Despite the US Federal Trade Commission’s challenge of the Superior Plus-Canexus merger last year, Canada’s Competition Bureau approved it based on the efficiencies defence.
THE COMPETITION BUREAU'S recent clearance of the proposed acquisition of Canexus Corporation by Chemtrade Logistics Income Fund, despite finding that the merger would be anti-competitive, brings both glad and bad tidings for M&A stakeholders.
The good news is that the Bureau continues to defer to the Supreme Court of Canada’s 2015 decision in Tervita v. Canada, which established that anti-competitive mergers could be saved by the unique “efficiencies” defence found in section 96 of the Competition Act.
Section 96 prohibits the Bureau from refusing to approve a transaction where it finds that the merger “is likely to bring about gains in efficiency that will be greater than, and will offset, the effects of any prevention or lessening of competition.”
“The Canexus approval is another sign that the Bureau is willing to undertake the efficiencies analysis itself rather than refer the matter to the Competition Tribunal for litigation and determination,” said Kevin Ackhurst of Norton Rose Fulbright Canada LLP’s Toronto office.
The bad news is that Commissioner of Competition John Pecman persists in his view that Tervita’s interpretation of the efficiencies defence does not reflect Parliament’s intent. Noting that the defence in its current form is unique to Canada, he has called it “misaligned with other jurisdictions,” “bad for business and bad for consumers,” and made it clear that he would prefer the provision be amended or repealed.
“The key question moving forward is whether Commissioner Pecman will convince the government to amend the Act, and how the Minister of Innovation, Science and Economic Development’s quest for an innovative and dynamic economy jibes with removing or amending a provision that allows for efficiency-enhancing mergers,” Ackhurst said.
The Bureau’s opposition to s. 96 is longstanding. As far back as 2003, former commissioner Konrad von Finckenstein supported a bill that would have applied the efficiencies defence only where benefits to consumers could be demonstrated. Von Finckenstein’s position emerged after the Bureau lost a five-year battle that culminated when the Federal Court of Appeal upheld the application of section 96 in a case involving Superior Propane.
In 2006, von Finckenstein’s successor, Sheridan Scott, announced that the Bureau would no longer seek amendments to section 96 and would consider the efficiencies defence where appropriate.
That statement of resolve, however, did not have a chance to be tested until Superior Plus made its $982-million offer to acquire Canexus last year. Despite the US Federal Trade Commission’s decision to challenge the merger, the Bureau approved it based on the efficiencies defence.
“This was the first time Canada’s Competition Bureau had ever approved a transaction based upon the efficiencies defence,” says Brian Facey of Blake, Cassels & Graydon LLP in Toronto, who represented Superior. “Past Bureaus would have dragged the matter on and tried not to use it.”
The deal aborted, however, when the parties could not reach an extension agreement following the FTC’s announcement that it would challenge the transaction.
When Chemtrade’s offer came along, it was an all-Canadian proposition and therefore did not require FTC approval. Again, the Bureau cleared the deal on the basis of the efficiencies defence despite reaching the same anti-competitive conclusion it had arrived at with respect to the Superior offer.
“Canexus reflects the Bureau’s maturing economic capacity and the fact that they’re getting more comfortable dealing with the efficiencies defence internally,” Ackhurst said.
Still, Facey believes mergers involving major competitors who intend to achieve significant efficiencies still face too many costs and delays in the regulatory process. In a paper for the C.D. Howe Institute, Facey, with co-author and Blakes colleague Joshua Krane, recommended that the predominate purpose of merger review be to increase the efficiency of the Canadian economy; that the Bureau be given sufficient resources to review mergers intended to benefit the economy within reasonable and set timeframes; that merging partners be given access to mediation or to the Competition Tribunal to adjudicate or mediate merger cases; and that the Competition Act be amended to prevent decisions from foreign agencies interfering with the realization of efficiencies in Canada.
“Economic efficiency and innovation are and must be seen to be the paramount objectives of merger review by the Competition Bureau,” Facey and Krane concluded.