Canada: Mind The Gap: Merger Efficiencies In The United States And Canada

Co-authored by Paul Cuomo And Jeffrey Oliver

THE  PEACE  BRIDGE, LOCATED  AT the end of Lake Erie, connects the United States to Canada. Opened in 1927, it was named to commemorate 100 years of peace between the two countries and remains one of North America's most important commercial ports.

Notwithstanding the close ties between Canada and the United States, there is an important difference in the way that mergers are reviewed on either side of the border. In Canada, the efficiencies defense is typically credited and increasingly determines the outcome of transactions that would otherwise be considered anticompetitive under the law. In the United States, efficiencies are seldom credited and almost never influence the outcome of mergers that are otherwise deemed anticompetitive. This is important because a significant number of mergers are reviewed by both the Canadian Competition Bureau (the Bureau) and the U.S. antitrust agencies.¹

The differing treatment of efficiencies can lead to different results on different sides of the border. ²/ This is despite the fact that U.S. government officials stated in the aftermath of GE/Honeywell that convergence is desired whenever possible to avoid one authority blocking a transaction that may be procompetitive and efficiency-enhancing in another. ³ As discussed in this article, when it comes to efficiencies, the differences are greater than the similarities.

Background

Efficiencies remain the primary rationale for almost all mergers; they allow the merging firms to achieve economies of scale and scope in production, staff rationalization, financial synergies (e.g., lower cost of capital), and other synergies. ⁴ Intergovernmental agencies such as the Organization for Economic Co-operation and Development (OECD), as well as most antitrust authorities, have generally acknowledged the importance of an assessment of efficiencies in merger review. ⁵ The International Competition Network recommends that competition agencies include an assessment of potential efficiencies in their overall merger review analytical framework, noting that certain efficiencies "may bring synergies on a potentially continuous basis, thus enhancing the potential performance of the merged entity and the potential benefit to competition and consumers." ⁶

While the U.S. Horizontal Merger Guidelines expressly recognize that "a primary benefit of mergers to the economy is their potential to generate significant efficiencies," ⁷ the U.S. Supreme Court has not expressly recognized an efficiencies defense for mergers. However, the Sixth, Eighth, Eleventh, and District of Columbia Circuits, and most recently, the Ninth Circuit, have at least suggested that efficiencies could save the day for the right merger—although the Ninth Circuit recently cautioned that "we remain skeptical about the efficiencies defense in general and about its scope in particular." ⁸

By contrast, the Supreme Court of Canada has recently approved a merger to monopoly based on the efficiencies defense, noting that only "marginal efficiency gains are required for the defense to apply." ⁹ Questions remain in both countries and in cross-border cases as to how efficiencies are to be treated in strategic mergers. This is particularly important given the 2014 publication of the Best Practices on Cooperation in Merger Investigations by the U.S. antitrust agencies and the Bureau, which encourages them to work together. ¹⁰

Regardless of whether merger laws give primacy to economic efficiency (as in Canada) or incorporate economic efficiency as an element in merger review (as in the United States), there is significant value in ensuring consistent results with conclusions that  are supported by sound economic principles. Economics provides an objective basis for assessing antitrust issues, which is important when agencies may be feeling pressure to take into account more political factors, such as the impact on employment. As new issues emerge, particularly in terms of the assessment of vertical mergers, or mergers that can result in significant dynamic efficiencies and innovation, tools that are used to evaluate economic efficiency offer the potential for an objective approach to such assessments, often through sophisticated and quantifiable economic analysis.

Prominence of Efficiencies in Canadian Merger Review

Canada has a strong track record of crediting efficiencies in merger reviews, and even clearing transactions that would otherwise be challenged if not for the claimed efficiencies. In Canada, primacy is given to economic efficiency as a statutory objective in Section 96 of the Canada Competition Act (the Act), ¹¹ which provides a defense to mergers that are otherwise likely to lessen or prevent competition if efficiencies from the merger are likely to be greater than and offset the merger's anticompetitive effects. ¹² As the Supreme Court of Canada recognized in Tervita Corp. v. Canada (Commissioner of Competition), this efficiencies defense was introduced following a report from the Economic Council of Canada that "identified economic efficiency as the overriding policy objective" behind reforming the Act. ¹³

The efficiencies defense in Section 96 of the Act recognizes the important benefits that mergers can generate for the economy through cost savings and economies of scale, which make the Canadian economy more competitive and more efficient. At the same time, the provision acknowledges that certain mergers can also have negative impacts on competition, and seeks to balance these factors to determine whether a merger will result in a net economic benefit to the Canadian economy. There is no requirement that efficiencies be passed on to consumers; therefore, fixed cost savings are an important consideration in addition to variable cost savings. As a result, efficiencies could save a merger to monopoly in Canada, even if it leads to higher prices or less choice for consumers.

