Decoding The Competition Bureau's Draft Merger Enforcement Guidelines

The Competition Bureau (the "Bureau") has issued its Proposed Merger Enforcement Guidelines (the "Draft MEGs"). Once finalized, the Draft MEGs will replace the 2011 guidance. They come on the heels of significant amendments to the merger provisions of the Competition Act (the "Act")¹ and provide guidance on the statutory changes in addition to updating the Bureau general analytical approach in merger investigations.

Key Takeaways

• Structural presumption and evidentiary burden: The Draft MEGs clarify that the new statutory presumption based on market share and concentration thresholds will serve as a starting point, shifting the evidentiary burden to the merging parties to demonstrate that the transaction is not likely to result in harm to competition.
• Broadened interpretation of significant interest: The Bureau has expanded its interpretation of "significant interest" from material control over economic behaviour to material influence over competitive behaviour. This expansion may capture a broad range of minority interests, interlocking directorates, and a series of transactions that individually may not constitute a merger.
• Expanded dimensions of market power: The Draft MEGs include new guidance about employment conditions and privacy considerations, alongside price and traditional non-price dimensions of competition such as quality, product choice, service, innovation, and advertising. This change reflects amendments to the analytical factors for merger as well as the Bureau's increased focus on labour markets and data-driven competition.
• New market types: The Draft MEGs introduce specific guidance on multi-sided platforms, bundled markets, and complementary products, recognizing the emergence of business models driven by network effects and zero-price services. Businesses operating in these spaces may face heightened scrutiny, particularly in connection with prevention of competition claims.
• Diminished role of pro-competitive benefits: Following the repeal of the efficiencies defence, the Bureau now treats efficiencies as one category of possible pro-competitive benefits rather than a standalone defence. Notably, the Draft MEGs indicate that even rigorously substantiated efficiencies are unlikely to alter the Bureau's conclusions where a merger otherwise raises significant competition concerns, although we expect the Competition Tribunal may not accept this position in litigated merger cases.
• Heightened focus on prevention of competition: The Draft MEGs place particular emphasis on mergers that may prevent future competition, as distinct from the more traditional lessening of competition analysis. This is especially relevant for technology transactions and acquisitions of nascent competitors, where the Bureau will assess impacts on innovation, market entry, and dynamic competition.

Structural Presumption

If a merger results or is likely to result in a significant increase in concentration or market share (described below), the amendments to the Act now require the Tribunal to find that the merger prevents or lessens, or is likely to prevent or lessen, competition substantially ("SPLC"), unless the merging parties rebut the presumption.

The 2011 guidance referenced the HHI² to measure market concentration and change in concentration, although it was not then mandated by statute. The Act as amended now requires the use of the index (without naming it). A transaction will be presumed to result in a SPLC, subject to the merging parties' ability to rebut the presumption, if:

• the concentration index increases or is like to increase by more than 100; and
• either
• • the concentration index is or is likely to be more than 1,800, or
  • the market share of the parties to the merger is likely to be more than 30 percent.

Given the change,³ the Draft MEGs explain this new statutory presumption and place the evidentiary burden on the merging parties to explain why a merger that exceeds the defined concentration and market share thresholds is not likely to harm competition. The Draft MEGs also state that the greater the concentration or share above the relevant threshold, the greater the evidentiary burden to demonstrate that the merger will not harm competition. The existence of the presumption does not automatically mean that a merger will lead to an SPLC, but it will be for the parties to bring forward evidence rebutting the presumption. The Bureau also may review and challenge transactions that fall below these thresholds but would need to establish a SPLC without the aid of the presumption in such cases.

To determine the relevant market shares and concentration levels in its analysis, the Bureau has retained the approach in the 2011 guidance. It will look to use the best measure of the current and future significance of competitors, depending on the industry and particular circumstances surrounding the transaction. These measures may include revenues or unit sales, capacity to produce or sell, but the Draft MEGs add measures such as use, attention or engagement, thus reflecting measures common in modern technologies, especially social media.

Overcoming the Structural Presumption

Market share and concentration levels may not accurately reflect the future competitive landscape in a relevant market or a merger's harm to competition. Size is not everything, nor are markets static. The Draft MEGs recognize that market structure and concentration can skew the significance of competitors by understating or overstating their individual and coordinated market power. Thus, the Draft MEGs set out criteria that the Bureau will use to assess additional factors and how the merging parties may address a SPLC presumption:

