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Chapter 6

The Merger Review Process

Analysis of national transportation policy must acknowledge the link between the effectiveness of all elements of Canada's transportation system and its ability to remain competitive as a trading nation. Developments beyond our borders, for example, have already had specific effects on Canada's rail sector. Mergers and acquisitions have produced an industry featuring a few major carriers with extensive networks and many smaller carriers operating regional and short line systems.1 The relevance of such events is twofold. First, the trend to greater concentration could make consideration of measures to foster competition all the more urgent. Second, it raises the question of whether the existing legislative framework can deal adequately with changing industry structure. The December 1999 announcement of the proposed merger between Canadian National and Burlington Northern Santa Fe fuelled the debate.

Which body, if any, should oversee transportation industry restructuring? Should it have the authority to prevent mergers or influence the conditions of a merger? If so, what criteria and tests should apply? This was the context for the Panel's consideration of how mergers in the transportation sector should be regulated.

Background

Before 1996, the National Transportation Act, 1987 directed that proposed mergers be examined by the National Transportation Agency in certain circumstances. The Agency had the power to disallow a proposed transaction if it was found to be against the public interest. The Agency's public interest determination could and did include competition issues. Mergers were also reviewed by the Competition Bureau, under the Competition Act. The overlapping authorities of the Agency and the Competition Bureau could, and occasionally did, result in conflicting decisions. The National Transportation Act Review Commission questioned the need for industry-specific oversight of transportation sector mergers.

The government saw merit in the Commission's recommendations and terminated industry-specific oversight in the transportation sector. As a result, transportation-sector mergers or acquisitions are now subject only to the Competition Act review process. The mandate of the Commissioner of Competition, who heads the Competition Bureau, is limited to competition issues, however, and does not include any other public policy issues.

The merger provisions of the Competition Act are designed to establish whether a proposed merger will likely result in a substantial lessening or prevention of competition in any relevant market. Notice of a proposed merger must be given to the Competition Bureau when certain financial thresholds are exceeded.2 The rationale for pre-merger notification is to give the Competition Bureau sufficient information and time to determine whether a transaction is likely to raise a serious competition issue.

Assessing the impact of a proposed merger under the Competition Act involves subjecting the proposal to a test — will there be a substantial lessening of competition if the merger proceeds? The Bureau attempts to determine whether a merger will have a negative impact on the level of competition in a particular market. Will the market power of a merged entity enable it to increase its price above competitive levels for a sustained period in a relevant market, for instance, or will the transaction hinder or impede competition that would naturally have occurred in the absence of the merger?

As part of the review, the Competition Bureau makes extensive market contacts to seek the views and concerns of customers, suppliers, competitors and any other party that might be affected. It also receives submissions and recommendations from anyone potentially affected by the proposed transaction. In very complex transactions, the Bureau may retain industry experts, economists and accountants to assist in assessing the competitive impact of a proposed transaction.

The Competition Commissioner's policy is then to discuss any concerns with parties to a proposed merger, exploring how to alleviate any negative impact on competition, generally through structural changes.

If these discussions do not address the Competition Commissioner's concerns adequately, the proposed merger can be challenged before the Competition Tribunal, a judicial body independent from the Competition Bureau. The Tribunal, on application of the Competition Commissioner, can hold a hearing at which both the Competition Bureau and the parties call evidence. There is an opportunity for other interested parties to intervene before the Tribunal. Decisions of the Tribunal can be appealed to the Federal Court of Appeal.

The Competition Act merger review process has several positive attributes. It assesses the impact of a proposal against a standard — whether the merger would substantially reduce competition in a specific market. This provides a degree of certainty and predictability to all parties. If the proposed merger does not meet the standard, structural remedies are the preferred means of addressing the shortcomings. Such remedies encourage competition with little need for continued monitoring or further regulatory intervention.

The Competition Act process does have two apparent shortcomings, however. First, the scope of the review process is limited to competition issues — it does not consider broad national or public interest issues. Second, at least during the Bureau's assessment of a proposed merger, the process is by necessity not very open or public. Although the Competition Bureau discusses proposed mergers with parties that would be affected, its analysis is conducted in private, and all documentation is confidential, because of the sensitive commercial nature of much of the material.

