Increased Rigour In Merger Enforcement

The Canadian merger review regime under the Competition Act (the Act) has undergone significant change from a substantive, technical and procedural perspective. We address the key amendments below — namely, the introduction of a rebuttable presumption of harm based on market shares and concentration levels; a heightened remedial standard for anti-competitive mergers; the repeal of the efficiencies defence; the codification in statute of additional factors to be considered during a merger review; adjustments to the pre-merger notification thresholds; and certain procedural amendments designed to improve the Commissioner of Competition's (Commissioner) ability to review and challenge mergers.

The amendments bring the merger review provisions of the Act closer to U.S. merger law (i.e., a more onerous remedial standard, with no efficiencies "defence") and mirror aspects of the more aggressive enforcement approach of the U.S. Department of Justice (Antitrust Division) and the Federal Trade Commission as set out in their 2023 U.S. Merger Enforcement Guidelines.

While the full impact of these changes on merger reviews in Canada will only be appreciated with experience, overall, there is the potential for more robust merger enforcement activity in Canada. This places a premium on merging parties engaging in comprehensive pre-signing assessments of the competitive effects of a proposed transaction and mapping a path to a successful completion.

New rebuttable presumptions of harm for mergers

The substantive legal test to be met before the Competition Tribunal (the Tribunal) can issue any remedial order in respect of a merger has not changed. Under section 92 of the Act, the Commissioner must establish that the merger prevents, lessens or is likely to prevent or lessen competition substantially (SLPC). However, section 92, which establishes a framework for assessing whether the SLPC test has been satisfied has been changed in a number of important respects. Notably, the assessment framework now includes a rebuttable presumption of competitive harm based on post-merger market share and concentration levels.

Previously, section 92(2) of the Act explicitly stated that the Tribunal could not find that a merger was likely to result in an SLPC on the basis of evidence of concentration or market share alone. While the Competition Bureau's (Bureau) Merger Enforcement Guidelines have long indicated that the Commissioner generally would not challenge a merger on the basis of a concern related to the unilateral exercise of market power where the parties' combined share was less than 35%, or one related to a coordinated exercise of market power when the post-merger market share accounted for by the four largest firms in the market would be less than 65% or the parties' combined share would be less than 10%, the Act did not previously contain prescribed market share or concentration thresholds for purposes of analyzing the likely competitive effects of a merger. Following the amendments to the Act, section 92(2) now provides that if the Tribunal finds, on a balance of probabilities, that a merger is likely to result in a significant increase in concentration or market share, the Tribunal shall (i.e., not discretionary) also find that the merger is likely to result in an SLPC unless the contrary is proven on a balance of probabilities by the merging parties. Accordingly, where the concentration or market share thresholds are established, the onus shifts from the Commissioner to the merging parties to demonstrate why, notwithstanding the significant increase, the transaction is not likely to result in an SLPC. Section 92(3) prescribes what constitutes a significant increase in concentration or market share. Now, a merger is likely to result in a significant increase in concentration or market share if, in any relevant market, as a result of the merger, both

(a) the concentration index (measured as the sum of the squares of the market shares of the suppliers or customers) increases by more than 100

(b) either the concentration index is more than 1800 or the market share of the merging parties is more than 30%

Not only does the Act now prescribe the market share and concentration thresholds that will result in a presumption of anti-competitive harm, but they do so at levels that — at least from a unilateral perspective — are lower relative to those previously articulated by the Bureau in the Merger Enforcement Guidelines as likely to raise concerns. The new market share and concentration levels do, however, align exactly with the approach taken in the recently revised U.S. Merger Guidelines.

The establishment of a rebuttable presumption of harm based on post-merger market share and concentration levels draws upon the enforcement practice in the United States that has been in place for some time. However, unlike in the United States, the presumption in Canada is now prescribed by statute, raising concern that there may be less room for flexibility and discretion than would be the case where the presumption is set out as part of an enforcement approach or directive.¹ Indeed, U.S. case law has commented that the framework for merger reviews in the U.S. is applied "flexibly" with "evidence considered all at once and the burdens are often analyzed together."²

In practice, we expect the merger review process will continue in many respects as it has previously, with the merging parties and the Bureau engaging in a dialogue on market definition, shares, and competitive effects. However, a heightened focus on quantifying market shares and concentration levels can be expected, placing a premium on assessing market definition, shares and concentration levels when considering a proposed transaction. A focus on quantifying shares and concentration levels presents potential challenges for merging parties in industries where there is very little or no reportable share data (or where such data does not align with defined markets for purposes of a competitive effects analysis). In such cases, merging parties may be on a poor informational footing relative to the Bureau, which has access to information gathering tools to obtain data and information from third-party market participants on a confidential basis. It remains to be seen how, from a procedural and substantive perspective, the rebuttable presumption (and the corresponding burden-shifting to merging parties) will play out in the context of contested merger litigation at the Tribunal.

