Competition Bureau approves merger 'efficiencies defence'
The failed acquisition of Canexus by Superior Plus nonetheless yields a valuable legal tool
The demise of Superior Plus Corp.’s $982-million deal to acquire Canexus Corp. is not without its upside for M&A stakeholders subject to the Competition Act.
“This is the first time Canada’s Competition Bureau has ever approved a transaction based upon the efficiencies defence,” says Brian Facey of Blake, Cassels & Graydon LLP in Toronto, who represents Superior. “It’s also one of the rare occasions on which the Bureau didn’t go along with a US Federal Trade Commission’s decision to challenge a merger.”
The deal aborted when the parties could not reach an extension agreement following the FTC’s announcement that it would challenge the deal.
Both Superior and Canexus are Canadian companies headquartered in Alberta. But both also operate in the US, making the merger subject to FTC review. If the deal had gone through, the new company and competitor AkzoNobel would have controlled 80 per cent of the total sodium chlorate production capacity in North America. Sodium chlorate is a chemical used to bleach wood pulp that is then processed into paper, tissue, diaper liners and other products.
On June 27, the FTC announced it was challenging the transaction because it would significantly reduce competition in the North American market for sodium chlorate. The next day, the CB reached much the same conclusion regarding the Canadian market, but it cleared the acquisition on the basis of the efficiencies that the merger would have created.
Although the CB and the FTC cooperated closely in reviewing the transaction, they operate under different legal frameworks.
“The Bureau attributed its decision to the unique availability of the efficiencies defence under section 96 of the Competition Act,” says Anita Banicevic of Davies Ward Phillips & Vineberg LLP in Toronto. “The legislation provides that a merger cannot be prohibited when the expected efficiency gains outweigh the likely anti-competitive effects of the transaction.”
Facey lauds the CB’s decision. “It’s clear that the Bureau has guts,” he says. “What they’re saying is that we have our own law in Canada and we’re going to be doing our own thing.”
Doing its own thing, however, is not de rigueur for the Bureau. Earlier this year, for example, Staples called off its proposed merger with Office Depot after the regulators in both countries challenged the deal. The same thing happened in 2014, effectively aborting Louisiana-Pacific Corp.’s plan to acquire Ainsworth Lumber Co. Ltd.
But what seems clear now is that the efficiencies defence has become meaningful in Canada.
“The Bureau is now listening to companies whose deals involve efficiencies, which is something they weren’t doing previously,” Facey says. “Previous commissioners took the position that they would always litigate this issue, which was tantamount to saying ‘don’t bother.’”
This despite the fact that the Supreme Court of Canada’s 2015 decision in in Tervita Corp. v. Canada (Commissioner of Competition) had validated the defence.
“The Commissioner at the time questioned whether Tervita reflected Parliament’s intent when it introduced the efficiencies defence in 1986,” Banicevic says. “In particular, the Commissioner has expressed a view that the efficiencies defence was intended by Parliament to enable Canadian companies to better compete internationally.”
The upshot, Banicevic says, is that the future may see proposals to amend or remove the defence. But that doesn’t detract from the significance of the Bureau’s recognition of the defence in the Superior deal.
“For the time being the defence remains available to parties that are able to present compelling economic evidence regarding the efficiencies that are likely to be realized as a result of a proposed merger,” the lawyer states. “That said, this same evidence may not be persuasive to the US antitrust authorities, given the distinct legal framework involved.”
On reflection, there’s a certain irony in the FTC blocking the merger of two Canadian companies when the transaction had been approved in Canada. Indeed, American authorities were outraged in 2001 when the European Commission blocked a deal between General Electric and Honeywell, two US companies whose merger had been approved domestically.
“This is just another example of the US further extending the long arm of its antitrust jurisdiction,” says one veteran Canadian competition lawyer.