Canadian COMPETITION LAW

On August 11, 2011 the Competition Bureau issued a Merger Remedies Study, summarizing its review of the effectiveness of merger remedies obtained in 23 cases under the merger provisions of the Competition Act between 1995 and 2005.

The results of the Bureau’s study are to be used to revise its Information Bulletin on Merger Remedies in Canada first issued in 2006 (see: Information Bulletin on Merger Remedies in Canada) and its consent agreement outline template.

135 interviews were conducted with merged entities (20), purchasers (28), customers (60) and third parties (27).  According to the Bureau, its remedies study “has been of significant value in confirming that many of the Bureau’s existing policies and procedures relating to the design and implementation of merger remedies are effective and in identifying areas where such policies and procedures could be more effective.”

Some highlights of the Bureau’s study include:

Types of merger remedies – The Bureau reiterates that it considers four categories of merger remedies in negotiations with merging parties: (i) structural, (ii) quasi-structural, (ii) combination and (iv) stand-alone (all of which were included in the study).

Structural v. behavioural remedies – Quasi-structural and combination remedies were obtained in a larger number of cases than stand-alone behavioural remedies (which is consistent generally with the Bureau’s preference for structural remedies).  The Bureau also states that “[g]iven that quasi-structural, behavioural and combination remedies vary widely from case-to-case, and are typically tailored to the business and industry at issue, it is very difficult to draw general conclusions regarding the effectiveness of these remedies.”

Behavioural remedies – the Bureau draws several conclusions regarding behavioural remedies including: (i) the failure to implement structural remedies may impact any quasi-structural remedies also included as part of a merger remedies package, (ii) a failure to appoint a monitor impacted the effectiveness of behavioural commitments in some cases, (iii) relatively long-term purchaser access provisions to key services (i.e., supply agreements) were key to allowing some purchasers to become effective competitors, (iv) standalone behavioural remedies were “critical” where the Bureau had “imperfect information about the likelihood of future entry” and (v) behavioural remedies can be ineffective where it is difficult to anticipate future market conditions (although it is not clear how this differs from the Bureau’s ability to anticipate future market conditions for structural remedies).

Divestiture as a remedy – 20 of the cases reviewed by the Bureau involved at least one divestiture remedy.

Success of divestitures – Divestitures were completed in all cases reviewed except two (and, at least according to the Bureau, were seen as effective by the interviewees in eliminating the potential substantial lessening of competition arising from the merger, the relevant substantive test under the merger provisions of the Act).  In the cases where divestiture was not completed, the Bureau identifies several reasons including unattractive assets, minimum pricing provisions and a limited pool of potential buyers.

Quality of divestiture assets – In some cases, concerns were raised that divestiture assets were poor quality (or insufficient to be viable or saleable).  Based on these concerns, the Bureau indicates that it will need to more thoroughly “market test” the viability/saleability of divestiture assets during negotiations with merging parties.

Initial sale and trustee sale periods – In most cases, initial sale periods ranged from 3 to 24 months and trustee sale periods ranged from 3 to 12 months (since 2006, the Bureau has taken a position on its preferred length of sale periods and use of sale trustees).  Not surprisingly, and consistent with its position generally, the Bureau also states that “a longer sale period was associated with degradation of the asset(s) or market changes that affected the saleability of the asset(s) in some cases.”

Crown jewels – Five cases involved crown jewels (“crown jewel” provisions contemplate the sale of specific key assets to be added to divestiture packages to increase the viability of a merger remedy and, as such, are commonly a subject of significant negotiation with merging parties).  Interestingly, the Bureau states that the crown jewel provisions were not triggered in any of those five cases.  Until the publication of this study, while it was known that the Bureau’s policy was to require crown jewel provisions “in some cases”, it was not clear how prevalent they were in recent years in Canada (i.e., in how many cases the Bureau successfully obtained crown jewel provisions).

Interim maintenance of assets – Some concerns were raised about the interim maintenance of assets prior to sale including: (i) degradation of assets pending sale, (ii) purchasers’ failures to keep assets to be divested at arm’s length, (iii) lack of investment in divestiture assets pending sale, (iv) loss of key personnel, (v) supplier/customer problems prior to sale and (v) issues related to the length of initial sale and trustee sale periods.

For the Bureau’s Merger Remedies Study see:

Competition Bureau Merger Remedies Study Summary

For the Bureau’s news release see:

Competition Bureau Releases Merger Remedies Study Summary

For the Bureau’s Merger Remedies Bulletin see:

Information Bulletin on Merger Remedies in Canada

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