Situating structural presumptions in Canadian merger control

July 2024  |  SPECIAL REPORT: MERGERS & ACQUISITIONS

Financier Worldwide Magazine

July 2024 Issue

Bill C-59, a budget bill advanced by Canada’s governing Liberal party, emerged from committee at the House of Commons on 6 May 2024 with a new proposed framework for assessing mergers under the Competition Act.

The revised Bill invites debate over where best to situate structural presumptions in Canadian merger review. Currently, market share thresholds feature in the Competition Bureau’s substantive guidance, with mergers resulting in a combined market share in excess of 35 percent more likely to attract in-depth scrutiny. Bill C-59 would mark a significant divergence from the Act’s present structure, inserting a rigid – and statutory – structural assessment into what is currently a flexible and contextual inquiry.

Like other recently proposed (and implemented) revisions to the Act, the proposed amendments would be a substantial modification to Canada’s competition regime. As with the prior amendments, these appear poised to pass with minimal consultation. In our view, a more flexible and contextual approach to market shares and concentration ratios is preferable to fixed legislative rules in the context of merger review.

Canada’s proposed presumptive test

Before considering proposed changes, it is important to provide a brief description of where we are now. Under the Act, the Competition Tribunal, Canada’s specialised competition decision-maker, may dissolve or prohibit a merger only where it finds that the merger “prevents or lessens, or is likely to prevent or lessen, competition substantially”. A merger may substantially prevent or lessen competition where it creates, maintains or enhances the ability of the merged entity, post-closing, to exercise market power, either unilaterally or in coordination with other firms. This is a flexible, multifaceted assessment. The Act enumerates some factors the Competition Tribunal may consider; these factors include considerations that would tend to support a finding of an anticompetitive effect (such as barriers to entry, or the elimination of a vigorous competitor), together with those that would undercut such a conclusion (such as effective remaining competition). Further, the list is non-exhaustive, allowing the Tribunal to consider “any other factor that is relevant to competition in a market that is or would be affected by the merger or proposed merger”.

Importantly, the Act contains a small but significant limitation on this multifaceted assessment, barring the Tribunal from finding that a merger is likely to result in a substantial prevention or lessening of competition solely based on evidence of market share.

Outside of the statute itself, the Competition Bureau provides guidance on merger review, so that merging parties can understand how the agency will typically assess their transaction. It is here where Canada’s approach to structural presumptions currently resides, in the form of ‘safe harbour’ thresholds below which the Competition Bureau will generally find that a transaction does not present a competitive concern.

This framework would change fundamentally under the amended regime. Bill C-59 would start by repealing the provision of the Act that prevents the Tribunal from concluding that a merger is anti-competitive solely based on market share. It will also add “change in concentration or market share” to the enumerated list of factors that the Tribunal may consider in assessing whether a merger prevents or lessens, or is likely to prevent or lessen, competition substantially.

These changes would permit the Tribunal to conclude that a merger has resulted in a substantial prevention or lessening of competition on the basis of market share alone, setting the stage for the structural presumptions that follow within the bill.

The revised Bill C-59 would also create a rebuttable presumption that a merger will create a substantial lessening or prevention of competition (i.e., which will allow the parties to bring evidence to establish the contrary on the balance of probabilities) where certain concentration thresholds are met. The proposed test considers both the market share of the combined entity and the sum of the squares of the market shares of all firms in the market. This latter measure is sometimes referred to as the Herfindahl-Hirschman Index (HHI) and is a commonly used measure of market concentration in US merger review. For example, if there is only a single firm in the market, the HHI result would be 100 squared, or 10,000. If there were two firms that split the market equally, it would be 50 squared plus 50 squared (for a total of 5000). The proposed presumption would apply where each of two conditions are met. The first is minimum increment, whereby the proposed merger increases (or likely increases) the HHI by more than 100. The second is increase in concentration, by which, as a result of the proposed merger the HHI is (or is likely to be) more than 1800; or the combined market share of the parties is (or is likely to be) 30 percent or more.

To put these above HHI thresholds into perspective, a market that is divided equally between six competitors would have an HHI of approximately 1667, whereas a market divided equally between five competitors would have an HHI of 2000. The ‘minimum increment’, of course, will vary considerably based on the size of the other participants in the marketplace and can yield unintuitive results.

Crucially, the structure of the test is somewhat more important than the proposed values, as Bill C-59 provides that the specific thresholds in the structural presumption can be amended by regulation, allowing the government to make alterations to the thresholds in the future without statutory reform.

