Competitively sensitive mergers: a long and winding road ahead

January 2022  |  SPOTLIGHT | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

January 2022 Issue

Parties to contentious mergers under the Canadian Competition Act may face more hurdles on their road to closing moving forward.

On 23 August 2021, the Canadian Competition Tribunal released a critical decision regarding the scope of the Competition Bureau’s ability to obtain interim injunctive relief to prevent merging parties from implementing a transaction. The transaction involved the merging of two competing companies in the midstream infrastructure and environmental solutions space. The Bureau sought to prevent the parties – SECURE Energy Services Inc. and Tervita Corporation – from closing their transaction. In the end, the parties succeeded in implementing the transaction, following which the Bureau sought to prevent the parties from integrating certain facilities formerly owned by Tervita and instead requiring those assets to be held separately and operated independently from Secure, pending the outcome of the Bureau’s substantive challenge to the deal, which typically takes many months, if not more than a year.

The decision to deny the Bureau the requested injunctive relief was less significant than its reasoning as to why. The Tribunal’s guidance for future requests and its interpretation of the applicable legal test will have ripple effects on the Bureau’s approach to handling potentially harmful mergers, likely at the expense of merging parties.

In this article, we will first outline the facts of the decision and then set out the impact for future transactions.

By way of background, an injunctive order under section 104 of the Act may be sought only where the Bureau has also challenged the transaction as being anticompetitive under section 92. The section 104 injunction is, therefore, interim relief until such time that the Tribunal hears and decides the section 92 challenge. If successfully challenged under section 92, the Tribunal may block the implementation of a pending merger or order the dissolution of a closed merger.

At the outset of its reasons in Secure/Tervita, the Tribunal created more leeway for the Bureau to succeed in its section 104 requests. The Tribunal dealt, at length, with the correct legal test to be applied to the Bureau’s request for interim relief under the Act, weighing the two differing standards – the classic (and more relaxed) tripartite test or the more stringent strong prima facie test. The former has as a gating item whether there is a “serious issue to be tried”, meaning simply that the legal issue cannot be vexatious or frivolous. However, the latter requires that the Bureau demonstrate not only that there is a serious legal issue to be tried but that its case is also likely to succeed. The more stringent standard is typically applied to applications for mandatory relief, which Secure argued was applicable in the case at hand. Though the Tribunal agreed that the more stringent test would ordinarily apply to such situations, it declined to do so. The merging parties’ conduct influenced this decision. Citing the parties’ “high-handed” behaviour evidenced by their decision to close in the face of a prior Bureau application for interim relief, the Tribunal held that it would not be in the interests of justice to permit Secure to benefit from the Bureau facing the more stringent strong prima facie case test.

Although the less stringent test for interim relief was applied, this did not prevent the merging parties from prevailing. The Bureau was found to have produced insufficient evidence to make its case. The Tribunal determined that where the Bureau is on notice that merging parties intend to rely on Canada’s statutory efficiencies defence and, as here, the merging parties have made some effort to quantify those efficiencies, the Bureau is obligated to provide at least some rough or initial sense of the alleged competitive harm that will flow from the merger so that the Tribunal may weigh the approximated efficiencies against the approximated competitive harms. For context, the efficiencies defence is prescribed in the Competition Act and allows for a trade-off analysis between anti-competitive effects and efficiencies resulting from a transaction; should the efficiencies be greater than and offset the anticompetitive effects, the transaction may proceed. The Bureau’s failure to concretise the anticompetitive harm to any degree ultimately led the Tribunal to conclude that the Bureau had not satisfied its evidentiary burden and the merging parties therefore triumphed.

The Tribunal also rejected the Bureau’s argument that Secure had not formally invoked its efficiencies defence, which would mean that the Bureau therefore had no obligation to meet the higher evidentiary burden. Instead, the Tribunal found that the Bureau had been on notice by virtue of the parties making efficiencies-based arguments in their initial notifying submission to the Bureau back in March 2021. As such, the Bureau was expected to be prepared to counter any efficiencies claims and, accordingly, lost its case when it appeared before the Tribunal empty-handed.

Despite the Bureau’s loss, the Secure/Tervita decision raises several important considerations for merging parties and the Bureau in future transactions in Canada, some of which may ultimately empower the Bureau in subsequent reviews. First, the Tribunal considered the parties’ conduct throughout the merger review process to be a key consideration in deciding the appropriate evidentiary standard at several stages of its decision. For one, the parties’ flippant behaviour in a merger review may directly benefit the Bureau in front of the Tribunal; it is possible that the reverse may also be true. In addition, parties’ initial arguments may strengthen their position later. In making the Bureau aware at an early stage of the review that efficiencies arguments would be made to help justify the transaction, the parties raised the Bureau’s evidentiary burden to quantify the transaction’s competitive harm. This creates a significant hurdle for the Bureau given that the merger review process allows it only 30 days following the receipt of the parties’ supplementary information request submission – an internal document production typically counting in the hundreds of thousands, equivalent to a second request in the US – to review, come to a decision, and prepare the requisite materials to file applications to both challenge a merger and seek interim relief.

Second, the Tribunal explicitly noted that the Bureau could avoid the more stringent strong prima facie case test by filing the section 104 application earlier in its merger process.

Recognising the logistical challenges of this task, the Tribunal recommended the Bureau increase its reliance on a seldom-used application under section 100 of the Act, which allows the Commissioner to seek an order preventing merging parties from taking any steps to complete a merger where the Bureau requires more time to complete its review. Accordingly, this permits the Bureau to obtain additional time to complete its inquiry and simultaneously prepare applications under sections 92 and 104. As a result, it seems likely that the Bureau will make far greater use of its interim relief powers under section 100 of the Act.

Increased reliance on section 100 has repercussions for closing timelines where a merger is reviewable under the Act. Section 100 allows for up to two injunctive orders of 30 calendar days each, providing the Bureau with the potential to delay closing by up to 60 days while it continues its review of the merger. Consequently, in transactions where the Bureau has serious concerns, we expect that the Bureau may seek to protect its position by seeking 30 or 60 days of injunctive relief under section 100 of the Act to continue its review before the suspensory period expires, and then subsequently apply for section 104 relief within seven to 10 days of the expiration of the section 100 order prohibiting the parties from taking steps to complete the merger.

Decisions on transactions’ outside dates and whether to close transactions still under review following the expiration of the statutory waiting periods raise complex and multi-layered tactical questions for purchasers and for vendors. Parties should consult closely with competition and antitrust counsel in coming to their decision.

 

Casey Halladay is a partner and Erin Keogh is an associate at McCarthy Tétrault LLP. Mr Halladay can be contacted on +1 (416) 601 4348 or by email: challaday@mccarthy.ca. Ms Keogh can be contacted on +1 (416) 601 4320 or by email: ekeogh@mccarthy.ca.

© Financier Worldwide

BY

Casey Halladay and Erin Keogh

McCarthy Tétrault LLP

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