Summary
Facts
Supreme Court decision
Prevention of competition analysis
Efficiency defence
Implications
Comment
Summary
On January 23 2015 the Supreme Court released its much-anticipated decision in Tervita Corp v Canada.(1) In 2011 the commissioner of competition had challenged Tervita Corp's merger with a potential competitor, Complete Environmental Inc. In 2012 the Competition Tribunal ruled in favour of the commissioner and ordered Tervita to divest itself of the assets it had acquired. The Federal Court of Appeal upheld that decision. In its first ruling on the Competition Act's merger review provisions in more than 20 years, the Supreme Court allowed Tervita's appeal and overturned the earlier decisions.
The decision largely validated the commissioner's analytical approach, but found fault with the commissioner's failure to adduce evidence of the identified anti-competitive effects. Section 96 of the Competition Act provides that no order can be made in respect of a merger where the merger is likely to result in gains in efficiency that will be greater than, and will offset, the anti-competitive effects of the prevention of competition that are likely to result from the merger. The fact that Tervita had demonstrated even marginal efficiency gains was enough to succeed with the Section 96 defence.
There are several key lessons from the case:
- In appropriate cases, the commissioner will challenge mergers or acquisitions believed likely to prevent competition;
- The analysis and evaluation of potential efficiency gains will take on a greater role in strategic mergers where a lessening or prevention of competition is possible;
- Small mergers that do not exceed the pre-merger notification thresholds are not immune from scrutiny; and
- A robust competition compliance programme that includes training on how employees communicate can help to minimise competition law-related risks.
Tervita owns and operates the only two hazardous waste landfills in northeastern British Columbia. These landfills are utilised by oil and gas producers to treat, recover and dispose of the hazardous waste produced through their drilling activities. On January 7 2011 Tervita acquired the shares of Complete, which owned a site at Babkirk in northeastern British Columbia that had received a provincial government permit authorising the construction of a third secure landfill in the area that could potentially compete with Tervita. Tervita paid just over C$6 million for Complete's shares. The acquisition did not meet the financial thresholds under the Competition Act, which required mandatory pre-closing notification to the Competition Bureau.
However, on January 26 2011 the bureau filed an application with the tribunal to challenge Tervita's acquisition of Complete. The application alleged that the transaction substantially prevented competition by precluding a competitor of Tervita from building and operating a landfill at Babkirk. Conversely, Tervita argued that Complete would not have built a hazardous waste landfill at Babkirk and instead would have operated a bioremediation business which would not have competed with Tervita's landfills in the area.
On May 29 2012 the tribunal ruled in favour of the commissioner and ordered Tervita to divest the Babkirk site. The tribunal concluded that without the merger, Complete would have operated a bioremediation business, but such business would have failed within a year and Complete would have consequently built and operated a landfill at Babkirk (or sold the site to a third party which would have done so). The tribunal stated that this landfill would be in direct competition with Tervita's secure landfills in northeastern British Columbia and, as such, the acquisition was a merger that was more likely than not to maintain the ability of Tervita to exercise greater market power materially and likely to substantially prevent competition.
The tribunal rejected Tervita's defence that, pursuant to the efficiency defence in Section 96 of the Competition Act, the merger was likely to achieve efficiencies that outweighed any anti-competitive effects. Tervita appealed this decision to the Federal Court of Appeal.
The court confirmed the tribunal's decision and upheld the order that Tervita divest the Babkirk site due to the likelihood that the transaction would result in a substantial prevention of competition. The court also endorsed the tribunal's approach of analysing the future performance of the target business under various scenarios by concluding that ultimately the target business would have competed with the business of the acquirer, and therefore the acquisition removed a poised competitor and was likely to lessen competition substantially. Tervita successfully sought leave to appeal to the Supreme Court.
The Supreme Court's decision focused on the following issues:
- What is the proper test to determine when a merger results in a substantial prevention of competition?
- What is the proper approach to the efficiency defence?
Prevention of competition analysis
The Supreme Court held that to determine whether a merger is likely to prevent competition substantially, it is necessary to identify the potential competitor, assess whether, but for the merger, that potential competitor is likely to enter the market and determine whether its effect on the market is likely to be substantial.(2)
The first step involves identifying the firm that the merger would prevent from independently entering the market (ie, the potential competitor). The Supreme Court stated that in most cases, the potential competitor will be either the target firm or the acquiring firm.
The second step requires a 'but for' analysis which asks whether, without the merger, the potential competitor was likely to have entered the relevant market and if so, whether the effect of that competitor's entry on the market was likely to have been substantial.
The Supreme Court held that any fact that could influence entry upon which evidence has been adduced should be considered, such as plans and assets of the potential competitor, current and expected market conditions and other factors listed in Section 93 of the Competition Act.(3) Further, the court upheld the Federal Court of Appeal's decision stating that when assessing potential market entry, the determination must not be confined to when the merger occurred; rather, the analysis must take into account future events that are likely to occur after the merger closes. The Supreme Court further upheld the guidelines established by the Federal Court of Appeals regarding such a forward-looking timeframe. These guidelines state that the potential market entry must occur within a reasonable period of time.
