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Block-buster: Competition Bureau Unable to Stop Rogers-Shaw Deal

On January 23, 2023, the Federal Court of Appeal dismissed an appeal by the Commissioner of Competition (the “Commissioner”) from the Competition Tribunal’s (the “Tribunal”) earlier decision refusing to grant the Commissioner’s application to block the proposed amalgamation of Rogers Communications Inc. (“Rogers”) and Shaw Communications Inc. (“Shaw”). The appellate court’s decision comes under a month after the Tribunal released the reasons for its decision.[1] The Commissioner has stated that he will not appeal the matter further. While industry-watchers have been eagerly anticipating this decision, as is discussed below, its ramifications will spread well beyond the telecom sector.

This case is the Bureau’s second recent defeat challenging a transaction before the Tribunal. It is also the second case in a row in which the Bureau has failed to substantiate the anti-competitive effects required to block a transaction.

The defeat may have implications for competition law reform and for transacting parties in future transactions. With respect to reform, Rogers/Shaw calls into question whether changes to section 92 of the Competition Act proposed in the government’s Future of Competition Policy in Canada paper are truly needed.

For transacting parties, Rogers/Shaw highlights the utility of leveraging the Tribunal as an independent check on the Bureau as well as the power of a proactive remedy package, both of which can represent important tools to get a deal through.

Background

The original transaction that prompted these proceedings was a plan of arrangement between Rogers and Shaw, dated March 13, 2021, under which Rogers agreed to purchase all of the issued and outstanding shares of Shaw for approximately $26 billion, inclusive of debt (the “Initially Proposed Transaction”).

The parties were aware of potential Bureau enforcement risk raised by the Initially Proposed Transaction. Potential divestiture buyers were already interfacing with the Bureau early on in the process. Videotron Ltd. (“Videotron”), a subsidiary of Quebecor Inc (“Quebecor”), first expressed its interest in purchasing Shaw’s wireless business to the Commissioner on April 9, 2021.[2]

In February 2022, the Bureau informed Rogers and Shaw of its position that remedies would be required in Alberta, British Columbia, and Ontario.[3] In the months that followed, Rogers and Shaw sought out a number of potential divestiture buyers. The parties ultimately proposed two separate financial buyers to the Bureau, both of which were rejected in April 2022.[4]

On April 7, 2022, Videotron informed the Bureau that the company had made a proposal to acquire the assets and shares relating to Shaw’s wireless business.[5] Nevertheless, in the face of an active divestiture proposal from an experienced wireless operator, the Bureau proceeded to file its application to block the Initially Proposed Transaction on May 9, 2022.

Approximately two months later, on June 17, 2022, Rogers informed the Commissioner that it had entered into a Letter Agreement and Term Sheet with Quebecor for the sale of Freedom Mobile Inc. (“Freedom”), Shaw’s key wireless subsidiary.[6]

In what will no doubt rankle the Bureau, the Tribunal evaluated the deal not as it stood when the Bureau commenced its challenge, but rather as it stood at the time of the hearing. In its modified form, the transaction would proceed in two steps. For the first step (the “Divestiture”), Shaw would transfer Freedom to Videotron. For the second step (the “Amalgamation”), Rogers would acquire the remainder of Shaw through an amalgamation arrangement.

As a result, the deal that the Tribunal evaluated was one where Rogers would not acquire Freedom and its associated wireless business and customers. Rogers would, however, retain the Shaw Mobile banner, wireless customers under that banner, as well as minimal related assets. 

The Tribunal’s reasons explain why it took a holistic view of the transaction as it stood at the time of the hearing. From first principles, the competitive effects analysis is necessarily forward looking, and requires the Tribunal to take into account events occurring after the filing of the application.[7] Considering the Divestiture was not unfair to the Commissioner in light of the substantial notice provided to the Bureau concerning Videotron’s interest and potential acquisition. The Tribunal criticized the Commissioner’s position to the contrary as a request “that the Tribunal spend scarce public resources assessing something that will never happen”.[8]

Summary of the Tribunal’s Decision

To block a transaction under section 92 of the Competition Act, the Commissioner must demonstrate that a substantial prevention or lessening of competition (“SPLC”) would likely result should the transaction be approved.

