Canadian Merger Review:New MEGs Released in Draft for Public Comment
Susan M. Hutton and Catherine Mckenna
On March 25, 2004, the Canadian Competition Bureau released its highly anticipated draft revised Merger Enforcement Guidelines (Draft MEGs) for public comment. Once finalised this summer, they will replace the Merger Enforcement Guidelines first published in 1991 (1991 MEGs) as a comprehensive explanation of the Competition Bureau's merger enforcement policy under the Competition Act (the Act).
The revised MEGs are not intended to "reflect a shift in policy or direction" but rather to "clarify and explain the Bureau's current practice." Notably, the "safe harbour" market share thresholds established in the 1991 MEGs have not changed. Since 1991, however, there have been significant new developments in Canadian merger review, including a number of important Competition Tribunal and court decisions, as well as developments in the underlying economics. The Draft MEGs are intended to reflect these developments, and are replete with references not only to contested cases, but also to numerous uncontested cases decided - effectively - by the Commissioner.
The format of the MEGs has also changed. Gone is the step-by-step analysis of the statutorily identified "section 93 factors" relevant to the analysis of the competitive impact of a transaction. Rather, the Draft MEGs are now organized thematically. Following chapters on "Definition of Merger", "The Anti-Competitive Threshold", and "Market Definition", the factors relevant to competition are part of the discussion of "Market Share and Concentration", "Anti-Competitive Effects", "Entry", "Countervailing Power", "The Efficiency Exception", "Failing Firm", "Vertical Mergers" and "Conglomerate Mergers".
Comments on the Draft MEGs are due by May 25, 2004, and the final document will be issued in the summer of 2004.
Of particular note, the Draft MEGs contain important new insight into the Bureau's approach to, among other things:
- the definition of a "merger": significantly expanded discussion of when a minority interest can constitute a "significant interest" for merger review purposes, and of when a transaction other than an acquisition can also be viewed as a merger. While the 1991 MEGs focused on the influence of the acquirer over the acquiree through voting shares, the Draft MEGs provide additional guidance on the ways in which influence could be exercised. For example, the guidelines provide that financing arrangements and terms of default relating to such arrangements, long-term contractual arrangements or pre-existing long-term business relationships are examples of arrangements that could enable a party to materially influence management decisions of another business and may constitute a "merger" under section 91.
- the anti-competitive threshold: expanded discussion of the circumstances under which the Bureau would determine that a transaction is likely to substantially "prevent" competition. Referencing recent Competition Tribunal decisions, the Draft MEGs gives examples of mergers that may result in the prevention of competition, such as: an acquisition that prevents a rival's expansion into a new geographic market; an acquisition that precludes the pro-competitive effects of new capacity; and an acquisition that prevents a rival's expansion into new product areas.
- clarification of the test for a substantial lessening of competition: the Bureau evaluates whether the merger is likely to provide the merged entity (alone or in concert with others) with an ability to profitably sustain a material price increase in a substantial part of a market, regardless of whether the firm will be dominant, and even if the price increase in question is less than 5% (so long as it will be sustainable profitably for two years).
- recognition that increased buyer power will result in below-competitive prices when the buyer is prepared to reduce the purchase of inputs.
- market definition: clarification that markets are defined having regard only to demand-side substitution - supply side responses are relevant only to determining the participants in, or potential entrants into, a market.
- product market definition: expanded discussion of differentiated product markets, and possibility that suppliers of non-substitutable products might be in the same product market where buyers value a single source of supply.
- geographic market definition: discussion of spatial competition analysis and the process by which the Bureau delineates the boundaries of local or regional markets, where necessary for its analysis.
- anti-competitive effects: expanded discussion of the issue of coordinated effects (formerly, "interdependence"), a topic of significant interest and debate among competition lawyers and economists. The Draft MEGs include a list of factors that the Bureau will consider in its analysis of coordinated effects. These factors include: product and cost homogeneity; stability of underlying costs; market transparency; many small buyers making frequent purchases; multi-market exposure; inelasticity of demand; limited excess capacity; and a history of collusion/cooperation.
- new chapter on countervailing power, with application to both supplier and buyer power cases.
- of necessity, given the Federal Court rulings in Superior Propane, the Bureau's approach to the efficiencies defence has been substantially revised. In particular, the 1991 MEGs looked only at the deadweight loss to society when evaluating the anti-competitive harm, whereas the Court directed the Bureau to evaluate the anti-competitive effect of the transaction from the perspective of all of the objectives of the Act (not merely allocative efficiency). The result is a multi-faceted, and admittedly subjective, balancing that will be highly case specific. In recognition of this, the Draft MEGs encourage parties relying on the efficiencies defence to make submissions as to how the different qualitative and quantitative effects of the transaction ought to be balanced against the efficiencies expected to flow from the transaction.
