Two recent statements from Canada’s competition regulator could help businesses hit by the economic impact of the pandemic defend their plans to merge with or acquire competitors.
The Competition Bureau recently published position statements to explain its analysis of two separate mergers it investigated over the past year. In both cases, it decided not to block the transactions.
Mergers that lead to substantially less competition are typically prohibited, but there are exceptions – and lawyers say the bureau’s recent reviews provide new clarity around two such defences: one that focuses on efficiencies created by a deal and another that argues a “failing firm” would simply go out of business if the transaction did not go through. Those defences could be particularly relevant to companies that need to dramatically cut costs or may even face bankruptcy because of the COVID-19 crisis.
Omar Wakil, a competition law partner at Torys LLP, said that in both recent cases the bureau undertook lengthy and complex reviews – suggesting merging parties should still prepare for a great deal of scrutiny – but ultimately the deals went through as planned. He added that the position statements provide welcome transparency that the bureau does not have an obligation to provide.
“I think that the bureau recognized that these were reviews that happened pre-COVID but they’re relevant for the COVID world and the post-COVID world,” he said. “So kudos to them for getting these out and giving people some guidance as to what their thinking is.”
In the first case, Canadian National Railway Co. acquired the intermodal shipping assets of H&R Transport Ltd. (Intermodal shipping refers to goods transported in a container using multiple methods, such as trucking and rail services.)
CN announced the acquisition in May, 2019, and the bureau investigated and concluded the deal would lead to reduced competition for refrigerated container shipping services in eight markets. But it cleared the acquisition when it was convinced that the efficiencies created would outweigh any anti-competitive effects. Those efficiencies included lower overhead costs and savings from eliminating extra facilities, IT systems and software licences.
The second case was a deal for American Iron & Metal Company Inc. (AIM) to buy Total Metal Recovery Inc. (TMR). The two companies were the largest scrap metal processors in Quebec and had neighbouring facilities in Montreal, but the bureau concluded the deal would not lessen competition in the market because TMR was a failing firm.
In its position statement, the Competition Bureau made clear that probable business failure is not a sufficient defence for an anti-competitive merger. Rather, the parties must show that “imminent failure” is likely and that “the assets of the firm are likely to exit the relevant market because no competitive alternatives exist.”
Jean-Philippe Lepage, a spokesman for the bureau, said that the investigations were conducted prior to the current crisis and reflect practices that “remain consistent in the context of the COVID-19 pandemic.
“The bureau’s current guidance provides an established and reliable framework in which to assess the various factors at play,” Mr. Lepage said.
Subrata Bhattacharjee, national co-chair of the competition law group at Borden Ladner Gervais LLP, said the bureau likely wants to highlight that it already has tools to deal with situations that could arise from the COVID-19 crisis.
“The bureau has always maintained and continues to maintain that the existing framework of the Competition Act can deal with situations that are driven by pandemic concerns,” Mr. Bhattacharjee said.
Mr. Wakil said the two cases are also notable because they involved deals that were considered “non-notifiable.” Under Canada’s competition laws, merging companies must notify the bureau of transactions when the target company’s assets or revenues from sales in Canada exceed $96-million.
But last year the bureau said it was expanding its Merger Intelligence and Notification Unit and would actively look for and investigate deals that don’t meet that threshold. This suggests that merging parties should be aware of competition concerns even in smaller-value deals.
Merger and acquisition activity is likely to increase in the coming months, according to Mr. Wakil. “There are going to be distressed firms out there that are going to need to re-evaluate their position in the marketplace, and many will be thinking about consolidation as one potential way to deal with crisis.”
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