In economic terms, Section 96 posits a cost-benefit analysis that aims to maximize total surplus (the sum of producer surplus and consumer surplus) for Canadian society. This total surplus approach set out in Canada's statute has led commentators to call it the "most economically literate" competition law in the world. ¹⁴ As set out in the Merger Enforcement Guidelines, the Bureau will exclude efficiency gains that would have been achieved through alternative means even if an order from the Canadian Competition Tribunal were issued; efficiency gains that would not be affected by a Tribunal order; gains that are redistributive in nature (e.g., cost reductions from increased bargaining leverage); efficiency gains that do not accrue to the benefit of the Canadian economy; and savings resulting from a reduction in output, service, quality, or product choice. ¹⁵

Footnotes

1 More than one-quarter of the Bureau's merger reviews involve a significant level of cooperation from at least one international antitrust counterpart. See John Pecman, Comm'r of Competition, Can. Competition Bureau, Remarks at the International Privacy Enforcement Meeting (June 4, 2015), http://www.competitionbureau.gc.ca/eic/site/cb-bc.nsf/eng/03957.html.

2 For example, the Superior/Canexus merger was cleared in Canada on the basis of the efficiencies defense but challenged in the United States. Compare Can. Competition Bureau, Competition Bureau Statement Regard- ing Superior's Proposed Acquisition of Canexus (June 28, 2016), http:// www.competitionbureau.gc.ca/eic/site/cb-bc.nsf/eng/04111.html, with Press Release, Fed. Trade Comm'n, FTC Challenges Proposed Merger of Canadian Chemical Companies Superior Plus Corp. and Canexus Corp. (June 27, 2016), https://www.ftc.gov/news-events/press-releases/2016/ 06/ftc-challenges-proposed-merger-canadian-chemical-companies.

3 Deborah Platt Majoras, Deputy Assistant Att'y Gen., U.S. Dep't of Justice, Remarks Before the Antitrust Law Section, State Bar of Georgia (Nov. 29, 2001), https://www.justice.gov/atr/speech/ge-honeywell-us-decision.

4 OECD: POLICY ROUNDTABLES, THE ROLE OF EFFICIENCY CLAIMS IN ANTITRUST PROCEEDINGS, DAF/COMP(2012) 23, May 2, 2013, at 16 [hereinafter OECD EFFICIENCY ROUNDTABLE], http://www.oecd.org/competition/EfficiencyClaims2012.pdf.

5 Id. at 16.

6 INT'L COMPETITION NETWORK: RECOMMENDED PRACTICES FOR MERGER ANALYSIS 30 (2008), http://www.internationalcompetitionnetwork.org/uploads/doc1107.pdf.

7 U.S. Dep't of Justice & Fed. Trade Comm'n, Horizontal Merger Guidelines 29 (2010) [hereinafter Horizontal Merger Guidelines], https://www.ftc.gov/sites/default/files/attachments/merger-review/100819hmg.pdf.

8 St. Alphonsus Med. Ctr.–Nampa Inc. v. St. Luke's Health Sys., Ltd., 778 F.3d 775, 790 (9th Cir. 2015; see also ProMedica Health Sys., Inc. v. FTC, 749 F.3d 559 (6th Cir. 2014); FTC v. H.J. Heinz Co., 246 F.3d 708 (D.C. Cir. 2001); FTC v. Tenet Health Care Corp., 186 F.3d 1045 (8th Cir. 1999); FTC v. Univ. Health, Inc., 938 F.2d 1206 (11th Cir. 1991).

9 Tervita Corp. v. Canada (Comm'r of Competition), 2015 SCC 3, para. 151 (Can.).

10 Can.-U.S. Merger Working Group, Best Practices on Cooperation in Merger Investigations (Mar. 25, 2014), http://www.competitionbureau.gc.ca/eic/site/cb-bc.nsf/vwapj/Canada-US-Best-Practices-en-2014-03-25.pdf/

11 See e.g., Canada (Comm'r of Competition) v. Superior Propane, Inc., 2002 Comp. Trib. 16, paras. 80, 215, aff'd, 2003 FCA 53 (CanLII); Tervita, 2015 SCC 3, paras 111–113.

12 Competition Act, R.S.C. 1985, c. C-34, § 96 (Can.).

13 Tervita, 2015 SCC 3, para. 85.

14 MICHAEL J. TREBILCOCK ET AL., THE LAW AND ECONOMICS OF CANADIAN COMPETITION POLICY 31 (2002). The Canadian approach, as articulated by the Bureau, also includes somewhat extraneous considerations where a merger results in these "socially adverse" wealth transfers from low-income consumers. See Tervita, 2015 SCC 3, paras. 90–99. The incorporation of wealth transfers into the efficiencies trade-off analysis has been criticized by the Canadian Competition Tribunal because of the need to rely on value judgments that go beyond the traditional scope of antitrust law. See Superior, 2002 Comp. Trib. 16, para. 372.

15 Can. Competition Bureau, Merger Enforcement Guidelines 12.20 (Oct. 2011) [hereinafter Merger Enforcement Guidelines] http://www.competionbureau.gc.ca/eic/site/cb-bc.nsf/eng/03420.html.

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