September 27, 2010
The Competition Bureau announced today that it had reached an agreement with The Coca-Cola Company to address its competition concerns in relation to Coca-Cola’s proposed acquisition of the North American business of its primary bottler (Coca-Cola Enterprises Inc.). Before the proposed acquisition, Coca-Cola Enterprises produced, marketed and distributed not only Coca-Cola products but also products for Dr. Pepper Snapple Group, Inc.
In making its announcement, the Bureau said:
“The Bureau concluded that the proposed acquisition could have allowed The Coca-Cola Company to gain access to Dr Pepper’s marketing plans and other commercially sensitive information, and was, as a result, likely to lessen and/or prevent competition substantially in the supply of soft drinks in Canada.
The Coca-Cola Company has agreed to certain restrictions on the use of, and access to, Dr Pepper’s commercially sensitive information, including robust restrictions on access to relevant personnel. Further, Dr Pepper’s commercially sensitive information can only be used for the purpose of bottling and distributing Dr Pepper beverages.
The Competition Bureau will appoint an independent monitor to ensure that Coca-Cola complies with the restrictions set forth in the consent agreement. The consent agreement between the Bureau and Coca-Cola will be in effect for 20 years. A copy of the consent agreement will be available on the Competition Tribunal’s Web site.
Mergers in Canada are subject to review by the Competition Bureau under the Competition Act to ensure that they will not prevent or lessen competition substantially. The merger review process involves collecting information from, and conducting interviews with, a wide range of industry participants, including the parties, suppliers, competitors, industry associations, customers and industry experts. In this case, the Bureau worked cooperatively with the United States Federal Trade Commission to coordinate parallel reviews of the proposed acquisition and to negotiate mutually acceptable resolutions to this matter.”
The settlement in this case is interesting for a number of reasons. Behavioural remedies are generally speaking far less common in Canada than structural remedies (e.g., divestitures) and not the preferred form of merger remedy for the Bureau for a number of reasons, including based on the fact that unlike divestitures they require ongoing monitoring. For example, in its Information Bulletin on Merger Remedies in Canada, the Bureau states: “when designing remedies, terms must be clear and measures must be sufficiently well defined. This is to ensure timely implementation of the remedy and either no or minimal future monitoring by the Bureau”. While behavioural remedies may in many cases be the preferred route for acquirers (principally to avoid divesting assets which often raises both strategic considerations – i.e., sales to rivals – and valuation issues – i.e., how to realize the market value of assets in a forced sale context), the Bureau’s strong preference is for structural remedies and behavioural remedies are “seldom accepted by the Bureau.” In this case, however, it would appear that there were either no (or few) viable structural remedies available (e.g., to divest assets to service Dr. Pepper) or Coca-Cola’s counsel were able to persuade the Bureau and U.S. Federal Trade Commission that sufficient behavioural precautions would be adequate. Also, as a practical matter, given that it is a vertical merger, the behavioural remedy may well have been seen as sufficient if presumably there was no increase in Coca-Cola’s downstream market share.
The behavioural remedy in this case, which appears to in essence partition the flow of information between two downstream rivals after one (Coca-Cola) vertically integrated its supplier, is also noteworthy for its significant length (20 years). While there is no statutory limit to the term of a consent agreement negotiated between the Bureau and an acquirer in the context of a merger, the settlement in this case would appear to commit significant resources to monitor compliance with the settlement and may also mean that Coca-Cola will be subject to ongoing reporting and other compliance obligations as part of the settlement (which, though the consent agreement is not yet filed with the Tribunal, are typically part of negotiated consent agreements).
As a practical matter, the settlement in this case also shows that the Bureau continues to be attuned to potential anti-competitive effects that can result from information exchanges between competitors, which can arise in both the merger context (where, as here, in the case of a common supplier, as well as in the case of interlocking directorships or in the merger review and clearance process itself, for example during due diligence) and in relation to other dealings between competitors (e.g., joint ventures, strategic alliances, trade association activities, etc.).
The Atlanta Business News reported that the settlement between Coca-Cola and Canadian and U.S. antitrust officials required Coca-Cola to establish a firewall to partition Dr. Pepper Snapple Group information from Coca-Cola:
“The regulatory authorities required Coca-Cola to set up a “firewall” to ensure that certain Coca-Cola employees do not get access to commercially sensitive, confidential marketing information and brand plans from Dr Pepper Snapple Group. Dr Pepper Snapple currently sells many of its beverages through Coca-Cola‘s distribution system.”
In any event, it appears that Coca-Cola was able to negotiate a behavioural remedy, against the Bureau’s stated strong preference for structural remedies, while the Bureau was able to snapple perceived SLC issues.
For more information on the Bureau’s merger remedies policy see: Information Bulletin on Merger Remedies in Canada. For more information about Canada’s merger control and foreign investment regimes see: Canadian Merger Control, Canadian Merger Control FAQs, Investment Canada, Investment Canada FAQs. For a copy of the consent agreement (to be filed with the Competition Tribunal) see: Competition Tribunal – Mergers.
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