• present and future competitive constraints that limit the exercise market power or, conversely, how these constraints may be weakened, removed, or changed by a merger;
• current rivalry between firms, stability and changes in market shares, and whether a market is already concentrated;
• remaining competitors in a market, their effectiveness in constraining exercises of market power, and whether they are likely to remain as vigorous and effective after a merger;
• extent and quality of excess capacity in a market, and who controls that capacity, whether rivals can easily expand production to constrain a merged firm's attempts to exercise market power, and whether a merged firm's share of excess capacity would discourage rivals from expanding;
• removal of a vigorous and effective competitor, regardless of size, including when one of the merging parties:
  • has a history of resisting price increases or has led price cuts;
  • offers unique services, warranties, or other terms that set it apart from competitors;
  • has recently expanded its capacity or plans to do so;
  • has been gaining market share or is well positioned to grow; or
  • has recently acquired or developed intellectual property or other inputs or product features, like relevant data, that enhance its ability to compete, or is likely to do so;
• whether the merger would contribute to the entrenchment of the market position of an incumbent firm, which may include non-merging parties;
• impacts of a merger on change and innovation in a market;
• countervailing power, including the ability of buyers to sponsor new entry or self-supply and credibly bypass a merged entity by vertically integrating; and
• creation, maintenance or enhancement of monopsony power, including in labour markets.

Acquisition of Significant Interests (and Interlocking Directorates)

A "merger" under the Act includes the acquisition or establishment of control over or a significant interest in all or part of another business. The Draft MEGS assert that minority interests and interlocking directorates⁴ may constitute a merger.

In the 2011 guidance, the Bureau's interpretation of significant interest centered around determining whether the acquiring party gained the ability to materially control the economic behaviour of the target. The Draft MEGs, however, expand this interpretation, noting that the Bureau will determine significant interest based on whether the acquiring party gains the ability to materially influence the competitive behaviour of the target, or the incentive to materially change its own competitive behaviour due to the acquired interest. They also expand the list of qualitative factors that may give rise to material influence over the competitive behaviour of parties to a merger.⁵

In addition to common M&A transactions (share and asset transactions, amalgamations and combinations), the Draft MEGs discuss several relationships, including interlocking directorates and contractual arrangements that may give rise to "material influence" or that may result in a "significant interest" and thus constitute a "merger".⁶ The Tribunal or the courts may not accept this broad interpretation of "merger" in litigated proceedings.

Unlike the 2011 MEGs, the Draft MEGs assert that the Bureau also may determine that a merger arises when implemented through a series of transactions that include a combination of the foregoing agreement types, even where none of the individual transactions would be notifiable or constitute a "merger" on its own.

Market Power and Substantiality

Merger review involves assessing the effect of a merger on the ability of a firm or group of firms to exercise market power. The Draft MEGs expand the guidance on how the Bureau defines market power to include employment conditions and privacy considerations as dimensions of competition, in addition to price and non-price dimensions of quality, product choice, service, innovation, and advertising. The Draft MEGs now explain that "regardless of the merged firms' role in the market, we are concerned with market power that involves limiting access to the use of any product, service, set of customers, route to market, or data, or otherwise harming the competitive process."⁷

The Bureau's stance on substantiality in relation to the SPLC test has shifted as well. The Bureau will consider the effect of the relevant merger on both static and dynamic competition. The Draft MEGs pay particular attention to prevention of competition, illustrated by a revised list of possibly harmful merger examples, as well as reference to similar impacts from non-horizontal mergers.⁸

Multi-sided Markets, Bundles and Complements

Consistent with its efforts to update the Draft MEGs to address modern technologies and business structures, the Bureau considers that there may be special considerations when it assesses multi-sided platforms.⁹ For firms that provide services to connect users in different groups and monetize the access provided, demand may be more affected by network effects than price. Network effects in this context can be either direct or indirect. Direct effects arise when a product's demand depends on the use of the product by others such as social media platforms while indirect effects exist where the use of a product by one user group creates more value for another group such as with online marketplaces.

In considering these types of businesses, the Bureau may define a market for each side of a related platform that deals with a user group. Alternatively, the Bureau may consider how the exercise of market power on one side affects demand and profits across all sides of the platform, or it might consider multiple sides in the aggregate. The Bureau also recognises that the nature of certain multi-sided markets allows for operators to offer services at zero price and thus will focus its analysis on changes to non-price dimensions such as privacy or quality in such instances.

The Draft MEGs also provide guidance in relation to bundles and complements, consisting of markets where merging parties supply products that are purchased or sold as a group, or are complementary or operate interdependently with each other. In these instances, the Bureau may decide to define a market that includes a group of diverse products that are not substitutes for each other. When deciding whether to include products that are not substitutes in the same market, the Bureau will consider factors such as whether the products are usually purchased together, sold as a bundle, produced together, produced by the same firms, and used in fixed or variable proportions to each other, among others.

Pro-competitive Benefits and Efficiencies

The Draft MEGs address the amendment that repealed the efficiencies defence to an otherwise anticompetitive merger. The Bureau now places efficiencies under the category of possible pro-competitive benefits, like others such as those that increase rivalry, none of which are defences to anticompetitive mergers.