If the tribunal finds that without the merger the potential competitor would have been likely to enter the relevant market within a discernible timeframe, the next step is to examine whether this entry would likely have resulted in a substantial effect on competition. In assessing this effect, the Supreme Court held that a number of dimensions of competition should be assessed, including price and output as well as the factors listed in Section 93.(4)
Applying this test to the facts, the Supreme Court upheld the tribunal's decision that the merger would likely result in a substantial prevention of competition. The tribunal correctly identified Complete as the potential competitor. Further, it used the forward-looking 'but for' analysis to determine that, without the merger, Complete would have entered the relevant market in a manner sufficient to compete with Tervita. As a result, the Supreme Court held that the merger was likely to prevent competition substantially.
The Supreme Court next examined the efficiency defence, which requires an analysis of whether the efficiency gains resulting from the merger outweigh the anti-competitive effects of the merger. The court reiterated that the commissioner has the burden of proving the anti-competitive effects and the merging parties have the burden of proving that the efficiency gains are greater than and offset such anti-competitive effects.
Tervita argued that the commissioner has an onus to quantify all quantifiable anti-competitive effects. As the commissioner had failed to do this, she had not met her legal burden under Section 96. The Supreme Court agreed with Tervita and held that the commissioner's legal burden is to "quantify all quantifiable anti-competitive effects upon which reliance is placed".(5) As the commissioner failed to adduce any evidence with respect to quantifying the merger's anti-competitive effects (ie, measuring the deadweight loss associated with the merger), the Supreme Court held that she had failed to meet her legal burden under Section 96 of the Competition Act. As a result, zero weight was assigned to the merger's anti-competitive effects.
The Supreme Court then turned to the Federal Court of Appeal's decision that more than marginal efficiency gains are required for the efficiency defence to apply. The Supreme Court rejected this finding, stating that "[h]ad Parliament intended for there to be a threshold level of efficiencies, qualifying language could be used to express this intention".(6) Consequently, it was held that Section 96 involves a balancing exercise where proven efficiency gains must be assessed relative to proven anti-competitive effects.(7) Where there are no proven anti-competitive effects, even marginal efficiency gains will be enough for the merging parties to successfully rely on the efficiency defence.
Applying this test to the facts, the Supreme Court found that Tervita was able to prove quantifiable overhead efficiency gains resulting from combining administrative and operating functions of the merging parties. Although these efficiencies were marginal, they nonetheless met the greater than and offset requirement under Section 96 because no quantifiable or qualitative anti-competitive effects were proven by the commissioner. As a result, the Supreme Court held that the efficiency defence applied and allowed Tervita's appeal, resulting in the divestiture order being set aside and the commissioner's application under Section 92 being dismissed.
In a statement issued following the decision, the commissioner "welcomed" the decision, "embraced the clarity" it offered in respect of applying the merger review provisions and was "pleased" that the Supreme Court had endorsed the decisions of the tribunal and Federal Court of Appeals on the question of whether the merger substantially prevented competition.
The bureau is expected to continue to apply its theory of prevention of competition as warranted in future cases. The commissioner is also expected to ensure that where the efficiencies defence is likely to be invoked, he or she will present evidence of the identified anti-competitive effects. Therefore, it is likely that the commissioner will seek more detailed economic data from merging parties through the supplementary information request process, and that bureau economists will be busy crunching the numbers to support merger case teams.
The case also serves as a reminder that the bureau will not shy away from reviewing mergers that are below the pre-merger notification thresholds in the Competition Act. As the former Commissioner Melanie Aitken stated: "[The] volume of commerce is not the only factor we consider when reviewing mergers – we are willing to take on cases where competition is being denied, regardless of size." Merging parties must be cognisant of this fact and not stop their competition analysis after reviewing the notification thresholds.
The evidentiary record in this case proved problematic for Tervita. The tribunal relied upon internal documentation from Tervita and Complete to conclude that Complete's bioremediation business would have failed and Complete's eventual entrance into the secure landfill market in northeastern British Columbia would have caused Tervita financial hardship and resulted in a reduction in prices charged to customers in this market.
Merging parties must be cognisant that the bureau will seek all relevant internal documentation to bolster its case. This is a valuable reminder that companies should have a competition law compliance programme in place, which includes training on the scope of the bureau's investigative powers and the importance of exercising caution when drafting reports about potential transactions.
For further information on this topic please contact Kevin Ackhurst or Bradley Schneider at Norton Rose Canada LLP by telephone (+1 416 216 4000), fax (+1 416 216 3930) or email ([email protected] or [email protected]). The Norton Rose Fulbright Canada website can be accessed atwww.nortonrosefulbright.com/ca.
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Endnotes
(1) Tervita Corp v Canada, 2015 SCC 3.