Most importantly, however, it continues to be the case that market shares and concentration levels are not the end of the story. A presumption is just that: a presumption that can be rebutted by evidence sufficient to demonstrate that, on a balance of probabilities, an SLPC is not likely to occur. Such evidence may include, for example, the likelihood of entry or expansion by other market participants; ongoing innovation efforts and change within a dynamic market; customers' countervailing power; and whether the target was likely to fail absent the merger, to name a few of the key factors.

New remedial standard: all anti-competitive effects must be eliminated

Alongside the introduction of a rebuttable presumption of harm based on market shares and concentration levels, a remedial order to address the anti-competitive effects of merger must now preserve or restore the level of competition that would have prevailed in the absence of the merger.

This change directly undoes the decades-old Supreme Court of Canada decision in Canada (Director of Investigation and Research) v. Southam Inc.,³ which held that a remedy need only to restore competition to the point at which it can no longer be said to be substantially less than it was before the merger. In other words, remedies that are fashioned only to take the "S" out of the "SLPC" are no longer sufficient; instead, remedies must go further to restore (in the case of a completed merger) or preserve (in the case of a proposed merger) competition.

While contrary to longstanding jurisprudence and the Act's express focus on "substantial" impacts on competition, this change is not entirely surprising given the Bureau's stated preference for a remedy that fully eliminates the anti-competitive effect in the applicable market rather than one that only addresses substantial anti-competitive effects. It remains to be seen what actual impact the change in the remedy standard will have in the determination of merger remedies, which to date have been largely negotiated on a consensual basis.

Statutory efficiencies defence has been repealed, but efficiencies remain important

The efficiencies defence, previously found in section 96 of the Act and repealed in December 2023, provided that the Tribunal may not make a remedial order if it found that a merger was likely to bring about gains in efficiencies that would be greater than and offset the anti-competitive effects of the merger, and that such efficiencies would be lost if the order were made. Successive Commissioners had called for the repeal of the efficiencies defence for over a decade, frequently commenting that the defence (which was unique to Canada) was out of step with the approach to merger review and enforcement by the Bureau's peer antitrust enforcement agencies globally.

First introduced as part of the Act in the 1980s, section 96 had only been relied upon to clear a small handful of mergers, either by the Commissioner declining to challenge a transaction or through a successful defence by merging parties at the Tribunal. The most recent decision involving the efficiencies defence — which was upheld on appeal — was the Tribunal's decision in the Secure/Tervita merger. In that case, the Tribunal held that the efficiencies defence did not apply and ordered multiple divestitures to remedy the anti-competitive effects.⁴ Notwithstanding its limited application in merger reviews, the availability of the efficiencies defence had a broader impact on the merger review process and timelines in Canada.

While efficiencies no longer provide a complete defence to a merger that is otherwise likely to result in an SLPC, efficiencies still remain relevant in assessing competitive effects, just as they have in the U.S., where there has never been an efficiencies defence. As stated in section 1 of the Act, the promotion of economic efficiency remains one of the Act's central purposes, and section 93(h) provides that when assessing the competitive effects of a merger, the Tribunal may have regard to, among other things, any other factor that is relevant to competition in a market that is or would be affected by the merger or proposed merger. Accordingly, the Tribunal is still able to consider submissions regarding claims of efficiencies (particularly those which would be passed on to consumers in the form of lower prices, increased quality or innovation). Moreover, the Commissioner has clearly stated that "the pro-competitive efficiencies of a merger could absolutely be considered in the framework of considering whether the merger substantially lessens or prevents competition".⁵

Additional assessment factors to be considered in merger review

The factors the Tribunal must consider in determining whether a merger is likely to result in an SLPC, which are set out in section 93, were first expanded in June 2022 and then again through additional amendments in June 2024. The list of factors in section 93 has long been non-exhaustive, but the expanded factors highlight the Bureau's areas of focus in recent years:

• Innovation: The Tribunal is to consider the nature and extent of change and innovation in a relevant market.
• Network effects: The Tribunal is to consider network effects within a market.
• Entrenchment of incumbents: The Tribunal is to consider whether the merger would contribute to the entrenchment of the market position of leading incumbents.
• Non-price effects: The Tribunal is to consider any effect of the merger on price or non-price competition, including quality, choice or consumer privacy.
• Coordination between competitors: The Tribunal is to consider whether the merger is likely to result in express or tacit coordination between competitors.
• Change in market share or concentration: The Tribunal is to consider any effect resulting from the change in concentration or market share that the merger has or is likely to bring about. This addition aligns the section 93 factors with the new rebuttable presumptions of harm discussed above.

