Competition Tribunal Releases its Decision in the CCS Merger Case
On June 15, the Competition Tribunal (Tribunal) released its decision in Commissioner of Competition v. CCS Corporation and ordered CCS Corporation (CCS) to divest the shares or assets of Babkirk Land Services Inc. (Babkirk). The Tribunal’s decision addresses several important issues in merger cases, including the applicable test for a substantial prevention of competition, the assessment of the efficiencies defence and the determination of an appropriate remedy where a transaction (or proposed transaction) results in a substantial lessening or prevention of competition.
In 2011, the Commissioner of Competition (Commissioner) applied for an order dissolving CCS’ acquisition of Complete Environmental Inc. (Complete Environmental) or, in the alternative, requiring the divesture of assets to a purchaser that had been approved in advance by the Commissioner. In her application, the Commissioner argued that the merger prevented, or was likely to prevent, competition substantially by eliminating the only potential competitor for secure landfill services in Northeastern British Columbia.
At the time of the transaction, CCS was the owner and operator of the only other secure landfill in Northeastern British Columbia. Complete Environmental had obtained regulatory approval of the conversion of the Babkirk landfill into a "secure landfill" for hazardous waste, which would have allowed a new entrant in the area. However, Complete Environmental did not enter the market, but rather sold the Babkirk landfill site to CCS. The transaction was not notifiable under the Competition Act (Act), but nevertheless prompted a Competition Bureau investigation, and ultimately resulted in the Commissioner’s application, alleging that the merger would substantially prevent competition for the disposal of hazardous waste in Northeastern British Columbia.
The Tribunal concluded that the merger was likely to prevent competition substantially in the market for the supply of secure landfill services for solid hazardous waste from oil and gas producers in Northeastern British Columbia. It also found that the merger would have prevented a decrease in average prices for hazardous waste disposal (referred to as "tipping fees") of at least 10%, although not for almost three years. As a result, the Tribunal ordered CCS to divest the shares or assets of Babkirk.
Was the Acquisition a Merger?
CCS argued that the acquisition was not a "merger" within the meaning of section 91 of the Act because Complete Environmental was not actually carrying on a business of supplying secure landfill services for hazardous waste at the time of the acquisition. As such, CCS argued that the acquisition did not constitute an acquisition of an interest in a "business," and was therefore not a merger within the meaning of section 91 of the Act. The Tribunal rejected the argument on the basis that, at the time of the acquisition, Complete Environmental was actively engaged in the development of the Babkirk site as a hazardous waste treatment facility. In obiter, Justices Simpson and Crampton disagreed on whether the transaction would have been a merger if Complete Environmental had only been carrying on a business unrelated to the Commissioner’s application.
The Tribunal found that the relevant product market was services for the disposal of hazardous waste in a secure landfill; therefore rejecting CCS’ argument that bioremediation services should be included in the relevant market.
The Tribunal found that a substantial number of generators of hazardous waste do not consider bioremediation to be a good substitute for the disposal of such waste in a secure landfill, and would not likely switch to bioremediation in response to a price increase. It therefore concluded that bioremediation cannot be considered as an acceptable substitute for the disposal of hazardous waste in a secure landfill.
The Tribunal stated that the evidence adduced did not permit it to delineate exact boundaries of the relevant geographic market, but concluded that it did not matter, given that CCS would remain the sole supplier of secure landfill services under any of the geographic markets the Tribunal considered to be plausible.
Prevention of Competition
The Commissioner and the respondents suggested that jurisprudence from the U.S. Supreme Court could provide helpful guidance on the approach that should be taken in assessing an alleged prevention of competition, but the Tribunal declined to consider it. Instead, it relied on the Federal Court of Appeal’s (FCA) interpretation of the abuse of dominance provision of the Act (section 79) in Commissioner of Competition v. Canada Pipe Company Ltd. The Tribunal noted that language similar to that found in section 79 also appears in the merger review provision of the Act (section 92), and that, accordingly, the "but for" test developed by the FCA is also appropriate for use in prevent cases under section 92 of the Act. As a result, the Tribunal considered whether the relevant market would have been substantially more competitive "but for" the merger.