Fig 6-1

In the Panel's view, it is these concerns that resulted in the development of sector-specific review processes. Table 6.1 lists some industry-specific merger reviews that are carried out in addition to the Competition Act review process and the substantive tests applied in those reviews.

In the airline sector, if a proposed merger exceeds the financial threshold for notifying the Competition Commissioner under the Competition Act, and if the Minister of Transport believes that it raises public interest concerns related to transportation, it must go before the Governor in Council for approval. The Competition Commissioner reports any concerns that the merger would prevent or lessen competition to the Minister of Transport, and recourse to the Competition Tribunal is precluded. The Minister in turn advises the parties of any national transportation concerns, along with which of the Competition Commissioner's concerns should be addressed with the Commissioner. This allows the parties to propose measures to address the concerns. The proposed transaction is approved by the Governor in Council if it is satisfied that the transaction is in the public interest. Approval is subject to any conditions the Governor in Council might make.

The airline merger process significantly changes the Competition Commissioner's role. The Commissioner interacts with the Minister of Transport, and it is the Minister who determines which, if any, of the Commissioner's competition concerns must be addressed by the parties. A decision of the Governor in Council considers both competition and public interest issues.

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The Panel's Assessment

Mergers in the transportation sector often involve matters of great public interest. The structure of the rail network, for instance, has implications for development, strongly affecting the economic viability of industry now in place and the location decisions of industry in the future. Similarly, in federally regulated industries with major national network infrastructure (banking and telecommunications, along with railways), citizens coast-to-coast, in large communities and small, see themselves as potentially affected by mergers that may transform important elements of their communities. As a result, broad cross-sections of the citizenry and many organized interest groups are bound to seek avenues to articulate their concerns and seek reassurances that they will be addressed.

Neither the Competition Bureau's merger review process nor the Competition Tribunal process can readily accommodate this generalized form of public engagement. Moreover, the legislative framework for both the Competition Bureau and the Competition Tribunal focuses on the competitive implications of a merger, recognizing efficiencies as a legitimate offsetting factor. In some circumstances, the potential economic and social implications — as accurately or inaccurately perceived by many citizens — are likely to range well beyond this evaluative framework. In bank and airline mergers, for instance, rationalization of networks, reduction of excess capacity, and various other economies of scale and scope were claimed as likely benefits of the mergers. For individual citizens, however, these efficiencies often translate into branch closings in smaller communities, staff layoffs, and reduced airline service to smaller communities. These events, coupled with a perceived reduction in competitive offerings in these industries, may well provoke intense public concern. Furthermore, in both industries, major public policy issues arise with respect to foreign competition and foreign ownership, requiring fundamental re-evaluation of long-standing government policies restricting foreign participation in these sectors.

Many potential effects of a proposed transportation sector merger would be addressed under the Competition Act process. Some related issues would not be considered, however, particularly in respect of a transnational merger. For example, a merger could lead to a more integrated North American rail network where the Canadian and U.S. portions of the network owned by one company would have to compete with each other for capital investment. If the Canadian portion of the network lost out in that competition, it could lead, over time, to a serious deterioration of the Canadian network. Another possible outcome might be the diversion of traffic to U.S. ports, significantly reducing economic activity at Canadian ports.

These are clearly issues of national interest. Transportation is key to the functioning of all sectors of the economy and the competitiveness of Canadian industry in the global marketplace. The rail and air sectors tend to be served by a small number of large enterprises. Restructuring as a result of mergers has the potential to affect the price and level of transportation services significantly. In its submission to the Panel, the Competition Bureau stated:

Competition law is directed at a person or persons engaged in anti-competitive acts that have the effect, or are likely to have the effect, of substantially preventing or lessening competition. It cannot address typical problems associated with a natural monopolist, such as high prices, insufficient supply, inadequate service or types of services, high or low profitability, absence of entry into the industry and insufficient investment, etc.3

This leaves a significant gap. The Panel therefore believes it is both prudent and justified to allocate the time and resources required to review the public interest implications of a proposed transportation sector merger and to ensure that it is right for Canada as a whole.

