary] onus,” said Curry. “But I think it’s a relatively easy fix to discharge the onus in future cases, having regard to the analysis the court laid out.”

The commissioner had persuaded the tribunal and the Federal Court of Appeal that Tervita’s merger was likely to substantially prevent competition in secure-landfill services in northeastern B.C., contrary to s. 92 of the act, a conclusion affirmed by the Supreme Court. But the top court majority disagreed with the conclusion that Tervita did not make out the efficiencies defence.

The court confirmed that section 92(1) is “forward looking” and that a “but-for” analysis should be used.

With respect to the efficiencies defence, Justice Rothstein said the commissioner should have quantified the deadweight loss resulting from the merger.

Deadweight loss results from the fall in demand for the merged entities’ products following a post-merger price increase, and the inefficient allocation of resources that occurs when, as prices rise, consumers purchase a less suitable substitute. The commissioner failed to provide the tribunal with estimates of the elasticity of demand — the degree to which demand for a product varies with its price — necessary to calculate the deadweight loss. As a result, the possible range of deadweight loss resulting from the merger remained unknown.