In this case, the Tribunal analyzed the competitive effects of the Divestiture and the Amalgamation together, even though the Divestiture was proposed after the Commissioner had filed an application to block the original transaction. In particular, the Tribunal assessed whether the Divestiture and Amalgamation, taken together, would likely prevent or lessen competition substantially in the provision of wireless telecommunications services in Alberta and British Columbia.

The Commissioner advanced three theories of anti-competitive harm, which the Tribunal rejected in turn.

First, the Commissioner argued that Shaw’s divestiture of Freedom to Videotron would result in Freedom being a less effective competitor than it was under Shaw. Much of the Tribunal’s decision concerned this point. The Tribunal did not identify any SPLC resulting from the transaction. Instead, the evidence demonstrated that Videotron was an “experienced market disrupter”.[9] The Tribunal in particular noted that Videotron’s “substantial success in Quebec” was used “to develop very detailed and fully costed plans for its entry into and expansion within the relevant markets in Alberta and British Columbia”.[10] The Tribunal was clearly swayed by what it regarded to be a robust business plan that detailed both Videotron’s geographic expansion plans as well as a rollout of 5G wireless technology.[11] Further, the Tribunal explicitly noted how Videotron’s expansion would be fueled by the favourable agreements reached as part of the Divestiture. Particularly relevant were the discounted price of the wireless assets acquired pursuant to the Divestiture, as well as agreements whereby Rogers would provide certain telecommunications services (e.g., roaming) to Videotron at rates below those mandated by the Canadian Radio and Telecommunications Commission tariff schedules.[12]

In an unusual move, the Tribunal also took into account Videotron’s commitment to the Minister of Innovation, Science and Industry (the “Minister”) that, in the event the Divestiture proceeded, Videotron would offer telecommunications services at prices “comparable to what Videotron is currently offering in Quebec, which are today on average 20 per cent lower than in the rest of Canada”.[13] While the panel noted that “price commitments typically are irrelevant to the Tribunal’s analysis”, it was influenced by the fact that, in the particular circumstances of this case, the Minister would “retain leverage over Videotron” (e.g., in connection with future offerings or transfers of wireless spectrum).[14]

Second, the Commissioner argued that Rogers’ acquisition of Shaw Mobile would likely give rise to anti-competitive unilateral effects, for example, via market power flowing from Rogers’ acquisition of Shaw Mobile’s customers. Here, after disagreeing with the basis upon which the Commissioner’s economic expert calculated market shares, Tribunal noted Roger’s post-merger market shares would be mostly within the 35% “safe harbor” threshold (the point below which the Merger Enforcement Guidelines state that the Bureau generally will not challenge a merger on the basis of unilateral exercise of market power). The Tribunal found that, once it acquired Shaw Mobile’s customers, Rogers would control approximately 40% of the market for wireless services in British Columbia (and 26% in Alberta), and thus not sufficiently in excess of the safe harbour to indicate possible concerns.[15] The Tribunal further found that that Rogers’ post-merger shares would likely erode with Videotron’s anticipated growth.

Third, the Commissioner argued that the transaction would likely facilitate the exercise of collective market power by Rogers, BCE Inc. (“Bell”), and TELUS Communications Inc. (“Telus”). The Tribunal considered this theory to be a re-articulation of the two prior theories of harm. The Tribunal described the “lynchpin” of the Commissioner’s position to be that removing a disruptive player like Shaw from the market would result in greater coordination between competitors like Bell, Telus, and Rogers. Again, the Tribunal rejected this theory with reference to its earlier analysis that characterized Videotron as an equally (if not more) disruptive competitor.

