Canadian COMPETITION LAW

On June 15, 2012, the Competition Tribunal released the public version of its decision in the contested BC landfill merger case Commissioner of Competition v. CCS Corporation, allowing the Commissioner’s application and making a divestiture order.

As we wrote in our earlier post, the case, which involves the acquisition by CCS Corporation of Complete Environmental Inc. and its wholly-owned subsidiary Babkirk Land Services, is noteworthy for being the first contested merger case in Canada in six years (since 2005) and an uncommon example of a “prevent” case (mergers in Canada may be challenged under the Competition Act where they either lessen or prevent competition substantially, being the two aspects of the substantive test under section 92 of the Act).  While there have been three previous prevent cases considered by the Tribunal in Canada, all of those focused on the substantial lessening aspect of the substantive test under section 92.

The Bureau’s overarching concern in this case was that the completed merger was likely to prevent competition in the hazardous waste disposal service market in the relevant market in Northern British Columbia, given that, in the Commissioner’s view, Complete was ready to enter and compete with the acquirer CCS.  In this regard, Complete had obtained regulatory approvals to operate a secure landfill for hazardous solid waste.

The case is also noteworthy as an example of the Bureau’s apparent increased willingness to challenge some transactions post-closing, regardless of size, that may raise competition concerns.

In granting the Commissioner’s application, albeit with a lesser remedy than that sought by the Bureau (i.e., divestiture not dissolution), the Tribunal had some interesting things to say about the analytical framework for “prevent” cases and the competitive effects in this case (all forward looking), efficiencies and the assessment of the appropriate remedy.

A few interesting points from the Tribunal’s decision include:

Substantial Prevention of Competition

The Tribunal found that the completed merger was likely to result in a substantial prevention of competition in the market for the supply of secure landfill services, and in particular that a decrease in average tipping fees of at least 10% would be prevented by the merger.

In coming to this conclusion, the Tribunal applied a “but for” test in assessing competitive effects (i.e., comparing whether the market would, “but for” the merger, be substantially more competitive, or in the Tribunal’s words: “comparing a world in which CCS owns the relevant Secure Landfills … with a world in which Babkirk is independently operated as a Secure Landfill”).

In adopting this test, the Tribunal drew on the Federal Court of Appeal’s decision in Canada Pipe, an abuse of dominance case under section 79 of the Act, finding a parallel between the language in sections 92 (which sets out the substantive test for merger review) and 79 (abuse of dominance).

Interestingly, the Tribunal refused to rely on U.S. authorities suggested by both the Commissioner and CCS to interpret the appropriate analytical framework in a prevent case, finding that they had developed in relation to a different statutory test and were not recently decided.

Entry

In its prevent analysis, the Tribunal held that it should focus on entry, both with respect to existing firms and new entrants.  Entry is a key component of the Bureau’s analysis of competitive effects as set out in its Merger Enforcement Guidelines and barriers are a relevant factor under section 93 of the Act that the Tribunal may consider in evaluating the competitive effects of a merger.

Citing Hillsdown, the Tribunal said that “conditions of entry into a relevant market can be a decisive factor in [its] assessment of whether a merger is likely to prevent or lessen competition substantially … because, ‘[i]n the absence of significant entry barriers it is unlikely that a merged firm, regardless of market share or concentration, could maintain supra-competitive pricing for any length of time.’”

While CCS argued that the relevant market was not characterized by significant barriers, pointing to a permissive regulatory approval regime, growing demand for secure waste facilities and short-term contracting practices in the industry, the Tribunal found that effective new entry would likely take a minimum of 30 months from site selection to a complete operational landfill, with no evidence of proposed new entry.

The Tribunal also found that, absent the merger, the vendors (Complete Environmental) would have constructed a new competing secure landfill that would likely have been operational by the fall of 2012 or early 2013.

Efficiencies

With respect to the efficiencies defence, the Tribunal held that CCS had failed to meet its burden of establishing that the efficiencies of the merger would likely be greater than or offset any anti-competitive effects.

In Canada, section 96 of the Competition Act provides an efficiencies exception where a merger has resulted (or will likely result) in efficiency gains that are greater than, and will offset, the anti-competitive effects arising from the merger.

In arriving at its conclusion on efficiencies, the Tribunal confirmed existing Canadian law relating to the burden for establishing efficiencies, holding that while it is the Commissioner’s burden to quantify anti-competitive effects, respondents bear the “ultimate burden” of demonstrating that any efficiency gains are likely to be greater than (and offset) anti-competitive effects.

More particularly, the Tribunal held that where it is possible to quantify the effects of a merger, even if only in “rough” terms, the Commissioner has the onus to do so and, where relevant data is available (e.g., estimates of market and own-price elasticity), the Commissioner will be “expected” to provide such estimates.

In assessing CCS’ efficiencies arguments, the Tribunal also amplified on screens that it applies to eliminate efficiencies that are not relevant for the purposes of section 96.

Appropriate remedy – divestiture

The Tribunal accepted the respondents’ remedy submission, ordering divestiture not dissolution, finding that divestiture would be an effective remedy and the least intrusive option.

In Canada, where it is shown that a merger prevents or lessens competition substantially, the Tribunal may block a merger, order the divestiture of shares or assets or that a transaction be dissolved.

In coming to its decision on the appropriate remedy, the Tribunal found that dissolution would be intrusive, overbroad and would not necessarily result in the timely operation of a competing landfill.  In contrast, the Tribunal concluded that divestiture would both be effective and offer certain benefits including Commissioner approval of a purchaser, a more efficient vendor (a trustee rather than separate shareholders) and certainty of timing.

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For a copy of the Tribunal’s decision see:

The Commissioner of Competition v. CCS Corporation

For the Bureau’s news release see:

Competition Bureau Successful in Precedent-Setting Merger Challenge

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