Lastly, it is noteworthy that section 92 itself has been amended to itemize labour specifically as a "market" in which the Tribunal may find that a merger is likely to result in an SLPC. Labour markets have come under increased scrutiny by competition enforcement agencies, particularly in the U.S., including in the context of merger reviews. The recently revised U.S. Merger Guidelines state that when evaluating a merger, the enforcement agencies will consider whether workers "face a risk that the merger may substantially lessen competition for their labor" and that "where a merger between employers may substantially lessen competition for workers, that reduction in labour market competition may lower wages or slow wage growth, worsen benefits or working conditions, or result in other degradations of workplace quality."⁶

We anticipate that the Bureau's forthcoming guidance will address labour market considerations, potentially drawing upon the considerations explored in the U.S. Merger Guidelines.

More mergers will be subject to mandatory pre-closing notification

The Bureau must generally be given advance notice of proposed transactions when both the transaction-size and parties-size thresholds are met. Two significant changes to the calculation of the transaction-size threshold set out in Part IX of the Act have been implemented. These changes generally align Canada's approach with that taken in other jurisdictions where jurisdictional turnover is a focus, and can be expected to increase the number of transactions that are subject to the mandatory pre-closing notification regime.

While the Bureau has the discretionary right to challenge any "merger" under section 92 of the Act, only certain types of prescribed transactions that exceed prescribed financial thresholds are subject to the mandatory pre-merger notification regime. A transaction that meets the prescribed transaction type must also exceed both the party-size threshold and the transaction-size threshold in order to trigger mandatory notification. The party-size threshold is met where the parties to the transaction, together with their affiliates, have in the aggregate either assets in Canada, or revenues in, from or into Canada, exceeding $400 million. Previously, the transaction-size threshold was met where the transaction target had either assets in Canada, or revenues in or from Canada generated from such assets, exceeding $93 million (may be adjusted annually). For the purposes of calculating the transaction-size threshold, parties were not required to include the target's sales into Canada (i.e., imports). Now, merging parties must include sales into Canada in determining whether the transaction-size threshold is met. It can be noted that the "transaction type" criterion still requires (among other things) that there be an operating business, which is defined as a "business undertaking in Canada to which employees employed in connection with the undertaking ordinarily report for work". Accordingly, while Canadian sales generated from outside of Canada are now clearly captured in the calculation of the thresholds, it remains the case that transactions involving targets with only sales into Canada who have no presence in Canada will continue to fall outside the pre-merger notification provisions of the Act.

Previously, the pre-merger notification regime did not treat a transaction implemented by way of both a share acquisition and an asset acquisition as a single notifiable event. Accordingly, the transaction-size threshold was calculated separately for each of the share acquisition and the asset acquisition, notwithstanding that they comprised part of a single transaction. If the transaction-size threshold was not exceeded for either the share acquisition or the asset acquisition, then the transaction was not subject to pre-merger notification as there was no requirement to aggregate the assets or revenues. Now, where a transaction is being implemented by way of a share acquisition and an asset acquisition, the value of the assets being acquired are to be aggregated — and the value of the revenues in, from or into Canada are to be aggregated — for the purposes of assessing the transaction-size threshold.

Lastly, it is worth noting that in June 2022, an anti-avoidance provision was introduced to the Act's merger notification regime to prevent merging parties from purposefully structuring transactions so as to avoid notification. Under section 113.1, if a transaction is specifically designed to avoid the application of the notifiable transaction provisions of the Act, the provisions will still apply to the substance of the transaction. This addition came as somewhat of a surprise, considering that the Commissioner has the power to review all "mergers" including those not subject to the mandatory pre-closing merger notification regime. Since the new provision came into force two years ago, we are not aware of a transaction where the Bureau asserted that section 113.1 applied to the transaction.

