The efficiencies defence, as it is known, can be played like a trump card whenever the Competition Bureau tries to block a merger.Gavin John/The Globe and Mail
Matthew Boswell, Canada’s Commissioner of Competition, is all but begging for substantive changes to the federal Competition Act, and he’s out for legal blood to make it happen.
One year ago this month, Mr. Boswell more or less pleaded in a public speech that Canada update what he believes are outrageously outdated competition rules. In doing so, he zeroed in on a short, but powerful, section of the Competition Act – Section 96 – that permits contentious mergers to proceed, all in the name of cost savings.
The efficiencies defence, as it is known, can be played like a trump card whenever the Competition Bureau tries to block a merger. If a bidder can prove that its deal will generate lower total costs for the combined business, the takeover can proceed – even if the transaction turns an already large company into more of a monopoly.
The message resonated. Just a few months later, François-Philippe Champagne, Minister of Innovation, Science and Economic Development, announced a “comprehensive” review of the act.
Mr. Boswell, though, doesn’t seem content. Federal reviews have a history of coming and going with very little changing, so last week the Commissioner got vocal again, this time at the Canadian Bar Association’s conference at the Fairmont Chateau Laurier, mere steps from Parliament Hill.
“Current provisions enable high levels of economic concentration – even monopolies – in the Canadian economy,” he said. “Our substantive merger tests, including the efficiencies defence, have not changed since 1986.”
His campaign is being waged at a pivotal moment. After decades of global expansion, some of Canada’s largest companies are eyeing major acquisitions at home. Pending deals include Rogers Communications Inc.’s RCI-B-T $26-billion takeover bid for Shaw Communications Inc. SJR-B-T and an auction of HSBC Holdings PLC’s Canadian arm, which is currently Canada’s seventh-largest lender.
As it stands, nothing suggests the efficiencies defence will be invoked in either case. But there is always the possibility – especially now the Rogers-Shaw merger is heading to the Competition Tribunal. Theoretically, Rogers and Shaw could use the defence and fight all the way to the Supreme Court.
Because such transformative deals are on the table, it can seem sensible to review a rule that was written nearly four decades ago – especially considering Canada is the only G7 country to have codified it as a defence. Yet the discussions have spurred a mini-war.
What’s at stake? In simple terms, it is a fight about the the benefits of merger efficiencies, and whether they outweigh the harm of monopoly behaviour. Where it gets complicated is that like so much else in law, the debate has morphed into a philosophical argument.
Much like the originalists who adore the U.S. Constitution, some people view Section 96 as something close to scripture – it is a beautiful thing and doesn’t need to change. Others think the section should be treated more like Canada’s constitution – a living tree that evolves with the times.
In 1986, the Canadian economy looked much different. The oil sands had hardly been developed, the country’s largest banks were mostly domestic lenders and the fear back then was that Canada was much too small of a market for domestic corporate champions to achieve the scale they needed to compete abroad.
Against this backdrop, business leaders were rattled when Ottawa set out to draft new competition rules. To appease this crowd, Ottawa wrote the efficiencies defence into the Competition Act. The rationale was a trade-off – oligopolies could be detrimental at home, but this market structure might allow companies to get big enough to expand abroad and ultimately boost gross domestic product.
That’s the commonly accepted view, but Lawson Hunter, Canada’s Competition Commissioner in the 1980s said in an interview there’s more to it. He was one of the act’s architects, and there was a broad goal “to create something that had standards, that had some predictability.” Efficiencies could be proven with an economic model.
The trouble is that Canada looks vastly different today. For one, free trade with the United States didn’t exist yet in 1986. “This whole efficiency defence is rooted in some very old economic thinking,” said Peter Glossop, who has been a competition lawyer in Canada for nearly four decades. “You’ll still get some lawyers who trot it out,” he added, as if “these are the sacred texts that one must protect.”
There have been calls to update the act for decades, and they grew much louder after a major Supreme Court ruling in 2015 that overturned rulings from the Competition Bureau, the Competition Tribunal and the Federal Court of Appeal in the matter of Tervita Corp. vs. Canada – all in the name of the efficiencies defence. Competition cases rarely make it to Canada’s highest court, so when they do, the decisions set precedents.
Despite the outcry in legal circles, the federal government didn’t pay much attention for a number of years. But then Mr. Boswell started making some hay last fall, and around the same time, Edward Iacobucci, the former dean of the University of Toronto’s faculty of law, put out a deeply researched paper advocating for changes to the Competition Act.
Then Sen. Howard Wetston, who used to be Competition Commissioner, launched a review of the act and later summarized the extensive feedback from the legal community. (He has since retired from the Senate.)
Both papers had very specific recommendations, including the way the efficiencies defence is applied. As it stands, it falls on the Competition Bureau to prove a merger’s efficiencies aren’t worth it. This is a very complicated, expensive and time-consuming exercise, so Mr. Iacobucci suggested inverting the process. Make the bidder show its hand first and explain where cost savings come from. “Efficiency gains from mergers are easily asserted, but may not materialize,” he wrote.
Despite this momentum, which helped prompt Ottawa’s official review of the act, developments in the United States have complicated things. In January, the U.S. Department of Justice and the U.S. Federal Trade Commission – both of which handle antitrust and competition policy – launched their own reviews of the American framework, and there are some arguably radical considerations.
Under existing antitrust laws, American mergers were generally approved if they lowered prices for consumers. Yet in the digital world, the lay of the land is much different. Many Google products, such as Gmail, are already free, so it isn’t clear how consumer benefits should be considered. Some experts think industry power and its effect on innovation, or lack thereof, is just as important.
In Canada, it isn’t yet clear if Ottawa wants to go anywhere near this. In fact, competition law here is arguably still outdated even relative to the existing American standards. In the U.S., efficiencies must be passed on to consumers; in Canada, there are no rules on who should benefit from the savings. It could even be shareholders. “It doesn’t matter if consumers get the short end of the stick,” Mr. Glossop said.
But the mere prospect of going as far as the current U.S. review has put some experts on edge. “Do we need to be like the U.S. up to 2020, or since 2020?” said Andy Baziliauskas, a competition and industrial organization economist. “There’s actually a huge difference between those.”
For some, the fear is a U.S.-style review will result in handing more power to regulators or the government. Once provided, this leeway could be used for nefarious reasons. Inserting overly broad language into the act will allow “increasing pressure to politicize the process,” Mr. Hunter said.
The counterpoint, of course, is that all of these fears could be overblown. There are ways to tweak the existing law without inviting wholesale regime changes. To this end, Mr. Glossop offers a simple framework: “Efficiencies are not irrelevant, just don’t make them the focus of the analysis.”