Efficiencies in mergers that "lead to certain types of cost savings, or benefit consumers by combining complementary assets or products" are now part of the Bureau's "overall analysis of harm to competition only where they are clearly merger-specific, substantiated with rigorous and independent evidence, and demonstrably likely to enhance competitive outcomes in a way that benefits Canadians."¹⁰ Further, the Bureau states that internal restructuring savings generally would require evidence of direct, tangible, and timely enhancements to competition.

The Draft MEGs conclude with statement that "when a merger otherwise presents significant competition concerns, even gains that are supported by rigorous evidence are unlikely to change our conclusions regarding harm to competition."¹¹ This statement is inconsistent with the preceding paragraphs that acknowledge that rigorously substantiated efficiencies arising from a merger that are likely to enhance competition are pro-competitive benefits.

The former Minister of Industry stated the following in parliamentary debate: "Of course, if a proposed merger creates efficiencies that strengthen competition in a sector, the tribunal would be able to consider them in its deliberations."¹²

The former Commissioner of Competition in his parliamentary committee testimony stated: "Minister Champagne has said that this "any other factor" [of section 93(h)] could be efficiencies that are pro-consumer. ... We will consider it under the "any other factor" provision that's in the act."¹³

We expect that the Tribunal and the courts will consider provable efficiencies in at least the manner suggested by the Commissioner. Whether the Tribunal or the courts will require pro-consumer evidence, as the Commissioner stated, or strengthening of competition, as the Minister stated, may yet be subject to litigation.

The Draft MEGs confirm that the changes to the merger provisions of the Act as well as Bureau enforcement practice present additional risks for merger transactions that will require early and careful analysis to assess possible barriers to deal completion. If you have any questions about these risks or the applicable laws, please contact any member of our Competition Law Group. Our team is ready to assist you and provide guidance on these matters.

Footnotes

1 See McMillan's bulletins summarizing the recent amendments to the Act enacted in June 2024, December 2023, and June 2022.

2 The Herfindahl-Hirschman Index, calculated by summing the squares of the individual market shares of all market participants.

3 In the 2011 guidance, market share and concentration metrics formed part of the Bureau's analysis to determine the likelihood of an SPLC from a merger. However, the Act prevented the Tribunal from using evidence demonstrating increases in post-merger market share or concentration alone to establish an SPLC. Instead, the 2011 guidance set out safe harbours by which to judge unilateral and coordinated exercise of market power following a merger of less than 35% and 65%, respectively, and noted that the Bureau might also examine changes in the HHI.

4 "An interlocking directorate may arise where a director of one firm is an employee, executive, partner, owner or member of the board of directors of a second firm or has another interest in the business of the second firm." Draft MEGs, para. 61.

5 Competitive behaviour includes decisions relating to pricing, production, purchasing, distribution, marketing, employment, investment, financing, joint ventures and partnerships, mergers and acquisitions, and the licensing of intellectual property rights (underlined decisions are new to the Draft MEGS).

6 The Draft MEGs indicate that mergers may be achieved via shareholder agreements, management contracts, franchise agreements and other contractual arrangements involving corporations, partnerships, joint ventures, combinations and other entities, and non-ordinary course loan, supply, and distribution arrangements if they give rise to material influence by one market participant over another (underlined examples are new to the Draft MEGs.)

7 Draft MEGs, para.38.

8 Illustrative prevention of competition examples (underlined examples are new to the Draft MEGs):

1. the acquisition of a potential entrant or of a recent entrant that was likely to expand or become a more vigorous competitor;
2. the acquisition of a business by an acquirer who was developing its own competing product and was likely to enter or expand in the same market;
3. the acquisition of a potential entrant by another potential entrant where both were likely to enter or expand in the same market;
4. an acquisition by the market leader that pre-empts a likely acquisition of the same target by another firm, including a competitor;
5. the acquisition of an existing business that would likely have entered the market in the absence of the merger;
6. an acquisition that prevents expansion into new geographic markets;
7. an acquisition that prevents or limits the introduction of new products;
8. an acquisition that prevents the pro-competitive effects associated with new capacity; and
9. an acquisition that prevents entry by lessening competition for the supply of an input that is important to entrants, or results in incumbents controlling inputs required by a prospective entrant.

9 Platforms that provide services to two (or more) user groups and manage interactions between them.

10 Draft MEGs, para. 286.

11 Draft MEGs, para. 288.

12 House of Commons Debates, 44th Parl, 1st Sess, Vol 151, No 223 (September 25, 2023).

13 House of Commons, Standing Committee on Industry and Technology, Evidence, 44th Parl, 1st Sess, No 127 (June 3, 2024) at 1250, Testimony of Commissioner of Competition.

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

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