Where are structural presumptions best placed?

There are a number of reasons why structural presumptions should be left to guidance or jurisprudence, rather than inserted into statute or regulation.

Structural presumptions are guideposts that should not impact legal rights. To adjudicate where structural presumptions are best-placed, consider how they function. It is clear that structural presumptions function as approximations. The test itself does not track competitive conditions; it merely serves as a proxy for them. In other words, a merger that increases concentration considerably or results in a firm possessing a significant market share should arguably be the starting point for a merger inquiry rather than its end destination.

The question is whether a rough guidepost should alter the legal test for assessing the merger. In other facets of competition law, such as hardcore cartels like price fixing, legislation presumes anti-competitive effects based on identifying the existence of the impugned conduct alone. A structural presumption for mergers – albeit rebuttable – adheres to the same principles. While it may be uncontroversial that price-fixing is presumptively illegal, regardless of competitive impact, the likelihood of a structural presumption for mergers resulting in a significant number of competitively benign transactions struggling to obtain approval is far greater.

For example, consider a market with four players, each with a 20 percent share, together with a number of smaller competitors (the remaining 20 percent share can be distributed among those competitors in any manner one wishes). Pursuant to a proposed merger with one of the smaller parties, one of the 20 percent players increases its share by 5 percent, to 25 percent. This merger would trigger the new structural presumption. The HHI would increase from a minimum of 1600 to at least 1825. In this case, the acquisition of a minimal increment by a medium-sized competitor is now presumptively anti-competitive. It is of course possible that such a merger could lead to substantial anti-competitive effects, but it is also equally possible that it would not in the face of competition from three other similarly sized firms.

While Bill C-59 provides for modifications of the particular thresholds by regulation, HHI will never map perfectly onto competitive reality. It is a proxy that will likely always produce false positives or negatives. Faced with this lottery, it is possible that the structural presumption will have a chilling effect on merger activity, especially for cases that fall on the borderline of the presumption’s thresholds or where there is scant evidence to facilitate the application of the new rules.

Structural presumptions in guidance can be justified and explained. Even if one accepts that some sort of guidepost is required in merger review, the values selected for this threshold are inconsistent with existing guidance and little justification has been provided for their use. The current (informational) threshold is contained within the Bureau’s Merger Enforcement Guidelines. For well over a decade, the Bureau has employed a 35 percent market share “safe harbor threshold” below which the agency “generally will not challenge a merger”.

Why the change? US guidance on the subject, which employs these same thresholds, likely serves as the inspiration for Bill C-59’s structural presumptions. It would be an understatement to say that thresholds taken from the largest economy in the world are poorly calibrated for use in Canadian merger review. Ultimately, the proposed amendments import a jurisprudentially influenced threshold from a foreign jurisdiction into Canadian merger review, enabling them to be changed only through regulation. By contrast, US guidance expressly tethers the thresholds it uses to jurisprudence, where courts have made observations about concentration that inform the agencies’ enforcement approach. Likewise, structural presumptions would be better placed in Bureau guidance, where they may be justified and contextualised, and where room for analytical nuance remains.

Regulation-based structural presumptions allow the executive branch to influence merger review. Agency guidance has the benefit of being entirely independent from the whims of the executive or the legislative process. The Bureau has long prided itself on its status as an independent law enforcement agency – challenging mergers even when the executive branch may have opposed doing so. To the extent the Bureau believes that these proposed structural presumptions will change the way in which it reviews mergers, its processes will now be influenced more than ever by the executive branch. Indeed, as the thresholds can be updated by regulation, the Bureau will be exposed to changes to the presumptions based on the prevailing political winds of the day.

Ultimately, if structural presumptions are to be used at all, they are best employed in agency guidance, not in statute or regulation. A guidance-based approach allows for a contextual, flexible assessment that leverages the expertise of Canada’s specialised competition court. For now, Canada has chosen a different path, and transacting parties will need to adapt their regulatory strategies accordingly.

 

Michael Caldecott is a partner and Will Rooney is an associate at McCarthy Tetrault. Mr Caldecott can be contacted on +1 (416) 601 7738 or by email: mcaldecott@mccarthy.ca. Mr Rooney can be contacted on +1 (416) 601 8202 or by email: wrooney@mccarthy.ca.

© Financier Worldwide

BY

Michael Caldecott and Will Rooney

McCarthy Tetrault

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