Presentation on theme: "April 23, 2009 Toronto Richard D. Elliott Shuli Rodal CBA National Competition Law Section Young Lawyers Committee An Introduction to Drafting Merger Submissions."— Presentation transcript:
April 23, 2009 Toronto Richard D. Elliott Shuli Rodal CBA National Competition Law Section Young Lawyers Committee An Introduction to Drafting Merger Submissions
2 Overview 1. Substantive Merger Review under the Competition Act Understanding the Bureau’s approach to merger review 2. Drafting Merger Submissions Strategic and process considerations in presenting merger submissions to the Bureau 3. Fact Pattern and Discussion
3 Substantive Review :: Sources Sources for guidance on merger review: Tribunal decisions Commissioner's Merger Enforcement Guidelines (“MEGs”) Other sources: Bank MEGs, speeches, sectoral guidelines, backgrounders
4 Substantive Review :: Definition of "Merger" "Merger" defined broadly (s.91) to include any acquisition resulting in control over, or a significant interest in, the whole or part of business of competitor, supplier, customer or any other person: "control" = "de jure" control, i.e., more than 50% of voting shares "significant interest" = ability to materially influence economic behaviour of target voting interest (rules of thumb – not absolute): >20%: absent evidence to the contrary, Bureau will treat as a significant interest <20%: Bureau may consider there is a significant interest, depending on other factors <10%: absent evidence to the contrary, Bureau will not treat as a significant interest other factors include: size and distribution of other shareholders, non- voting interests, board and management representation, shareholder agreements and other contractual arrangements
5 Substantive Review :: Basic Test: “SLC” Competition Tribunal has jurisdiction to issue a remedial order regarding a merger where it finds that the merger is likely to prevent or lessen competition substantially (usually known as the “SLC” test – for “substantial lessening of competition”) (s.92) Therefore, Commissioner may challenge a merger where she believes that it is likely to prevent or lessen competition substantially Commissioner may assert substantive jurisdiction over foreign mergers that have an effect in Canada
6 Substantive Review :: “SLC” & Market Power The MEGs focus on “market power" in assessing the likelihood of an SLC will merged entity be able to maintain prices above the pre-merger level for a significant period of time following completion of merger or will this be prevented by existing or new competitors? (“unilateral effects”) will merger result in increased likelihood of collusion (or decreased competitive vigour) among firm in the market such that prices are likely to be maintained above the pre-merger level for a significant period of time following completion of merger? (“coordinated effects“) Notes: although the analytical focus is usually on “price”, non-price effects (e.g., decreased quality) are also considered upstream effects may also be considered
7 Substantive Review :: "SLC" Threshold Bureau's analysis involves 4 steps: identification of relevant market (product and geographic) calculation of market shares assessment of "competitive effects" assessment of "efficiencies"
8 Substantive Review :: Relevant Market Market definition is a key issue in most contentious merger cases (e.g., Hillsdown, Southam, Canadian Waste) The relevant market is defined in 2 dimensions: product market geographic market In theory, Bureau uses "hypothetical monopolist" test to define relevant market: the smallest group of products and the smallest geographic area in which a hypothetical monopolist would impose and sustain a significant (usually 5%) and non-transitory (usually 1 year) price increase above levels that would likely exist in absence of the merger
9 Substantive Review :: Relevant Market In practice, Bureau looks at "practical indicia": industry views and behaviour end use switching costs price relationships and price levels ease of substitution transportation costs set-up costs
10 Substantive Review :: Market Shares Market shares: by statute, cannot be treated as determinative factor Bureau uses market shares as screening device Unilateral effects (single firm market power) MEGs says that merger will generally not be challenged when the post-merger share is under 35% most problematic mergers have involved shares well above 50% (Notable exception: proposed bank mergers) Coordinated effects (increased likelihood of collusion) MEGs say that merger will generally not be challenged when combined share of 4 largest firms remaining is less than 65% or share of merged entity is less than 10% share Bureau focuses less on coordinated than unilateral effects
11 Substantive Review :: Competitive Effects "Competitive effects": Unilateral effects: merged entity can profitably raise prices without being disciplined by competitors Coordinated effects: merger results in market conditions that enable sustainable coordinated behaviour among competitors Evaluative factors: key factors: barriers to entry, effective remaining competition other factors: acceptable substitutes/removal of vigorous competitor/change and innovation failing firm factor/defence As a practical matter, Commissioner will be influenced by level and degree of complaints from customers, suppliers and, in some cases, competitors
12 Substantive Review :: Efficiencies Efficiencies defence (s.96): will gains in "efficiency" resulting from merger be “greater than” and “offset” effects of SLC? Superior Propane case (2002): merger resulting in significant price increases in propane industry was allowed to proceed due to offsetting efficiency gains Bulletin on Efficiencies in Merger Review (March 2009): Bureau encourages parties to make efficiency arguments early Bureau now likely to apply a “balancing weights” approach to the efficiencies defence (i.e., approach adopted by Tribunal in Superior Propane) The wealth transfer from consumers to producers (from price increases) will count as a harmful effect to the extent that it is “socially adverse”
13 Substantive Review :: Remedies Most merger remedies are by way of consent agreement Information Bulletin on Merger Remedies in Canada structural remedies (divestitures) will now be the norm – not behavioural remedies purpose is remedy SLC/SPC principles to guide divestiture remedies: divesting a stand-alone business from one of the merging parties is preferable to divesting a "mix and match" of assets from both parties; a "hold-separate" order will typically be required pending divestiture; "fix-it-first" solutions are encouraged; the merged entity will usually be given an "initial sale period" of 3-6 months to effect the divestiture; if assets are not divested within the initial sale period, a trustee appointed by the Bureau will take over and sell assets at no minimum price; and the trustee may be able to add certain agreed-upon "crown jewel" assets to the divestiture package to ensure that a sale occurs.
