The Hillsdown and Southam Decisions: The First Round of
Contested Mergers Under the Competition Act
Calvin S. Goldman, Q.C. and John D. Bodrug*
The Competition Tribunal has recently
released its first two decisions in contested
applications under the merger provisions of
the Competition Act. In the Hillsdown case, the
Tribunal declined to issue a remedial order, in
the Southam case, a remedial order was held to
be warranted only in respect of a relatively
minor aspect of the case. Up to now, the Tribu-
nal has been somewhat reluctant to follow the
enforcement approach used by the Director of
Investigation and Research in the Merger
Enforcement Guidelines. It has also suggested
that it might set very high enforcement stand-
ards for parties to justify a merger on the basis
that it will likely generate efficiencies which
more than offset the potential lessening of
competition (the “efficiency exception” argu-
ment). The Tribunal has also emphasized the
need for the parties to provide it with extensive
facts and evidence on the economic impact of
mergers to enable it to render decisions in
these complex cases.
The authors argue that the length of the
merger review process and the absence of an
explicit set of criteria in the Tribunal’s evalua-
tion of transactions may tend to encourage par-
ties to conclude mergers before subjecting
themselves to the Tribunal’s jurisdiction, so as
to better protect themselves from its interven-
tion. In their analysis of the Hillsdown and
Southam decisions, the authors raise a number
of questions concerning the use of the Merger
Enforcement Guidelines and the role of the
Director and the Tribunal in the regulation of
merger activity under the Act. In the authors’
opinion, these two cases will have important
consequences for the future application of the
Act and for the interpretation of the central
concepts of the merger provisions (market def-
inition, substantial lessening of competition,
etc.).
Le Tribunal de la concurrence a rrcemment
rendu ses deux premieres decisions dans des
affaires concernant ]a partie de la Loi sur la
concurrence relative aux fusionnements. Dans
l’affaire Hillsdown, le Tribunal a refusd
d’6mettre une ordonnance rrparatrice; dans
l’affaire Southam, il a drcid6 de rendre une
ordonnance sur un aspect relativement mineur
de la cause. Jusqu’h present, le Tribunal a fait
preuve d’une certaine r6serve face A l’appro-
che 6noncde par le Directeur des enquetes et
recherches dans ses Lignes directrices pour les
fusionnements. Dans ses jugements, le Tribu-
nal a suggrr6 qu’il pourrait 6tablir des normes
d’6valuation 61evres si les parties cherchent a
justifier un fusionnement en montrant que les
gains en efficience drpasseront les effets anti-
concurrentiels possibles (il s’agit de l’argu-
ment de << l'exception d'efficience >>). Le Tri-
bunal a aussi soulign6 que les parties doivent
lui fournir une quantit6 importante de faits et
de preuves sur l’impact 6conomique des fu-
sionnements pour qu’il puisse rendre des d~ci-
sions 6claires dans ces affaires complexes.
Les auteurs soutiennent que la dure du pro-
cessus de rdvision et l’absence de critres
explicites dans ces jugements risquent d’inci-
ter les parties a conclure des fusionnements
avant de se soumettre
Ia juridiction du Tribu-
nal, de faqon A mieux se prot6ger contre son
intervention. Dans leur analyse des arr~ts
Hillsdown et Southam, les auteurs soul~vent
plusieurs questions concernant l’application
des Lignes directrices et le r6le du Directeur et
du Tribunal dans la supervision des fusionne-
ments. D’apr~s les auteurs, ces decisions
auront des consequences importantes pour
l’application future de laLoi et pour-l’interpr6-
tation des concepts principaux des articles por-
tant sur les fusionnements (definition du mar-
ch6, diminution sensible de la concurrence,
etc.).
* Partners, Davies, Ward & Beck, Toronto, Ontario. From May 1986 until October 1989, Mr.
Goldman was the Director of Investigation and Research, Bureau of Competition Policy, Ottawa.