Enhanced ability to secure interim injunctions

By way of background, the merger review regime provides that once the applicable statutory review periods have expired, the parties are legally in a position to complete their merger unless the Commissioner has applied for and obtained from the Tribunal an injunction to prevent or delay closing. More specifically:

• Section 100 of the Act provides that the Commissioner may apply for an interim order to delay closing of a merger where the Commissioner requires more time to complete the merger review.
• Section 104 of the Act provides that the Commissioner may apply for an interim order to prevent or delay closing of a merger where an application challenging a proposed merger has been filed with the Tribunal.

Historically, there has been very little contested merger litigation in Canada, particularly on a pre-closing basis. Moreover, there have been only two fully contested proceedings under section 104 concerning a merger.⁷ In 2021, the Commissioner entered into a timing agreement with Secure and Tervita which provided that following the expiry of the statutory waiting period, the parties would provide the Commissioner with 72 hours' notice of their intention to close. In compliance with this provision, the merging parties did so at 11:15 p.m. on June 28, 2021, and therefore were free to complete their transaction after 11:15 p.m. on July 1, 2021, absent a Tribunal order. On June 29, the Commissioner filed an application for an interim order under section 104 and an application challenging the merger under section 92. The Commissioner then requested an emergency case conference seeking an "interim interim" injunction to prevent the merger from completion prior to the hearing of the section 104 application. The Commissioner's request for "interim interim" relief was denied at the Tribunal on June 30 and at the Federal Court of Appeal on July 1, and the transaction closed shortly thereafter on July 2. Of note, the Commissioner successfully challenged the transaction on a post-closing basis, with the Tribunal ordering multiple divestitures.

As a result of amendments to the Act, a "lack of time" to hear an injunction application will not be a factor in the Commissioner's ability to obtain an injunction. Now, where the Commissioner has applied for an interim order under either section 100 or 104 of the Act to prevent or delay the closing of a merger, the merger is automatically prohibited from closing until the application has been disposed of by the Tribunal. The Commissioner therefore now has greater ability to prevent closing — at least temporarily — while the Bureau completes its review or prepares for litigation. While a noteworthy change, it remains to be seen how the Commissioner's ability to prevent closing by simply filing an application for an interim order will impact the dynamics of merger review in practice, considering that the vast majority of mergers have been resolved without litigation.

Look-back period increased to three years for non-notified transactions

Previously, the Commissioner had a one-year period following closing to challenge any merger before the Tribunal, unless the Commissioner had previously issued an Advance Ruling Certificate (ARC) in respect of the merger. Now, the Commissioner will be able to challenge, for three years following closing, mergers that were not subject to mandatory notification or for which an ARC request was not filed. Where a merger is subject to notification or where an ARC request is filed, the Commissioner continues to have one year following closing to challenge the merger (unless an ARC was issued). This change creates for the first time a potential incentive to file a request for an ARC in advance of closing for a merger that is not subject to the mandatory pre-closing notification regime. The market intelligence branch of the Bureau continues to monitor the market actively for mergers falling below the notification thresholds.

Footnotes

1. While section 92(5) provides that federal Cabinet may by regulation prescribe different values than those set out in section 92(3), this nonetheless involves a regulatory drafting process and therefore is less flexible than the guidelines approach taken in the United States.

2. Illumina, Inc. v. Federal Trade Commission, 23-60167 1 at 9 (5^th Cir, 15 December 2023).

3. [1997] 1 SCR 748 at para. 85, 144 DLR (4th) 1 (SCC).

4. Canada (Commissioner of Competition) v. Secure Energy Services Inc, 2023 Comp Trib 2, aff'd 2023 FCA 172.

5. Senate of Canada, Standing Committee on National Finance, Evidence [PDF], 44-1, No 88 (13 December 2023) at page 34 (Matthew Boswell).

6. U.S. Department of Justice and the Federal Trade Commission, "2023 Merger Guidelines" [PDF], (28 December 2023).

7. The two contested proceedings under section 104 are The Commissioner of Competition v. Parkland Industries Ltd, 2015 Comp Trib 4, and Canada (Commissioner of Competition) v. Secure Energy Services Inc, 2021 Comp Trib 7. In another recent contested merger, Rogers/Shaw, the Commissioner applied for an interim order under section 104 following which a consent agreement was registered with the Tribunal pursuant to which Rogers and Shaw agreed not to close their transaction until the section 92 application was concluded. See: The Commissioner of Competition v. Rogers Communications Inc and Shaw Communications Inc, 2022 Comp Trib 2.