Canadian businesses may soon face tougher standards in merger review if amendments being considered by the government to include “structural presumptions” and more onerous remedy standards in merger reviews are passed into law.
Businesses contemplating a merger or acquisition should carefully assess whether the proposed applicable market share or concentration thresholds are exceeded, and if so, prepare for a potentially more rigorous review process. Similarly, merging parties that expect that divestitures may be necessary will need to consider the impact of a tougher, modified remedy standard on their divestiture modeling.
Structural Presumptions: What and Why?
Currently, transactions are legal under Canadian competition law unless the Competition Bureau can demonstrate to the Competition Tribunal that a transaction is likely to substantially prevent or lessen competition, in which case the Tribunal may make an order blocking all or part of the merger or permitting the merger with conditions. This approach applies equally to all transactions, and while the merging parties’ market shares and the industry concentration are relevant considerations in making this assessment, the Competition Tribunal is specifically prohibited from finding solely on the basis of market shares that a likely substantial lessening or prevention of competition exists.
If the amendments are passed, transactions that exceed proposed market share or concentration thresholds would be presumed to be anti-competitive. Specifically, under the proposed amendments, a merger or proposed merger with a combined market share of at least 30% or a concentration index (commonly referred to as the “Herfindahl-Hirschman Index” or “HHI” and calculated as the sum of the squares of all competing firms’ market shares) of at least 1,800 points in any relevant market, and where there is an increase in the concentration index of at least 100 points, will trigger a “reverse onus”, such that merging parties will need to prove – in the event that the Competition Bureau decides to challenge such a transaction before the Competition Tribunal – on a balance of probabilities that the merger will not likely prevent or lessen competition substantially.
These thresholds are very low, are essentially arbitrary, and represent a significant departure from the Bureau’s current guidance: today, market shares below 35% are presumed by the Bureau not to harm competition; soon, market shares above 30% may be sufficient to trigger a presumption of harm.
Even so, we note that there is a very real question, as a practical matter, as to what actual impact this “reverse onus” will have on the Competition Tribunal when it assesses a merger. The Competition Bureau will still need to define relevant markets in every case – which is the key issue it lost on in relation to one of the only three fully litigated mergers over the past 10 years – and, in addition, the parties will still have every opportunity to bring forward any evidence they consider to be relevant to the assessment including, for example, in relation to different methods for calculating shares, likely competitive effects, closeness of competition, the nature and vigour of remaining competitors, the degree to which historical shares predict future competitiveness, entry and expansion, technological change and innovation, whether a merging firm is failing, and many other areas. It may be that in the end the Competition Tribunal will be faced with the same job as it currently faces, i.e., deciding whether or not, based on all the evidence before it, there is a likely substantial lessening or prevention of competition. Thus, while the structural presumptions are clearly favourable to the Competition Bureau in challenging a merger, it is far from clear that they will determine the outcome in any given case.
The Stikeman Elliot LLP Competition & Foreign Investment Group has created an illustrative “Concentration Calculator”† below that merging parties can use to quickly screen whether a proposed merger may fall above or below the proposed structural presumption thresholds:
Antitrust Merger Analysis
More Onerous Remedies?
Under the current legislation and caselaw, where the Competition Tribunal finds that a merger creates a likely “substantial” lessening or prevention of competition, the Competition Tribunal has discretion to order a remedy (such as a divestiture) that avoids the “substantiality”, but not the totality, of the harm to competition (i.e., a “lessening” of competition is permissible so long as it is not “substantial”).
If the amendments are passed, where the Tribunal concludes that there is a likely substantial lessening or prevention of competition the Tribunal’s remedial discretion will extend to any lessening of competition, so that an order may completely reverse the effects of the merger in some or all markets. In practice, this means that certain divestitures that may have been sufficient under the old standard may no longer be acceptable to resolve the Competition Bureau’s concerns.
For example, consider a gas station merger with twelve stations in the relevant local area, each with equal market share, where eight stations are independent and two are owned by each of two national chains. If the two national chains were to merge, bringing their four stations under common control:
- Under the new rules, the chains’ combined market share of 33% in this market would trigger a structural presumption of harm (where it might previously have been ignored as below the 35% “safe harbour” threshold); and
- Under the new rules, in the event the Bureau challenged the transaction, the Tribunal would – if the merging parties could not overcome the structural presumption – likely require the sale of two of the four stations, to completely reverse the effects of the merger in the market (where previously the sale of only one of the four stations, bringing the merged entity’s share to 25%, would have been sufficient).
In light of the above, merging parties will need to consider the impact of potentially more onerous divestiture packages when considering whether to proceed with potential transactions. If passed, we expect these amendments may impact risk-sharing and efforts provisions in purchase agreements with respect to litigation, divestiture package and consent agreement negotiation obligations.
Going Forward: Implications for Merger Reviews in Canada
Early Analysis. The amendments highlight the importance of conducting thorough competition analyses early in the transaction planning process (including pre-approach) to carefully review existing documents and relevant data to assess if the structural presumptions are exceeded for any relevant markets (including in any submarkets, especially in highly specialized industries and local markets).
Review Timeline. For transactions that exceed the structural presumption thresholds, merging parties should prepare for the possibility of a lengthier and more complex merger review process. Businesses should also note that obtaining positive clearance from the Competition Bureau may prove to be more difficult if the applicable concentration levels or market shares are particularly high, including in any relevant sub-markets. Onerous data and document requests, and challenges to transactions, may become more common given the relaxed burden on the Bureau.
Divestiture Negotiations. Should the amendments pass, we expect the Competition Bureau may take more aggressive stances when negotiating consent agreements, especially for transactions focused on local markets or in highly specialized industries. If applicable, businesses should consider factoring in potentially more extensive divestiture packages when building the business case for a transaction.
Internal Protocols and Guidelines. Businesses should revisit or implement internal document protocols and guidelines to reinforce the importance of not speculating when it comes to internal estimates of competition and market shares in Canada, and to acknowledge uncertainty regarding shares when appropriate.
The Bottom Line: Preparation is Key
Businesses that are planning any M&A activity in Canada should consult with regulatory counsel and conduct a competition assessment at the early planning stages (including a review of concentration levels and market shares) and ensure that they assess risk appropriately and build in sufficient time for merger reviews.
† Note that this Concentration Calculator is for illustration purposes only and does not constitute legal advice. A thorough assessment of product market and geographic market definition, including for potential antitrust submarkets, should be conducted when assessing whether a transaction would trigger a structural presumption threshold.
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