McGill Law Journal 1993
Revue de droit de McGill
To be cited as: (1993) 38 McGill L.J. 724
Mode de rtfdrence: (1993) 38 R.D. McGill 724
1993]
HILLSDOWN AND SOUTHAM
Synopsis
Introduction
I.
The Tribunal’s Decisions in Hillsdown and Southam
A. Hillsdown
1. Market Definition
2.
3.
4.
5.
Possible Market Power
Limits on Market Power
Substantial Lessening of Competition
The Efficiency Exception
B. Southam
1.
2.
The Acquisitions
The Community Newspapers
a. Lessening of Competition
b. Prevention of Competition
c. Enty
d. Market Power
Real Estate Advertising
3.
4. Remedial Order
U.
Implications of the Decisions
Appendices
Introduction
The Competition Tribunal (“the Tribunal”) has recently released its first
two decisions in contested applications by the Director of Investigation and
Research (“the Director”) under the merger provisions of the Competition Act’
in the Hillsdown2 and Southam3 cases. The Director was largely unsuccessful in
persuading the Tribunal that remedial action was warranted in either case –
no
order was issued in Hillsdown and the Tribunal concluded that an order was
‘Competition Act, R.S.C. 1985, c. C-34, as am. by R.S.C. 1985 (1st Supp.), c. 27, ss. 187, 189,
R.S.C. 1985 (2d Supp.), c. 19, Part II, R.S.C. 1985 (3d Supp.), c. 34, s. 8, R.S.C. 1985 (4th Supp.),
c. 1, s. 11, R.S.C. 1985 (4th Supp.), c. 10, s. 18, S.C. 1990, c. 37, ss. 29-32, S.C. 1991, c. 45, ss.
547-550, S.C. 1991, c. 46, ss. 590-594, S.C. 1991, c. 47, ss. 714-717, S.C. 1992, c. 1, ss. 44-46,
145, S.C. 1992, c. 14, s. 1, S.C. 1993, c. 34, ss. 50-51 [hereinafter the Act].
2Canada (Director of Investigation and Research) v. Hillsdown Holdings (Canada) Ltd. (1992),
41 C.P.R. (3d) 289 (Comp. Trib.) [hereinafter Hillsdown].
3Canada (Director of Investigation and Research) v. Southam Inc. (1992), 43 C.P.R. (3d) 161
(Comp. Trib.) [hereinafter Southam].
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[Vol. 38
warranted with regard to only one relatively insignificant aspect of the Southam
case. While each of these decisions is very long and includes an extensive
review of the evidence, there is a surprising lack of reference to the Director’s
Merger Enforcement Guidelines.! The Southam decision makes no reference to
the Guidelines at all and the Tribunal in Hillsdown refers to the Guidelines only
in the context of disagreeing with the Director’s approach to the efficiency gains
provisions of the Act. At the same time, the Tribunal’s decisions do not provide
an explicit analytical framework to guide counsel in future cases in such areas
as defining relevant markets, assessing whether a lessening of competition is
likely to be substantial, or applying the efficiency gains exception. In addition,
the extent of the entire litigation process in these first two contested cases, cou-
pled with the length of the hearings themselves, raises significant questions
about the willingness of parties to embark on contested proceedings in any sit-
uation where there is sensitivity to time or expense.
Although the decisions in both these cases were focused on their particular
facts, some general implications of the Tribunal’s approach to these issues and
the factors which the Tribunal will consider in determining whether to order
divestiture of an acquired business can be inferred from Hillsdown and Sou-
thzam. This paper reviews the findings of the Tribunal in these decisions which
may be of assistance in predicting the Tribunal’s approval in future cases, and
reviews some of the further implications of these decisions.
Section 91 of the Act defines a “merger” as an “acquisition or establish-
ment, direct or indirect, bX one or more persons, whether by purchase or lease
of shares or assets, by amalgamation or by combination or otherwise, of control
over or significant interest in the whole or a part of a business of a competitor,
supplier, customer or other person.” The Director has taken a wide view of the
scope of this definition and considers that the merger provisions may apply not
only to share and asset acquisitions, but also to contracts that give a person the
ability to materially influence another business.
