On May 29, 2012, the Competition Tribunal released its decision in Commissioner of Competition v. CCS Corporation, the first contested merger challenge since 2005.1 The decision addresses several important issues, including
- the test for a substantial prevention of competition;
- limitations on the efficiencies defence, including their assessment in relation to anti-competitive effects; and
- dissolution as a viable merger remedy.
In January 2011, CCS Corporation (now renamed Tervita Corporation) acquired Complete Environmental Inc. and its wholly owned subsidiary Babkirk Land Services. At the time of the merger, Complete had certain operating businesses that CCS considered desirable. Complete also owned, through Babkirk, land located on the Alaska Highway in northeastern British Columbia (NEBC) and a permit to operate a "secure" or solid hazardous waste landfill there. The Tribunal found that Complete intended to operate a waste bioremediation business with an incidental landfill on this land, rather than a full service secure landfill.
With a value of approximately $6 million, the acquisition fell well below the merger notification threshold. The Commissioner of Competition nevertheless reviewed and ultimately challenged the acquisition. She sought an order requiring the parties to unwind or "dissolve" the transaction 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 CCS owned the only two operating secure landfills in NEBC, it would have a monopoly and associated market power that would allow it to price discriminate between different customers and set prices (called "tipping fees") above a competitive level.
CCS argued that the transaction would not result in a prevention of competition as the sellers did not intend to open a competing landfill business. It also argued that the efficiency gains arising from the transaction were greater than, and would offset, the effects of any prevention of competition arising from the transaction.
The Tribunal rejected the key factual and legal theories underpinning the Commissioner’s case. It also rejected the economic analysis advanced by the Commissioner in support of her position that the acquisition would result in a prevention of competition. The Tribunal nevertheless concluded that the acquisition was likely to prevent competition substantially in the market for the supply of secure landfill services for solid hazardous waste in NEBC. The Tribunal found that the merger would prevent a decrease in average tipping fees of at least 10%.
Prevention of Competition
In reaching its decision, the Tribunal applied a "but for" analysis to decide whether the merger had, is having or is likely to have the effect of preventing competition substantially. The Tribunal considered whether the "relevant market in the past, present or future would be substantially more competitive but for" the merger.
Using the date on which CCS and Complete executed a letter of intent (July 2010) as the starting point for the analysis, the Tribunal found that the acquisition was not likely to lead immediately to a substantial prevention of competition; it accepted the vendors’ evidence that they intended to operate a bioremediation business that would not compete with CCS. The Tribunal also found that there was no other potential buyer for Complete at the time of the acquisition.
Despite these findings about circumstances at the time of the acquisition, the Tribunal looked further into the future. It determined that Complete’s bioremediation business would ultimately not have succeeded. The Tribunal found that after a year of operating a bioremediation business, Complete would have either switched to a secure landfill business or sold to an unidentified purchaser. At this point, the Tribunal found, competition between CCS and either Complete or the unidentified purchaser would have become "direct and substantial." It was this potential future competition, the Tribunal found, that the acquisition of Complete had prevented.
The Competition Act provides that the Tribunal may not issue an order in respect of an anti-competitive merger if it finds that the efficiency gains arising from the merger are greater than and offset the anti-competitive effects of the merger.
In this case, the Tribunal concluded, among other things, that the efficiency gains arising from the transaction did not offset the qualitative and quantitative anti-competitive effects of the acquisition. The Tribunal held that the term "offset" requires it to exercise its "subjective judgment." It concluded that in its own subjective assessment the qualitative effects of the transaction outweighed any quantifiable efficiencies, most importantly because the acquisition would "maintain a monopolistic structure in the relevant market."
Dissolution vs. Divestiture
On the issue of remedy, the Commissioner had asked the Tribunal to order the parties to unwind the transaction. The Tribunal rejected this request on the basis that a dissolution order was intrusive, overbroad and unlikely to be a timely remedy. The Tribunal ruled that divestiture was an available and effective remedy.
There is little jurisprudence in Canada addressing the test applicable to an alleged substantial prevention of competition. Decisions from, among others, the U.S. Supreme Court that consider this issue caution against the dangers of engaging in speculation as to future potential outcomes and related future effects on competition. At the hearing, all parties suggested that this jurisprudence would provide the Tribunal with helpful guidance. The Tribunal, however, declined to consider it.
The practical implications of this decision include the following:
- Upfront assessments of competitive effects are now more complicated. A merging party acquiring a non-competing business or assets must now consider whether, in the absence of the merger, the seller or target might start to compete with the buyer in the future and whether, in that hypothetical scenario, any resulting impact on competition would be substantial.
- The decision limits the availability of the efficiencies defence. The Tribunal’s analysis of the concept of "offset" suggests that it could, using its own subjective judgment, ascribe any weight that it saw fit to anti-competitive effects so as to outweigh measurable efficiencies, no matter how large. According to this decision, there is no clear objective standard that allows merging parties to assess in advance the availability of the efficiencies defence.
- Vendors should be able to take increased comfort that completed deals are unlikely to be unwound. The Tribunal confirmed that dissolution is a more intrusive and potentially overbroad remedy than divestiture, and therefore remains unlikely in merger cases.
- Pre-merger internal documents have considerable evidentiary importance. The Tribunal in this case indicated a willingness to rely on internal documents as determinative of corporate intent and anti-competitive effects, even if the documents were not authored by relevant decision makers and in the absence of corroborative expert economic evidence.
- The Commissioner is willing to pursue very small deals with little impact on the Canadian economy. Merging parties should take no comfort from the fact that their deal is non-notifiable.
This decision has complicated the landscape for merger enforcement. In the face of this decision, business people will likely find it more challenging to analyze and assess the Competition Act risks that a potential merger transaction may create.
1 The authors were counsel to CCS Corporation in this matter.
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