On Jan. 22, 2015, the Supreme Court of Canada released the long anticipated decision in Tervita Corp. v. Canada (Commissioner of Competition) in which it considered, for the first time, the analytical framework for prevention of competition cases and the statutory efficiency defence.

The Supreme Court upheld the Canadian Competition Tribunal's decision that a $6-million merger involving the market for secure, hazardous waste landfill services in northeastern British Columbia substantially prevented competition, but allowed the appeal on the basis that the tribunal and the Federal Court of Appeal had both erred in the analysis of the efficiencies test.

The general framework for analysis of prevention of competition is not a surprise. Merger analysis necessarily requires predicting possible future competition in a particular market. A key fight in this case was the line between credible evidence versus unsupported speculation about future competition. While the Court sided with the tribunal on this issue, it gave clear directions for future cases to follow.

The framework for dealing with the efficiency defence differs markedly from previous cases. That said, the decision introduces welcome clarity into the efficiency defence analysis and, in our view, gives merging parties a fairer and more predictable path to make out a defence.

Background to the Case

The case arose from Tervita's $6 million acquisition of Complete Environmental Incorporated ("CEI") and its Babkirk secure, hazardous waste landfill site. The case caught the attention of in-house counsel and competition law practitioners as the deal was well below the merger notification threshold under the Competition Act. It surprised many that a merger of this size was even on the Bureau's radar.

The Commissioner of Competition (the "Commissioner") challenged the merger on the ground that it would substantially prevent competition in the local market for secure landfill services because Tervita owned the other two hazardous waste landfills in northeastern British Columbia and it was alleged that its acquisition of CEI would prevent the emergence of a competitor to Tervita. Tervita argued that the merger would not prevent competition because the vendors, had they continued to own the Babkirk site, would not have competed with Tervita as they planned to operate the landfill as a bioremediation facility. Alternatively, Tervita argued that the efficiencies resulting from the merger would be greater than and would offset any anti-competitive effects, thus satisfying the efficiency defence in section 96 of the Competition Act.

The Competition Tribunal allowed the Commissioner's application and ordered Tervita to divest the Babkirk facility. The tribunal found that the merger resulted in a substantial prevention of competition on the basis that the vendors' planned bioremediation business would likely have failed and that they would instead have operated the Babkirk site as a secure landfill or sold it to secure landfill operator. The tribunal also found that the efficiency defence had not been made out as any efficiencies properly attributable to the merger were not greater than and would not offset the transaction's likely significant anti-competitive effects.

In its decision yesterday reversing the tribunal and setting aside the divestiture order, a majority of the Supreme Court affirmed the tribunal's conclusion that there would have been a prevention of competition but then concluded that the tribunal (and the Court of Appeal) did not approach the efficiencies analysis correctly.

Prevention of Competition

The Commissioner may challenge a proposed merger if "it prevents or lessens, or is likely to prevent or lessen, competition substantially" (s.92). Most mergers reviewed involve parties who are already competitors and the question addressed is whether the proposed merger will "substantially lessen" competition in the particular market. Mergers involving possible "prevention" of competition are rare. In such cases, there is no existing competitive overlap between the merging parties and so the Commissioner will analyse whether the merger would be likely to prevent competition in future.

Tervita caught the attention of many as the first 'prevention' of competition case. The framework the Court affirmed for the analysis of a prevention case is to: (i) identify the potential competitor; (ii) assess whether, but for the merger, that potential competitor is likely to enter the market; and (iii), determine whether its effect on the market would likely be substantial.

The analysis necessarily requires a 'crystal ball' assessment of what would happen in a market in future if there were no merger (known as the 'but for' merger analysis). Tervita was highly critical of the tribunal for making what it argued were unsupported, speculative determinations about what business steps would likely have been taken in future. The tribunal concluded that, in the absence of the merger, CEI's bioremediation business plan would have failed within a year. The tribunal concluded that CEI would then have transitioned into operating a secure landfill for hazardous materials and would have become a competitor to Tervita. The Supreme Court upheld the tribunal's approach and finding on prevention, affirming there is an inevitable forward-looking or predictive analysis about what future competition might occur. However, the Court's reasons are replete with cautions about the need for credible evidence and not mere speculation on what a proposed merger party would likely do in future.

Efficiency Defence

The Competition Act allows for anti-competitive mergers to proceed if they are likely to generate gains in efficiency that "will be greater than, and will offset the effects of any prevention or lessening of competition." The underlying rationale for the provision is that increased efficiency may provide a benefit to society that may, on balance, exceed the damage caused by the lessening or prevention of competition. Consequently, the tribunal is required to weigh the negative effects of the merger (the lessening or prevention of competition) against its benefits (efficiencies attributable to the merger). The Commissioner must prove the lessening or prevention, and then the Respondent must then make out the defence by proving that the efficiencies are greater than and offset the anti-competitive effects proved by the Commissioner.

The Court accepted previous case law that recognized that both efficiencies and negative effects on competition can be of two kinds: quantifiable and non-quantifiable. Where the Court differed from the decisions below (and this difference determined the outcome of the case) was that it held that the Commissioner bears the burden to quantify (at least by estimates) any prevention or lessening of competition that could be quantified. Because the Commissioner failed to quantify the quantifiable anti-competitive effects, the Court assigned zero weight to those effects and held that the (fairly minimal) efficiencies quantified by Tervita were sufficient for it to establish a good defence.

Implications and Practical Considerations

Tervita was a highly anticipated case; not because of widespread interest in the efficiency defence, but because of the fact that a $6 million acquisition not only attracted the Bureau's attention, but also went all the way to the Supreme Court of Canada. It's very likely that the parties spent much more in legal and expert fees on the case than the value of the transaction.

Nonetheless, the Supreme Court decision is well written and instructive. At a high level, we believe that the following points may be taken from the case:

  1. Tervita raises the bar on future merger challenges by the Bureau in cases where the merging parties can point to even "marginal" or "insignificant" gains in efficiency resulting from the proposed transaction.
  2. Contested merger cases are rare, contested cases involving non-notifiable mergers are rarer still, and contested non-notifiable prevent cases are extremely rare. While it remains the case in Canada (like in the U.S.) that no deal is too small to attract antitrust scrutiny, the Bureau may hesitate to challenge smaller deals given the evidentiary standard imposed by the Supreme Court and the associated expense of discharging that burden.
  3. The Bureau lost because it did not prove its case relating to efficiencies. It won't make the same mistake again. Any future case where efficiencies are at issue will be more expensive and somewhat more difficult for the Bureau to prove (because it must quantify or at least estimate deadweight losses so that the respondents can try to demonstrate that they are exceeded by the efficiencies gained from the merger).
  4. In a non-notifiable merger where there are potentially significant competition issues - i.e., either a potential substantial lessening of competition resulting from high market shares and barriers to entry or a potential substantial prevention of competition resulting from the removal of one of the merging parties as a poised competitor - the parties (and especially the Buyer) should assess the competition law risks (of both challenge and divestiture) before closing and develop an appropriate game plan for managing that risk.