Summary of the Federal Court of Appeal’s Decision

The Federal Court of Appeal upheld the Tribunal’s decision in an oral endorsement. Justice Stratas detailed that the Bureau had not demonstrated that any of the alleged legal errors in the Tribunal’s decision would have changed the conclusion the Tribunal reached. He explained that even if “the Competition Tribunal erred on the narrow legal points the Commissioner now raises in this court, we are not persuaded that the result could have been different. Thus it would be pointless to send this case back to the Competition Tribunal.”[16]

To the extent that the Federal Court of Appeal did opine on the substantive legal issues, the panel appeared to agree with the Tribunal. With respect to the question of whether the Tribunal ought to have considered the Divestiture in assessing the competitive effects of the merger, Justice Stratas characterized the Bureau’s position to the contrary as a “foray into fiction and fantasy”.[17]

Implications for Competition Law Reform

The Tribunal’s decision in Rogers/Shaw is the second recent challenge to a transaction that has failed because the Commissioner could not demonstrate the requisite anti-competitive effects. This may bear on proposed reforms to the Competition Act.

The Tribunal dismissed the Commissioner’s application in Rogers-Shaw because the Bureau did not demonstrate the anti-competitive effects necessary to justify blocking the transaction. Earlier last year, the Commissioner suffered the same defeat in a different case involving a different industry. In Canada (Commissioner of Competition) v. Parrish & Heimbecker, Limited, the Tribunal dismissed the Bureau’s application to block Parrish & Heimbecker’s acquisition of a single grain elevator in Virden, Manitoba from Louis Dreyfus Company Canada ULC.[18] That decision, too, turned on a finding by the Tribunal that the Commissioner had not established an SPLC.[19]

In light of the current state of challenges to transactions under the Competition Act, it is worth reevaluating whether proposed reforms are fit for purpose. The government’s Future of Competition Policy in Canada paper, for instance, contemplates relaxing the SPLC test to follow recent proposals in the United States.[20] But the Bureau’s loss may not be a result of any problem with the Competition Act, rather, it may signal a miscalculation regarding the Bureau’s assessment of the remedy contemplated by the parties in this particular case.

The decision also represents a lost opportunity to address areas where reforms have been proposed. The Future of Competition Policy in Canada paper spills substantial ink on the efficiencies defence.[21] While the Tribunal addressed this topic extensively in Parrish & Heimbecker, the compressed timeline in this case led the panel to entirely sidestep the issue. Since the Commissioner did not meet his burden of showing that the deal would result in an SPLC, there was no need for the Tribunal to consider whether the deal could be “saved” using the efficiencies defence.

Implications for Transacting Parties

Rogers-Shaw provides five key takeaways for transacting parties:

  • The Bureau’s analysis is not to be taken as gospel: For parties that have the wherewithal to take on the Bureau, they can be assured of an impartial adjudicator in the form of the Tribunal. Despite legislative changes over the past 15 years that have given the Bureau significant evidence-gathering tools and substantial time to review transactions, the Bureau has been unable to convert those powers into a winning track record in litigation. Simply because the Bureau elects to bring a challenge does not mean the Tribunal will agree with it. Merging parties who are confident in their case, provided that they have the time and resources to litigate the transaction, should consider the Tribunal’s definitive role carefully. This should also inform merging parties’ positions when negotiating remedies with the Bureau.
  • Effective remedy proposals can defeat a Bureau challenge: The Tribunal took into account the merging parties’ proposed remedy package in deciding that the transaction would not result in an SPLC. This gives merging parties another way to get a deal through; they can wait to see the Bureau’s case and then craft an acceptable remedy to undermine it. This will also force the Bureau to carefully evaluate remedy proposals, because it is now clear that if the Bureau won’t entertain them, the Tribunal might.
  • Timing: The Bureau initially filed its application in May 2022 and the decision was released seven months later. The appeal was heard and decided in less than a month. This case demonstrates that motivated parties can secure a Tribunal decision in a short period of time, even in respect of highly-contentious and highly-complex transactions. For a Tribunal that is frequently criticized for sitting on reserve judgments for too long, this case demonstrates that where the situation calls for it, the Tribunal can – and in this case, did – move quickly. Now that the Tribunal has demonstrated it is capable of moving with speed, the expectation should be that this expediency is maintained in future decisions.
  • Best practices on expert evidence of anti-competitive harm: The Tribunal’s findings concerning the Bureau’s primary expert provide a number of useful takeaways for expert witnesses in future litigation.
    • First, Tribunal expressly noted concerns with the Bureau’s key expert that undermined his evidence. The Tribunal noted that the expert “seemed to cherry-pick the facts that supported the Commissioner’s case”.[22] The panel was also concerned that he either did not request, or was not provided with, up-to-date pricing data with which to update his model.[23]
    • Second, the Tribunal also took the opportunity to remind litigants what the evidence must establish to effect a block: not just any price increase, but a material one.[24]
  • The Tribunal opines on remedies: In obiter, at the very outset of the decision, the Tribunal implied that it may not look as favourably upon a divestiture to a financial buyer as a divestiture to an experienced competitor in the industry.[25] This may impact the Bureau’s posture in future transactions where merging parties consider a remedy involving a financial divestiture buyer.

