May 16, 2022
The drama of the Rogers-Shaw deal without a doubt demonstrates the ability of corporate mergers to focus the popular mind.
Last week Competition Bureau chief Matthew Boswell asked the Competition Tribunal to block the merger on the grounds it will prevent or lessen competition in the mobility markets in Ontario, BC and Alberta where Shaw’s Freedom Wireless business had made great strides in lowering consumer prices.
If there is no settlement or deal (like the mooted Québecor option) that satisfies the Bureau, it is possible that Rogers might surrender and pay off Shaw with a $1.2 billion break-fee. Or more likely, Ed Rogers will fight it out at the Competition Tribunal.
If the Bureau and Rogers decide to lawyer up, expect all manner of legal arguments. The most controversial will be the notorious “efficiencies defence” in section 96 of the Act.
Unique to Canadian competition law, the efficiency defence requires the Bureau to bless a merger —even the creation of a monopoly owned by a foreign corporation— if the gains in allocative efficiency (read: increased output and productivity) outweigh on a net basis the anti-competitive harm of higher consumer prices.
This happened previously in 1998 when Superior Propane bought ICG Propane and, in a number of regional markets, was poised to become the sole propane supplier with the ability to jack up retail prices. The Competition Bureau tried to block the merger. The Competition Tribunal approved it and the Federal Court of Appeal backed that decision.
Analysts at the time reminded everyone how we got the efficiency defence in the first place.
The Mulroney Conservatives had overhauled the Competition Act with Bill C-91 in 1986 and the efficiency defence was explicitly designed to drive the Canadian economy through the growth and success of large Canadian corporations (especially in the resource sector) against global competitors. A “national champions” policy if you will.
C-91 might be judged as just another corporate end-zone celebration amidst the deregulatory era of Thatcher-Reagan. It ran deeper than that, judging by the parliamentary record. The business community anxiety over Canada’s fate as an economic backwater was described this way by Bay Street analysts:
Supporting the debate lay the implicit assumption that, in order to survive, Canada needed disproportionately large enterprises to take on the larger world. Fostering efficiency therefore, was the way to achieve policy objectives. Canada has always been an economy dramatically dependent upon exports. The geographic extent and the small population of the nation itself has historically led to a concentrated industrial structure. The ability to maintain large capitally intensive enterprises in Canada’s essential mining, oil and gas, and forest industries has constantly focused competition law upon the need to foster efficiency.
The debate behind the Competition Act does clarify the perspective. In the Report of the Economic Council of Canada in 1969 it was boldly stated that “competition policy should aim primarily at bringing about more efficient performance by the economy as a whole. Competition should not itself be the objective but rather the most important single means by which efficiency is achieved.” The provisions of the four bills introduced from 1971 to 1983 prior to Bill C- 91, which finally became the Competition Act, all gave prominence to efficiencies. Bill C-913 played the trump card: efficiencies could overrule anti-competitive effects. Not surprisingly the Committee consideration of Bill C-91 contains clear statements of government intent: “Competition itself is not an end, but is rather the most effective means of stimulating efficiency and productivity and Canadian industrial growth … we have to be cognizant of efficiency, international competitiveness and fairness.”
The national champions philosophy underlying the efficiency defence may have prevailed at the Supreme Court but its Superior Propane ruling got a lot of public attention because it impacted retail energy costs. Liberal MP Dan McTeague was able to navigate a private member’s Bill C-249 through the House of Commons in 2003, watering down the efficiency defence to the point of irrelevance.
Bay Street pushed back by reminding everyone of the industrial strategy behind the Mulroney legislation. Analysts pointed out that retail prices should not always be the bottom line in considering allocative efficiency in an advanced economy. They argued that consumers were not always retail customers but other businesses in the supply chain. To them, it was not self evident that consumers are always more important than shareholders.
McTeague’s C-249 foundered for months in the Senate (perhaps an interesting tale to tell) before a federal election in May 2004 wiped the order table clear. It never came back.
Mergers rarely get litigated in a small country like Canada, so it wasn’t until 2015 that another efficiency defence case grabbed public attention. This time it was the Supreme Court’s decision in the Tervita case rooted in a small scale merger of two hazardous waste companies operating a total of three disposal sites in remote British Columbia.
The Tervita case is noted mostly for the slap down the Court gave the Competition Bureau for (in the Court’s view) a less than rigorous effort to prove anti-competitive impact on prices on one hand or to appreciate the the efficiency gains on the other. The merger was approved.
The fallout of that decision within the competition law community was a nearly unanimous call to overrule the Supreme Court through legislative amendment.
Last month the Liberals made a down payment on legislative changes to the Act in its omnibus budget bill, but it didn’t include the efficiency defence. Likely we will hear more about that during the 44th Parliament.
In the meantime the $26 billion Rogers-Shaw deal will keep merger law in the spotlight.
When that deal was brought before the CRTC last year to review the $5 Billion cable and satellite TV assets, the efficiency defence did not apply under the Broadcasting Act. Nevertheless, the rhetorical signature of Rogers’ pitch to the Commission strongly resembled the Mulroney era justification of the efficiency defence: that in the face of strong global communications competitors, Canadian companies must increase scale and investment. It’s similar to an argument that one Bay Street analyst posed hypothetically about a Bell-Corus merger of programming assets.
Oddly, this “national champions” argument didn’t need to be made to the CRTC.
The Commission kept it simple by ruling that retail price competition in cable and satellite retail was unlikely to be lessened, given the assurances provided by Rogers which is only replacing Shaw in markets that are new to Rogers. The Commission also ruled that corporate consumers —meaning the other media companies that buy and sell programming with a merged Rogers-Shaw— were not going to be disadvantaged once the Commission’s existing regulatory guardrails were strengthened.
The Competition Bureau clearly thinks that the situation is different in the $4 billion wireless segment of the overall deal (the wireline ISP business does not seem to be an issue).
For now, Rogers-Shaw has everyone’s attention and the open window on legislative reform provides an opportunity for important political decisions about industrial strategy and competition principles.
That’s a good thing or at the very least entertaining.