Nearly two years after it was announced, the $26-billion takeover of Shaw Communications by Rogers Communications remains in the news — and in a state of limbo.
Rogers and Shaw have pushed the closing date of the deal to March 31 as they wait for Canada’s Minister of Innovation François-Philippe Champagne to approve the transfer of wireless spectrum licences from Shaw to Quebecor’s Videotron subsidiary.
Champagne is in a delicate position. Ever since the Competition Tribunal rejected the Commissioner of Competition’s application to block the deal on Jan. 24, 2023, opponents of the deal have urged Champagne to override the tribunal decision.
Regardless of what Champagne decides, the tribunal decision — endorsed by the Federal Court of Appeal — has created a new rule that raises significant questions about merger review going forward.
With a consultation on the future of competition policy in Canada underway, it is vital to seize the opportunity to correct a problematic new precedent.
Implications for merger law
Most experts thought the Rogers-Shaw case would focus on the controversial efficiencies defence, which has been a primary target for reform.
Unique to Canada, the efficiencies defence allows a merger to proceed if economic efficiencies, such as cutting staff and combining business units, are sufficient to compensate for the higher prices and less consumer choice caused by the merger.
In the end, there was no need to consider whether the efficiencies would compensate for any anti-competitive effects, since the tribunal dismissed the application. The tribunal was unconvinced the merger would negatively affect competition for wireless services in British Columbia and Alberta.
On the surface, this looks like an open and shut case, but something unprecedented happened — the original deal challenged by the commissioner in May 2022 — a one-step complete takeover of Shaw by Rogers — was replaced by a two-step process, announced in June and finalized in August, in which Rogers would sell Freedom Mobile to Videotron before acquiring Shaw.
Based on its interpretation of the law and applying “common sense,” the tribunal decided the merger review must look at the deal the parties actually intend to do, even though the new deal is the result of a change made after the commissioner started litigation.
The commissioner asked the Federal Court of Appeal to overturn this part of the decision. The Court refused, saying it would not have changed the outcome of the case because the tribunal had rejected all of the commissioner’s evidence.
Merger review process
In Canada, mergers are not subject to formal approval. The purpose of the Competition Bureau’s review of mergers is to identify and resolve problems.
Our merger regime has two parts: notification and enforcement. Most merger review happens at the notification stage when the bureau reviews transactions by parties to see if a deal raises competition concerns.
Most of the time, the bureau has none and takes no action. But when cases do raise concerns, the bureau may ask for more information to better understand the impacts of the merger. Usually merging parties have suggestions for how to remedy concerns ahead of time, and the commissioner and the parties can reach a resolution without needing litigation.
Very rarely, the gap between the commissioner and the parties cannot be bridged and the commissioner will challenge the merger. The commissioner can challenge any merger, including those completed within the last year or those, like the Tervita case, that don’t have to be notified.
The commissioner starts a challenge by applying to the Competition Tribunal for an order to fix the anti-competitive problems caused by the merger. The commissioner must prove the deal will likely cause a “substantial lessening or prevention of competition.”
Once he does that, he must show how his proposed remedy will bring the level of anti-competitive harm below the substantial level.
Parties that propose alternatives to the commissioner’s remedy must convince the tribunal their remedy is adequate and achievable. Sometimes the commissioner and the parties are able to agree on a remedy to settle a contested case. This can then be filed as a consent agreement, which is binding on both sides.
Upending the merger review process
The Rogers-Shaw decision upends the merger review process in two ways. First, allowing post-litigation changes removes the incentive for parties to work with the commissioner to resolve competition issues in the early stages of merger review.
For parties seeking a remedy the commissioner objects to, a late deal change is a way they can propose a remedy. Baking a remedy directly into a deal means the remedy isn’t looked at separately from the overall question of whether the deal is anti-competitive. This means parties don’t have to show their remedy is likely to work — it’s assumed to.
Second, merger challenges take months of preparation. To do this properly, the Competition Bureau has to know what deal it’s looking at so it can build a strong case.
When a deal is substantially modified after the commissioner files a formal application, he has to adjust his evidence and strategy on the fly. In Rogers-Shaw, the tribunal and the Federal Court of Appeal said there was no unfairness to the commissioner, but this ignores the potential for strategic abuse of the rule in future cases.
Proposals for reform
While it can sometimes take years to change judge-made rules, the second phase of competition law reform, expected in the coming year, gives us a chance to nip the issues raised by Rogers-Shaw in the bud.
Here are two ideas for how to strike a balance between the need for flexibility when deals change after litigation starts, and ensuring merger review serves the public interest.
First, when post-challenge deal modifications incorporate remedies, parties should have to convince the tribunal these remedies are sufficient to address any anti-competitive concerns, unless the commissioner agrees they are adequate.
This ensures private parties cannot choose their own remedy without convincing the commissioner or tribunal it’s in the public interest. This should discourage self-serving low-ball remedy offers.
Second, there must be conditions that determine when a deal change is too late or too significant to be folded into an ongoing merger challenge, without putting an unfair or unreasonable burden on the commissioner or harming public interest.
One solution is to create a default rule saying major post-challenge changes to the original deal require a new notification, triggering a fresh review, unless parties can prove it’s not needed. This would allow the commissioner to study a new deal properly, ultimately leading to a faster resolution without litigation.