The Rogers-Shaw case should be the impetus for a serious rethink of the merger review process and the rules that govern contested cases before the tribunal.Adrian Wyld/The Canadian Press
Jennifer Quaid is an associate professor and vice-dean of research in the civil law section of the University of Ottawa’s Faculty of Law.
Despite all the hype about the proposed Rogers-Shaw takeover turning on the infamous efficiencies defence, the decision instead hinges on the Competition Tribunal’s answer to a preliminary question: Which deal was being reviewed – the original Rogers-Shaw merger or the modified, two-step deal that would divest Shaw’s Freedom Mobile to Videotron before Rogers acquires Shaw for $20-billion and takes on $6-billion of its debt?
This question had never been raised in this way before, and the Dec. 29 decision of the tribunal – that the modified deal was the appropriate one to review – sets a worrying precedent, potentially smoothening the path for such big mergers by changing the way they are scrutinized. It is not a surprise that the Commissioner of Competition has decided to appeal the decision on this point, a matter the Federal Court of Appeal will hear this month.
In taking the modified deal as the baseline for their assessment, the tribunal has implicitly decided that divesting Freedom is a good remedy before even considering the full range of anticompetitive effects from a takeover of Shaw by Rogers.
Merger review is a three-step process: 1) an evaluation of any anticompetitive effects to determine if they are substantial; 2) if yes, consideration of the countervailing impact of any efficiencies generated by the merger; and 3) if there are still substantial competitive impacts after step 2, an assessment of the appropriate remedy.
Against this backdrop, the decision by Rogers and Shaw to change their deal by adding the sale of Freedom to Videotron – after the Commissioner had filed his challenge – was essentially an alternate remedy proposal, cleverly presented as a new but essential condition without which the deal would not happen at all.
This has three important effects. First, removing Freedom from the analysis up front narrowed the analysis to the residual anticompetitive concerns outside of Freedom, a more limited basis on which to conclude that the deal caused a substantial lessening of competition. Second, it became legally unnecessary to consider the impact of efficiencies, an unfortunate outcome since much of the hearing was devoted to evidence and argument on that point. Third, there was no analysis of the Freedom divestiture as an effective and sufficient remedy, even though it was obviously added to the deal to address concerns about anticompetitive effects. As a practical matter, treating the divestiture as part of the deal does an end run around the way merger review is supposed to work.
Some have suggested that the tribunal’s analysis of which “merger” is under review is a mere technical matter and that the Commissioner’s appeal is an unnecessary and unfair waste of time. I concede it is quite possible that an appeal won’t change anything for the Rogers-Shaw deal. Even if the Federal Court of Appeal finds that the tribunal made a mistake and should have looked at the whole deal first, then examined the divestiture at the remedy stage, given the tribunal’s assessment of the evidence, it may very well decide the divestiture is an appropriate and sufficient remedy and the deal can go through.
But focusing solely on the specifics of the Rogers-Shaw case overlooks the future ramifications of the tribunal’s novel analysis, which stretches current interpretations of the law and raises a fundamental question: How much deference should be afforded to deal modifications unilaterally proposed by the merging parties, where these are intended to allay concerns about their post-merger ability to engage in anticompetitive practices? Particularly when a merger is modified after it is challenged, is it in the public interest for the new deal to simply replace the original one, given the considerable time and enforcement resources likely to have been expended in preparation for a challenge of the original deal? How do we guard against the foreseeable risk of tactically timed last-minute deal changes? What scrutiny should be brought to bear on unilaterally proposed remedies as to their effectiveness? And what evidence should be required to establish that the remedy is in the public interest when the Commissioner does not agree with the remedy?
Many expected the decision on the Rogers-Shaw merger to be consequential for competition law, given the stakes for both sides. However, few would have predicted the way things have actually played out. Rather than being a lightning rod for those seeking to modify or eliminate the efficiencies defence, the Rogers-Shaw case should be the impetus for a serious rethink of the merger review process and the rules that govern contested cases before the tribunal.