For more information, please consult our Competition/Antitrust & Foreign Investment Group.

[1]Canada (Commissioner of Competition) v Rogers Communications Inc and Shaw Communications Inc., 2023 Comp Trib 1 [Rogers-Shaw].

[2]Rogers-Shaw, 2023 Comp Trib 1, para 115.

[3]Rogers-Shaw, 2023 Comp Trib 1, para 115.

[4]Rogers-Shaw, 2023 Comp Trib 1, para 22.

[5]Rogers-Shaw, 2023 Comp Trib 1, para 115.

[6]Rogers-Shaw, 2023 Comp Trib 1, para 115.

[7]Rogers-Shaw, 2023 Comp Trib 1, para 111.

[8]Rogers-Shaw, 2023 Comp Trib 1, para 110.

[9]Rogers-Shaw, 2023 Comp Trib 1, para 351.

[10]Rogers-Shaw, 2023 Comp Trib 1, para 5.

[11] For the geographic expansion plan, see Rogers-Shaw, 2023 Comp Trib 1, para 342-347. For 5G, see Rogers-Shaw, 2023 Comp Trib 1, paras 267-279.

[12] For discussion of the asset purchase price, see Rogers-Shaw, 2023 Comp Trib 1, para 269. For discussion of discounted rates see Rogers-Shaw, 2023 Comp Trib 1, paras 35, 289-291.

[13]Rogers-Shaw, 2023 Comp Trib 1, para 352.

[14]Rogers-Shaw, 2023 Comp Trib 1, para 353.

[15] See para 8. See also Rogers-Shaw, 2023 Comp Trib 1, paras 222-226 for a more thorough discussion of shares.

[16] CTV News, “Shaw, Rogers, Quebecor say they welcome Federal Court of Appeal ruling”, Jan. 24, 2023, accessible at: https://www.ctvnews.ca/business/court-of-appeal-rejects-effort-to-overturn-rogers-shaw-decision-1.6243353.

[17] CTV News, “Shaw, Rogers, Quebecor say they welcome Federal Court of Appeal ruling”, Jan. 24, 2023, accessible at: https://www.ctvnews.ca/business/court-of-appeal-rejects-effort-to-overturn-rogers-shaw-decision-1.6243353.

[18]Canada (Commissioner of Competition) v. Parrish & Heimbecker, Limited, 2022 Comp Trib 18.[Parrish & Heimbecker]

[19]Parrish & Heimbecker, 2022 Comp Trib 18, para 638.

[20] See, The Future of Competition Policy in Canada, section IV.1(a). Accessible at: https://ised-isde.canada.ca/site/strategic-policy-sector/en/marketplace-framework-policy/competition-policy/future-competition-policy-canada#IV.

[21] See, The Future of Competition Policy in Canada, section IV.2. Accessible at: https://ised-isde.canada.ca/site/strategic-policy-sector/en/marketplace-framework-policy/competition-policy/future-competition-policy-canada#IV.

[22]Rogers-Shaw, 2023 Comp Trib 1, para 73.

[23]Rogers-Shaw, 2023 Comp Trib 1, para 73.

[24]Rogers-Shaw, 2023 Comp Trib 1, paras 245-246.

[25]Rogers-Shaw, 2023 Comp Trib 1, para 1.

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