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Considerations and Recommendations

The Panel heard several proposals to address the lack of a public interest review. The most frequent suggestion was to give the Canadian Transportation Agency authority to review mergers.4

Re-establishing a merger review role for the Agency would mean either giving the Agency sole responsibility for reviewing transportation mergers — much like the U.S. Surface Transportation Board — or giving the Agency overlapping authority with the Competition Bureau, as was the case under the National Transportation Act until 1996. Neither option appears practical. In the first alternative, the Agency's consideration would inevitably be based to a significant extent on subjective public interest criteria rather than the Competition Bureau's assessment of the effects of a proposed merger on competition. The second alternative, with overlapping roles of the Bureau and the Agency, could lead to conflicting decisions.5

CN suggested yet another approach, amending the Competition Act to give the Minister of Transport authority to intervene and make submissions to the Commissioner of Competition during the Bureau's review process. The Commissioner would be required to take those submissions into account when reviewing the proposed merger, but would continue to be guided by the mandate to protect and enhance competition. The Panel believes, however, that such a process would transform the review from one based on applying an economic test to one that includes a public interest consideration; this would inevitably compromise the Competition Bureau's ability to assess a merger's competitive impact objectively.

The Competition Act process works well, offers predictability and encourages competition without the burden of ongoing monitoring and further regulatory intervention. The Panel concludes that it is important to maintain the integrity of this process for evaluating objectively whether a proposed merger in the transportation sector would prevent or lessen competition. The Panel's view is that a new process for reviewing proposed transportation mergers, either within modes or cross-modal, should be established to examine issues of broad national or transnational interest. To do so requires establishing a broader public interest review process separate from the Competition Act process.

A public interest review process should have the following characteristics:

Under the Panel's proposal, parties to a proposed merger would notify the Minister of Transport at the same time they notify the Commissioner of Competition. The notice to the Minister would include a statement of public interest impact, which would include

A detailed statement of public interest impact would open the important elements of the proposed merger to public scrutiny and allow the Minister to decide whether a public interest evaluation is required and, if one is required, who should do the evaluation. The statement would also oblige the parties to consider any potential adverse impacts of the transaction and to be proactive in suggesting remedial actions to address them.

If the Minister of Transport concluded that the proposed merger raised significant public interest issues, the Minister could appoint a public interest evaluator to evaluate the proposed merger. This would give the Minister flexibility to determine, on a case-by-case basis, whether a public interest evaluation is necessary.

Public interest issues will vary, depending on the merger proposal. The Minister should therefore have flexibility in selecting the public interest evaluator for each review. In some situations, the Agency may be the appropriate authority, because it may have the necessary expertise available in-house. In other situations, however, an individual or a small panel of experts might be more appropriate.

In appointing the evaluator, the Minister would establish an appropriate time frame for considering the public interest issues identified for evaluation. The public interest evaluator would have the authority to hold hearings on those issues.

The public interest evaluator and the Competition Bureau would also have legislative authority to exchange information and to discuss and co-ordinate their respective investigations. This would allow the evaluator and the Bureau to consider a co-ordinated set of remedies to address public interest and competition concerns. Similarly, if a proposed merger is transnational, the evaluator would be encouraged where feasible to co-operate with regulatory authorities in other countries to exchange information.

Parties to a merger could amend the terms of the proposed merger in response to concerns raised by the public interest evaluator with respect to public interest issues, or by the Competition Bureau with respect to competition issues.

At the conclusion of the evaluation, the public interest evaluator would report to the Minister, recommending, with respect to public interest issues, that the proposed merger

After receiving the evaluator's report, the Minister would review it and make a recommendation on the proposed merger to the Governor in Council. This would make decisions about broad national interest the responsibility of the Governor in Council. Issues related to the lessening of competition would continue to be determined under the Competition Act process. For a merger to proceed, the Governor in Council would have to be satisfied that there are no outstanding public interest issues, and the Competition Tribunal would have to be satisfied that any issues relating to a potential lessening of competition have been addressed. Because the scope of the two review processes would not overlap, there could be no conflicting decisions. Figure 6.2 illustrates the relationship between the two processes.

Fig 6-2

If the Governor in Council attached conditions to protect the public interest, the Minister of Transport would have the authority to set up a monitoring and enforcement process to ensure compliance, giving the Minister flexibility to determine the process required and the appropriate authority to carry it out. The appropriate authority might be the Agency, Transport Canada or another authority. Under the approach proposed by the Panel, a merger could be disallowed by the Governor in Council on public interest grounds, notwithstanding that the Competition Bureau/Tribunal may have not disallowed the merger in question for competitive reasons. The reverse situation would also apply.