The current merger provisions were enacted in 1986′ to replace the former
criminal provisions which had not been actively enforced. Under the 1986 leg-
4In April 1991, following extensive consultation with businesspersons and counsel, the Director
released in final form the first Canadian Merger Enforcement Guidelines (Canada, Director of
Investigation and Research (Ottawa: Supply and Services Canada, 1991) [hereinafter Guidelines]).
The Guidelines are intended to “promote a better understanding of the Director’s merger enforce-
ment policy” (ibid., preface) by providing detailed information on the criteria used by the Bureau
of Competition Policy (“the Bureau”) in analyzing whether a merger is likely to substantially
lessen or prevent competition for the purposes of the Act. The Guidelines state that they supersede
all previous statements made by the Director and other officials of the Bureau to the extent that
such statements differ from the Guidelines. While the Director has indicated that the Guidelines
do not represent a significant change in enforcement policy or restate the law, and that the Guide-
lines are not to be taken as a binding statement of how the Director’s discretion will be exercised
in a particular situation (ibid., interpretation section), the Guidelines do outline a number of criteria
which had not previously been publicly articulated by the Director. (For a detailed discussion of-
these guidelines, see C.S. Goldman, Q.C. and J.D. Bodrug, “The New Merger Enforcement Guide-
lines Under the Canadian Competition Act: A Survey of the Principal Provisions,” Clayton’s Com-
mnentaries, published by the American Bar Association, Section of Antitrust Law, July 1991).
5See R.S.C. 1985 (2d Supp.), c. 19 for the amending legislation.
19931
HILLSDOWN AND SOUTHAM
islation, the Director may apply to the Tribunal, a quasi-judicial body, for a
range of remedial orders, including orders to dissolve or enjoin a merger, if the
Tribunal determines that a merger or proposed merger “prevents or lessens, or
is likely to prevent or lessen, competition substantially.”6 The Tribunal can act
only on the Director’s application and, in contrast to the situation in the United
States, neither private parties nor provincial authorities can initiate a proceeding
under the merger provisions of the Act, either before the Tribunal or before a
court.7 The Act does not require every merger to be brought by the Director
.before the Tribunal for a determination of whether or not the merger substan-
tially lessens competition. The Act permits the Director considerable discretion
to pursue a range of alternate choices to address a particular merger. In order to
promote a better understanding of the Director’s merger enforcement policy and
facilitate business planning, the Director issued detailed Guidelines in 1991.8
I. The Tribunal’s Decisions in Hillsdown and Southam
A. Hillsdown
On March 9, 1992, the Tribunal released a lengthy decision in which it
declined to make an order under the merger provisions of the Act with regard
to the acquisition by Hillsdown Holdings (Canada) Limited of a majority of the
common shares of Canada Packers Inc., the parent corporation of Ontario Ren-
dering Company Ltd. (“Orenco”), in July 1990. Orenco was only one of a
number of businesses acquired in the transaction.
At the time of the acquisition, Rothsay (a division of a subsidiary of Hills-
down) and Orenco were the two largest meat rendering companies in Southern
Ontario. Rothsay operated facilities in Toronto and Moorefield, Ontario and
Orenco had a plant in Dundas, Ontario. In July 1988, Rothsay’s Toronto loca-
tion was expropriated by the City of Toronto, but it did not vacate the property
until the end of November 1990, at which time the Dundas and Moorefield
operations had reorganized their collection and processing of renderable mate-
rial, so as to deal with the materials formerly used by Rothsay’s Toronto plant.
Shortly after the acquisition, Hillsdown provided the Director with a “hold
separate” undertaking9 which expired on July 27, 1990. On February 15, 1991,
6Competition Act, supra note 1, s. 92.
