Supreme Court Allows Landfill Merger and Reaffirms Efficiencies Defence

On January 22, 2015, the Supreme Court of Canada released its decision in Commissioner of Competition v. Tervita Corporation, its first merger decision under the Competition Act since 1997. The decision addresses several important issues, including:

1. the test for a substantial prevention of competition; and
2. the proper approach to the efficiencies defence (which was the basis on which the Court allowed the merger).

Background

In January 2011, CCS Corporation (now Tervita Corporation) acquired Complete Environmental Inc. (Complete) and its wholly owned subsidiary, Babkirk Land Services (Babkirk). At the time of the merger, Complete had certain operating businesses that Tervita considered desirable. Complete also owned, through Babkirk, land in northeastern British Columbia (NEBC) and a permit to operate a "secure" or solid hazardous waste landfill there.

The acquisition had a value of approximately C$6 million and fell well below the notification threshold for mandatory merger review under the Competition Act. Nevertheless, the Commissioner of Competition opened an investigation as a result of marketplace complaints and ultimately challenged the acquisition. She sought an order requiring the parties to unwind the transaction or divest Babkirk on the basis that it was likely to result in a substantial prevention of competition in the market for the disposal of solid hazardous waste produced at oil and gas fields in NEBC. The Commissioner alleged that, because Tervita owned the only two operating secure landfills in NEBC, it would have a monopoly and associated market power that would allow it to set prices above competitive levels.

Tervita argued that the transaction would not result in a prevention of competition because the sellers did not intend to open a competing landfill business. It also asserted the efficiencies defence under section 96 of the Competition Act arguing that the efficiency gains arising from the transaction were greater than, and would offset, the effects of any prevention of competition. The Competition Tribunal and the Federal Court of Appeal held that (i) the transaction would prevent competition substantially; (ii) it could not be saved by the efficiencies defence; and (iii) Tervita must therefore divest Babkirk.

The Decision

The Supreme Court agreed that the merger would likely prevent competition substantially. However, it accepted Tervita’s efficiencies arguments and allowed the merger.

Prevention of Competition

The Supreme Court provided useful guidance that will assist future merging parties in determining whether a proposed transaction may result in a substantial prevention of competition. It confirmed that the test for assessing whether a merger prevents (or lessens) competition is to compare the likely competitive effects of the merger to the likely competitive environment "but for" the merger. However, in making these assessments, the Court warned that the Commissioner and courts should not "make future business decisions for companies" and that any such determinations must be grounded in evidence and cannot be "simply speculative." The further into the future the Tribunal must look, the less likely that the Commissioner will be able to meet the necessary standard. In Tervita’s case, the Court upheld the Tribunal’s findings that there was sufficient evidence that, "but for" the merger, the bio-remediation business that the sellers would have operated at the Babkirk site would have ultimately failed and a secure landfill would have subsequently been established there to compete with Tervita.

Efficiencies

The Supreme Court found that the rejection of Tervita’s efficiencies defence by the Tribunal and the Federal Court of Appeal was in error. Tervita established that the merger gave rise to efficiency gains and the Commissioner failed to meet her burden to prove the anti-competitive effects that were to be weighed against those efficiency gains.

The Supreme Court provided helpful guidance on the future application of the efficiencies defence:

• the Tribunal’s consideration of the efficiencies defence must be as objective as is reasonably possible;
• although the merging parties have to prove their claimed efficiencies gains, it is the Commissioner’s burden to prove the quantitative and qualitative anti-competitive effects of a merger and to quantify those effects wherever possible; and
• merging parties are not required to establish "more than marginal" efficiency gains and potentially "small degrees" of net efficiencies are enough for the defence to apply.

Implications

The Tervita decision provides greater clarity in the area of merger enforcement and a more transparent framework for the application of the efficiencies defence for participants in future merger transactions. Its impact will likely be significant for both merging parties considering whether the defence applies and the Commissioner in meeting the burden to prove all quantitative and qualitative effects of a merger. The Commissioner has already signaled that the Competition Bureau may overhaul its merger review information gathering process to ensure it has sufficient information to meet the efficiencies test established by the Supreme Court.

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