The Panel's proposals are summarized in the following recommendations.

Recommendation 6.1
The Panel recommends the establishment of a new process for reviewing proposed transportation mergers, either within modes or cross-modally, to examine issues of broad national or transnational interest separately from competition issues considered under the merger review provisions of the Competition Act.

Recommendation 6.2
The existing Competition Act process should continue to be used to evaluate whether a proposed merger in the transportation sector would prevent or lessen competition.

Recommendation 6.3
The proposed public interest review process would have the following steps:

  1. Parties notify the Minister of Transport of the proposed merger at the same time notice is served to the Commissioner of Competition.
  2. The notice to the Minister includes a statement of public interest impact, including
    • the objectives of the merger;
    • the impact of the merger on the transportation sector concerned and on the industry sectors it serves;
    • possible costs and benefits to shippers or passengers;
    • implications with respect to network rationalization and the labour force;
    • the regional impact of the merger;
    • the impact of the proposed merger on the overall structure of the transportation sector concerned; and
    • remedial or mitigating actions proposed by the merging parties to address public interest concerns.
  3. If the Minister concludes there are significant public interest issues related to the proposed merger, he/she would appoint a public interest evaluator to evaluate the proposed merger.
  4. The public interest evaluator evaluates public interest issues identified by the Minister, based on the statement of public interest impact provided by the parties to the proposed merger, and can hold hearings to receive input on public interest issues.
  5. Parties to a merger may amend the statement of public interest impact in response to concerns expressed by the public interest evaluator on public interest issues.
  6. The public interest evaluator interacts with the Competition Bureau to discuss and co-ordinate their respective investigations.
  7. At the conclusion of the evaluation, the public interest evaluator reports to the Minister, recommending, with respect to public interest issues, that the proposed merger

    • be allowed to proceed;
    • be allowed to proceed, subject to specified conditions; or
    • not be allowed to proceed.

  8. After receiving the report of the public interest evaluator, the Minister reviews it and makes a recommendation to the Governor in Council.
  9. Approval should be subject to any conditions the Governor in Council considers relevant to protect the public interest.
  10. Where the Governor in Council approves a merger subject to the parties to the merger meeting conditions to protect the public interest, a process to ensure compliance through monitoring and enforcement must be put in place.
  11. The Competition Bureau and the public interest evaluator should be encouraged to work closely with the appropriate authorities in other countries when considering transnational mergers.

The Panel believes that the same merger review process should apply to all transportation modes under federal jurisdiction. Retaining separate processes for different transportation sectors would imply that there is a different rationale for review of mergers in those sectors. In fact, concerns about the potential impact of a merger are not markedly different, so there is no reason to retain different processes.

Recommendation 6.4
The Panel recommends that the proposed merger review process apply to all transportation modes under federal jurisdiction.

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Notes

1 A detailed description of North American rail industry restructuring is provided in R.L. Banks & Associates, Inc., "North American Railway Restructuring and Implications for Merger Policy", paper prepared for CTAR, February 27, 2001.

2 The Competition Bureau must be notified if the parties to a proposed transaction, and their affiliates, have combined Canadian assets, or annual sales from those assets, exceeding $400 million and if the Canadian assets being acquired, or annual sales from those assets, exceed $35 million ($70 million in the case of an amalgamation).

3 Competition Bureau, November 17, 2000, p. 12.

4 See, for example, submissions by the Canadian Shippers' Summit and the provinces of Alberta and Nova Scotia.

5 This situation arose in 1995 under the National Transportation Act, 1987, when CP Containers (Bermuda) purchased the assets of The Cast Group. The Agency found that the transaction was not against the public interest and chose not to disallow it. The Competition Commissioner, on the other hand, determined that the transaction would prevent or lessen competition and sought to have the transaction dissolved. The matter was resolved when a competitor entered the market and the Competition Commissioner's application was dismissed.

This chapter also draws on the following research prepared for the Panel:

WESTAC, "Understanding Competitive Rail Access and Position Profiles", paper prepared for CTAR, February 20, 2001.

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