The Tribunal concluded (and the parties agreed) that July, 2010, was the appropriate time frame for considering the "but for" scenario. CCS argued that competition in the provision of secure landfill services was not prevented by the merger since, if the former shareholders of Complete Environmental (Vendors) had not sold to CCS, they would not have carried on that business. Instead, they would have operated a bioremediation facility (which the Tribunal found to be outside the relevant product market). The Tribunal accepted the Vendors’ evidence that, if they had not sold to Complete Environmental, they would have started a bioremediation business and would not have operated a full-service secure landfill. Nevertheless, the Tribunal concluded that the merger resulted in a substantial prevention of competition on the basis of its findings that, while the Vendors would have carried on a bioremediation business through the fall of 2012, that business would not have been profitable, and the Vendors would therefore have either switched to a full-service secure landfill or sold to another entity that would have done so. Accordingly, the Tribunal concluded that but for the merger, by the spring of 2013 (almost three years after the merger), there would have been a full-service secure landfill in operation on the site, which would have competed with CCS’ secure landfills.
The Tribunal’s decision would appear to be at odds with the conventional approach of assessing the competitive effects of a merger over a two-year time frame. It is noteworthy that, while the Tribunal found the merger to be anti-competitive on the basis of a prevention of competition that would not have occurred for almost three years after the merger, the Tribunal rejected the notion of possible entry on the basis that it would have taken at least 30 months to do so.
On the basis of expert evidence that a full-service secure landfill at the Babkirk site would likely lead to reduced tipping fees of 10% or more, the Tribunal concluded that competition was prevented substantially.
The Tribunal concluded that the efficiencies defence provided under section 96 of the Act did not apply, as the efficiency gains arising from the merger did not offset the qualitative and quantitative anti-competitive effects of the merger.
The FCA in Commissioner of Competition v. Superior Propane Inc. ruled that, in order to invoke the efficiencies defence successfully, merger parties must establish that efficiencies are likely to occur, are brought about by the merger, are greater than and offset the anti-competitive effect of the merger and would not likely be attained if an order in respect of the anti-competitive merger was made.
The Tribunal noted that the assessment of the claimed efficiencies first requires an assessment as to whether some efficiencies that are not relevant under section 96 of the Act should be eliminated. In this case, the Tribunal concluded that most of the efficiencies claimed by CCS should be eliminated, given that such efficiencies would likely be attained through the divestiture of Babkirk. It also noted that, although some uncertainty remained regarding the identity of a prospective purchaser, a divestiture would ultimately be made to a purchaser who will operate the Babkirk site. As a result, the Tribunal concluded that the claimed efficiencies could be realized through this alternative mean.
The Tribunal also held that the term "offset" requires the exercise of its subjective judgment to determine whether the efficiencies compensate for the likely effects referred to in section 96 of the Act. It noted that the acquisition would "maintain a monopolistic structure in the relevant market" and that, based on the exercise of its subjective judgement, the qualitative effects of the transaction outweighed any quantifiable efficiencies. Accordingly, the Tribunal concluded that CCS had not met its burden to establish the "greater than" or "offset" elements set forth under the efficiencies defence of the Act.
As indicated above, the Commissioner had applied to the Tribunal for an order dissolving the transaction or, in the alternative, requiring the divesture of assets to a purchaser that had been approved in advance by the Commissioner. The Tribunal rejected the Commissioner’s proposal for an order to dissolve the merger on the basis that a dissolution order was more intrusive, overbroad and unlikely to result in a timely remedy. It further noted that, in this case, divestiture was an available and effective remedy and accordingly ordered the divestiture of the shares or assets of Babkirk.
The Tribunal also rejected the Commissioner’s allegation that, once she established that dissolution was an effective and available remedy, the burden of proof shifted to the Vendors of Complete Environmental to demonstrate that divestiture was an available, effective and less intrusive remedy. In the Tribunal’s view, if the Commissioner proposes alternative remedies, she then bears the burden of proving that, although one may be preferable, each is available and effective.
McCarthy Tétrault Notes
The decision provides parties to a transaction with additional comfort in regard to the Tribunal’s approach to dissolution. The Tribunal confirmed that dissolution is a more intrusive and potentially overbroad remedy than divestiture, and therefore remains unlikely in merger cases.
The decision also reminds parties to a transaction that internal documents can have a significant impact in the future. Indeed, in this case, the Tribunal largely relied on internal documents to determine the intent of the parties, and afforded significant weight to the information provided in such documents in its conclusions.
To a certain extent, the Tribunal’s decision also limits the availability of the efficiencies defence, as it does not provide an objective standard that allows parties to a transaction to assess in advance the availability of the efficiencies defence.
Finally, this case is a reminder that mergers of any size can be challenged by the Commissioner, including after closing. As a result, a substantive competition assessment should be included in due diligence when considering proposed transactions of any size which may lessen or prevent competition.