The Canadian Competition Bureau recently issued a position statement on its review of the acquisition by Canadian National Railway Company ("CN") of H&R Transport Limited ("H&R") (the "Transaction"). The Bureau completed its review of the Transaction in November 2019 following a lengthy review process with its conclusion being that it would not challenge the Transaction. Stikeman Elliott was counsel to CN in respect of the Transaction.
As we discuss below, the Transaction is notable for three reasons:
- The Transaction represents the first case to use the Bureau's draft model timing agreement for evaluating efficiency defence claims under the Competition Act.
- On a related point, the Bureau accepted that the claimed efficiencies were substantiated, notwithstanding the Bureau's apparent discomfort with the defence in Canadian law, with it being relatively rare for the Bureau to clear a transaction on the basis of efficiencies
- The Transaction was subjected to an extensive review even though it did not trigger the thresholds for pre-merger notification.
First Use of Model Timing Agreement
Canada's Competition Act contains an efficiencies defence which, when successfully made out, can save an otherwise anti-competitive merger from being challenged by the Competition Bureau (or blocked by the Competition Tribunal) where the efficiencies arising from a transaction outweigh the competitive harm.
The efficiencies defense has long been a source of criticism and skepticism from the Bureau. In May 2019, the Bureau announced that it was introducing a new model timing agreement to ensure that efficiencies are carefully evaluated and only accepted with "reliable, credible, and probative" evidence and that transactions cannot close pending such evaluation. This was a significant development because timing agreements have otherwise been used only sparingly and inconsistently in Canada.
The key provisions of the model timing agreement include an extensive review period (potentially six-months in total); examination of witnesses under oath to test the claimed efficiencies; extensive informational demands on the parties; formalized Bureau updates; a prohibition on the Bureau taking legal action to challenge the transaction while the timing agreement is in place; and a requirement that merging parties provide 30 days' notice of closing.
The Transaction represented the first experience with the model timing agreement. As noted in the Bureau's position statement, the merging parties and the Bureau met their respective obligations under the timing agreement, including having representatives of each party examined under oath.
Parties considering timing agreements will have to weigh the advantages of timing agreements – such as improved opportunity for positive clearance, review timing certainty and potentially greater Bureau transparency – with key disadvantages, especially the length of the process and the fact that entering into a timing agreement can result in a situation where the parties cannot legally close as a matter of contract when they could otherwise close as a matter of statute. We expect timing agreements to be the subject of ongoing discussion in 2020. The key issues to watch going forward will be the frequency with which the Bureau seeks to enter into the timing agreement and whether a refusal to enter into such an agreement meaningfully impacts the Bureau's review.
Bureau Accepted Claimed Efficiencies
CN and H&R both provided full truckload refrigerated intermodal services. The Bureau alleged that the Transaction would reduce competition for such services on eight routes between Eastern Canada and Western Canada. However, the Bureau determined that the efficiencies defence applied as the claimed efficiencies related to the elimination of overhead, facility rationalization and savings from duplicative IT systems and licenses would more than offset the alleged anti-competitive effects of the Transaction. In addition to the Transaction being notable for using the timing agreement framework, this case is notable for being cleared on the basis of the efficiencies defence, which in itself is rare.
Notwithstanding the Bureau's application of the efficiencies defence, the Bureau's position statement included a passing criticism of the defence. Referring to the Supreme Court's decision in Tervita, the Bureau stated that the Transaction engaged "purely domestic markets" and implied that the Transaction was not intended to benefit from the defence because it was a domestic merger and therefore allegedly did not engage one of the rationales behind the efficiency defence to support economies of scale with reference to international competition. While the Bureau's statement is perhaps not surprising given ongoing discomfort with the defence, neither the Competition Act nor case law restrict the application of the efficiencies defence to domestic mergers, and it is somewhat unusual for the Bureau to make policy arguments around statutory defences in position statements.
Review of Non-Notifiable Transactions
The Transaction did not meet the thresholds for pre-merger notification but was nevertheless reviewed by the Bureau. In the past, reviews of so-called non-notifiable transactions were relatively rare but have recently been targeted by the Bureau. In fact, in September 2019, the Bureau announced that it had tasked its Merger Intelligence and Notification Unit (MINU) towards "active intelligence gathering on non-notifiable merger transactions that may raise competition concerns". We expect the Bureau's review of non-notifiable mergers to continue to be a focus in the months ahead. We note also in this regard that the "Size of Transaction" threshold under the Competition Act, which is typically increased annually to reflect inflation, was left unchanged in 2020, a development that appears to be consistent with the Bureau's interest in reviewing smaller transactions that might otherwise go unnoticed.
Originally published 12 May, 2020
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
We operate a free-to-view policy, asking only that you register in order to read all of our content. Please login or register to view the rest of this article.