14 Drafting Merger Submissions :: Process and Strategic Considerations Submissions can serve a variety of purposes ARC requests reserved for clearly uncomplicated cases can be filed together with or instead of a pre-merger filing Competition analyses provide additional information and analysis not called for in the pre- merger filing to add clarity on points such as the extent of competitive overlaps, competitors, industry conditions, etc. take a position on market definition/share etc. if advisable pre-empt/address anticipated complaints and concerns where appropriate, address/offer remedies to resolve concerns can also be filed in cases that are not notifiable on behalf of third parties who wish to raise concerns about a deal
15 Drafting Merger Submissions :: Process and Strategic Considerations Canadian practice under prior merger review regime: initial submissions made routinely at the outset of nearly every filing comparison to U.S. practice supplemental submissions to address specific topics “No-action” letter or ARC typically requested Changes in Canadian practice in light of new merger regime? circumstances are somewhat different anticipated greater reliance on pre-filing discussions and presentations to Bureau unclear role for “no-action” letters however, continued filing of submissions remains advisable principal goal -- avoiding/narrowing second request timing of initial submission – as early as possible supplemental submissions as needed e.g. during second request (narrowing scope or addressing specific areas of concern)
16 Drafting Merger Submissions :: Drafting Considerations ARC requests What to submit? pre-merger notification filing and ARC request or ARC request alone ? How much information to provide? need to balance providing enough information with avoiding giving unnecessary profile to non-issues
17 Drafting Merger Submissions :: Process and Strategic Considerations Competitive impact submissions – considerations: whether to commit to market definition(s)/market shares where there is competitive overlap an assessment of “industry” position and share is advisable detailed discussion of markets and commitment to a particular position is usually only advisable if called for by the facts: for example, where there are different ways of viewing the market(s) one or more of which is less favourable and would result in a potentially problematic share (over 35%) generally useful to highlight competitors and entry whether/when to address coordinated effects whether/when to make failing firm arguments whether/when to make efficiency arguments whether to explicitly address complainants/complaints whether/when to propose remedies
18 Fact Pattern Hockey Equipment Inc. (HEI) owns and operates retail stores selling hockey helmets in a number of Canadian cities. HEI has been experiencing financial difficulties and has been looking at its options, including a sale of the business. HEI has significant revenues and is assuming that a pre-merger notification filing under the Competition Act will be required regardless of who the purchaser is. HEI has provided the following information to assist in preparing the necessary filings and evaluating potential purchasers: HEI has retail locations in each of Toronto, Oshawa, Ottawa, Montreal, Kingston, Calgary and Vancouver. HEI estimates that its share of hockey helmet sales across Canada is approximately 15%, and its share in each of the cities in which it operates (taking into account sales by local retailers as well as mail orders from a large online competitor based in Toronto, Helmets.com) is about the same, except in Montreal.
19 Fact Pattern HEI estimates that its share of hockey helmet sales in the Montreal area is about 20%. The remaining share in the Montreal area is accounted for by four competitors. Centre Ice Inc. (CII), with an approximate 20% share; Skaters Inc. (Skaters), the longest standing competitor, with an approximate 50% share; Sports Inc. (Sports), which recently opened and through competitive pricing has quickly taken 5% of Montreal area business; and Helmets.com, which has mail order sales into the Montreal area accounting for approximately 5% of sales in the area. With the exception of HEI and Helmets.com, none of the Montreal area competitors have any business outside of the Montreal area. None of HEI’s Montreal area competitors have a Canada-wide share that exceeds 10%. HEI has also noted that while the basic functionality of the type of helmet it sells is similar to the helmets sold by its competitors, all of HEI’s helmets are made from an ultra-light material patented by HEI, and retail for approximately 5% more than the next most expensive helmet on the market.
20 Fact Pattern HEI is negotiating a potential sale of its business with a number of interested parties and wants to be ready to make its filing as soon as an agreement is signed. The potential buyers are: a group of financial investors led by Celine Dion, none of whom have any existing interests in a business that manufactures or sells hockey helmets; and Each of HEI’s Montreal based competitors who are looking to strengthen their positions in Montreal while expanding their businesses into other areas of Canada: Sports; CII; and Skaters. HEI has asked its legal counsel to prepare filings to the Competition Bureau for each of the buyer scenarios, including an outline of a draft submission as appropriate, so that filings can be finalized as quickly as possible once the buyer has been selected.