The Competition Bureau (Bureau) employed two of its less commonly used economic analysis tools in approving two recent non-notifiable mergers:
- In the acquisition of H&R Transport Limited (H&R) assets by Canadian National Railway Company (CN), the Bureau approved the otherwise anti-competitive merger on the grounds that the efficiencies produced by the merger would outweigh any anti-competitive effects.
- In the acquisition of Total Metal Recovery Inc. (TMR) by American Iron & Metal Company Inc. (AIM), the Bureau employed the “failing firm” analysis and concluded that no enforcement action should be taken.
What you need to know
- The Bureau’s recent reviews of non-notifiable mergers underscores the expanded role of its Merger Intelligence and Notification Unit, which now actively monitors and investigates small, non-notifiable merger transactions that may raise competition concerns.
- These reviews provide useful guidance on the Bureau’s approach to the efficiencies and failing firms analyses, both of which are likely to be of significant relevance in COVID-19-related merger assessments.
CN and H&R
CN announced last year that it would acquire certain intermodal shipping assets of H&R. Both companies provided domestic intermodal shipping services, which consist of truck and rail transportation. The Bureau reviewed the transaction, which was not subject to a mandatory reporting requirement under the Competition Act (Act).
The Bureau determined that CN and H&R directly competed against each other and that the transaction would lessen or prevent competition substantially in eight markets.
During the review, the Bureau, CN and H&R voluntarily entered into a timing agreement pursuant to which the parties agreed not to close before the Bureau had an opportunity to assess evidence of efficiencies claims. CN and H&R presented evidence that the merger would create efficiency gains that would outweigh any potential anti-competitive effects. The Bureau agreed that efficiencies in the elimination of overhead costs and duplicative facilities/IT systems would outweigh the anti-competitive effects generated by the transaction.
AIM and TMR
AIM and TMR both operated scrap metal processing facilities in Québec. Although not notifiable, the Bureau commenced a formal inquiry into the acquisition of TMR by AIM. The Bureau’s review included significant document production orders issued to AIM, TMR and a third party. The parties closed the transaction in December 2019, but AIM entered into an agreement with the Bureau to preserve TMR’s assets for 60 days after closing. The purpose of the agreement was to ensure that the TMR assets could be divested by AIM if the Bureau concluded that there was a competition concern.
In its review of the transaction, the Bureau undertook a “failing firm” analysis. Under this analysis, the Bureau may conclude that a merger transaction does not lessen competition because the target firm would have, in any event, exited the market. The Bureau uses rigid criteria in such cases, and considers whether the target could be successfully restructured to prevent failure, whether there were any other competitively preferable buyers (including evidence of a bona fide search by the vendor for such buyers and whether buyers can finalize a transaction in a timely way) and whether liquidation of the target’s assets would be competitively preferable to the transaction. Ultimately, the Bureau concluded that TMR was failing and opted not to take any enforcement action.
The Bureau’s monitoring and review of non-notifiable transactions is a reminder that parties to all transactions ought to assess competition risk upfront and consider the possibility of an inquiry. Even in small mergers, these inquiries can be long, document-intensive and complex. The successful use by merging parties of efficiencies and failing firm analyses is also important, because they are likely to be of increased relevance for transactions in economic climate created by COVID-19.
To discuss these issues, please contact the author(s).
This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.
For permission to republish this or any other publication, contact Janelle Weed.
© 2020 by Torys LLP.
All rights reserved.