- Merger Review: Can A “Countervailing Public Interest” Flow From The Competition Enquiry?
- October 22, 2012
- Law Firm: Norton Rose Canada LLP - Montreal Office
Under the Competition Act, a merger is assessed in two steps. The first step is the competition enquiry, which relies on factors set out in section 12A(2), for example the level of import competition, the level of concentration and whether one of the parties is a failing firm. If the merger will substantially prevent or lessen competition, the parties might nevertheless be able to raise an efficiency defence of the merger in terms of section 12A(1)(a)(i). Then, whether or not the merger is anti-competitive, or can be justified on efficiency grounds, there is a second step, the public interest test, which is based on four factors in section 12A(3), concerning the effect that the merger will have on -
a. a particular industrial sector or region;
c. the ability of small businesses, or firms controlled or owned by historically disadvantaged persons, to become competitive; and
d. the ability of national industries to compete in international markets.
In the 2010 merger between Metropolitan and Momentum the Competition Tribunal ruled that where there will be substantial employment loss, the merging parties must justify the loss. The merging parties must demonstrate first that a rational process has been followed to determine the number of job losses, and secondly that “the public interest in preventing employment loss is balanced by an equally weighty, but countervailing public interest, justifying the job loss and which is cognisable under the Act.” The Tribunal stated there may be public interest justifications that flow from the prior competition enquiry. For example, competing public interest considerations under the Act, or that the merger “is required to save a failing firm; or is required, because pre-merger, the merging firms will not be competitive unless they can lower their costs to be equally as efficient as their rivals and only the merger can bring about these savings through the contemplated employment reduction; or will lead to lower prices for consumers because of the merged firm’s lower cost base and that this lower cost base can only come about or is materially dependent upon, the contemplated employment reduction.”
Can public interest justifications really flow from the prior competition enquiry? It seems not: there are only four public interest factors in section 12A(3), and no provision for bringing the competition enquiry factors into that list. The Tribunal referred back to the preamble of the Act, which requires the balancing of the interests of workers, owners and consumers, and refers to regulating the transfer of economic ownership in keeping with the public interest, but it is not clear how this supports its argument.
The Tribunal states: “Thus in the balancing exercise, the private interests of shareholders would have to yield to the weightier public interest in preventing employment loss as a result of the merger.” This confuses the consumer welfare standard with the total welfare standard in the efficiency defence of an anti-competitive merger. If efficiencies derived from job losses will lower prices, then the Tribunal says this can balance out the loss of employment in the public interest test, whereas if the efficiencies are simply added to profits, this should not be a balancing factor against the “public-interest negative” of the job losses. But this is a balancing of the public interest test with the competition test, rather than bringing efficiencies into the public interest test.
The Tribunal then refers to its Harmony/Goldfields decision:
“But sources of countervailing public interest need not be limited to those specifically mentioned in section 12A(3). In Harmony/Goldfields we recognised that the public interest inquiry was related to the prior competition enquiry:
This prioritisation of the competition inquiry explains the use of the word justification in the public interest test. The public interest inquiry may lead to a conclusion that is the opposite of the competition one, but it is a conclusion that is justified not in and of itself, but with regard to the conclusion on the competition section. It is not a blinkered approach, which makes the public interest inquiry separate and distinctive from the outcome of the prior inquiry. Yes, it is possible that a merger that will not be anti-competitive can be turned down on public interest grounds, but that does not mean that in coming to the conclusion on the latter, one will have no regard to the conclusion on the first. Hence section 12 A makes use of the term “justified” in conjunction with the public interest inquiry. It is not used in the sense that the merger must be justified independently on public interest grounds. Rather it means that the public interest conclusion is justified in relation to prior competition conclusion.”
The quoted passage does not show that competition factors can also be public interest factors. All it says is that the public interest conclusion might be justified in relation to the prior competition conclusion. A more relevant passage from the Harmony/Goldfields decision is:
“If in examining the public interest we find that it leads to some employment loss it will be public interest negative ... However the merger could also lead to the creation of a national champion and hence is public interest positive ... Thus the Tribunal is required to perform an internal balancing of two conflicting public interest considerations before coming to a net conclusion.”
It appears the Metropolitan decision errs in relying on Harmony/Goldfields - the competition test is indeed separate from the public interest test, and neither the competition factors nor the efficiency defence should appear later in the public interest test as countervailing public interest factors.