7For a more detailed review of the merger provisions of the Act and the Director’s approach to
merger enforcement, see C.S. Goldman, Q.C. & J.D. Bodrug, “The Canadian Competition Act and
the Investment Canada Act: An Update Including Implications of the Canada-United States Free
Trade Agreement” (1990) 11:3 Can. Comp. Pol. Rec. 39. See also C.S. Goldman, Q.C., “The
Merger Resolution Process Under the Competition Act: A Critical Time in its Development” (1990)
22 Ottawa L. Rev. 1 [hereinafter “Merger Resolution Process”]; C.S. Goldman, Q.C. & J.D.
Bodrug, eds., Competition Law of Canada (New York: Matthew Bender, 1992) c. 10 [hereinafter
Competition Law of Canada].
8Supra note 4.
9Where the Director has preliminary concerns about a proposed merger or the Bureau has not
had an opportunity to complete its investigation, the Director may seek an interim “hold separate”
undertaking from the acquiror. Such an undertaking would be drafted with a view to preserving
the acquired assets as an independent operating business that may be divested in the event that the
McGILL LAW JOURNAL
[Vol. 38
seven months after the acquisition had closed, the Director applied to the Tri-
bunal for an order requiring Hillsdown to divest itself of Orenco. Subsequent to
this application and after Rothsay’s expropriated plant was closed and its oper-
ations were merged with Orenco’s, the Tribunal issued, with the consent of both
the Director and Hillsdown, an interim order requiring the preservation of the
Orenco assets.’
1.
Market Definition
The Tribunal had little difficulty accepting the Director’s position that the
appropriate product dimension of the relevant market in this case was the pro-
vision of rendering services for certain red meat materials. Captive renderable
materials processed by other firms (i.e. red meat materials obtained from affil-
iates) were excluded from the market, apparently without opposition by Hills-
down. The Director argued that the geographic dimension of the relevant market
should be limited to Southem Ontario, while Hillsdown contended that it should
include parts of New York and Michigan.” The Tribunal disagreed with the
Director’s conclusion that the additional costs incurred in crossing the Canada-
United States border justified excluding U.S. reiderers from the relevant geo-
graphic market. The Tribunal stated that:
The identification of the relevant market in which it is alleged a substantial lessen-
ing of competition is likely to occur is normally assessed from two perspectives:
the product or products with respect to which a merged firm acting alone or in con-
cert with others is likely to be able to exercise market power and the geographic
area within which such power is likely to be exercised …12
The Tribunal in Southam referred to and adopted this approach to market
definition and added that “[m]arket power is the ability of a finm or group of
firms to maintain prices above the competitive level.”‘ 3
The Director has commented that “[d]espite the ultimate decision, the
approach to merger analysis articulated by the Tribunal in Hillsdown does not
Director concludes this is necessary. For a detailed discussion of publicly disclosed undertakings
of this nature that have been obtained by the Director, see Competition Law of Canada, supra note
7 at 10.07.
1Pursuant to an undertaking dated July 4, 1990, Hillsdown promised the Director that, in
essence, it would preserve Orenco’s assets and not interfere with the management of that company.
The undertaking also limited the’exchange of confidential information between Hillsdown and the
Orenco operations. This undertaking expired on July 27, 1990. On February 21, 1991, the Tribunal
issued a consent interim order pursuant to s. 104 of the Act requiring preservation of the assets
comprising the Orenco business and the maintenance of Orenco’s records. Hillsdown was required
by the order to continue to operate Orenco and Rothsay through separate corporations in a manner
that would not hinder the divestiture of the Orenco business, and was prohibited from taking fur-
tiler steps to integrate Rothsay and Orenco; however, the order specifically permitted Hillsdown
to (i) redirect routes for the collection of renderable material, (ii) redirect deliveries of such mate-
rial, (iii) allocate the processing of such material, (iv) allocate sales of end products, and (v) allo-
cate equipment and operating personnel between the businesses of Rothsay and Orenco. (Canada
(Director of Investigation and Research) v. Hillsdown Holdings (Canada) Ltd. (21 February 1991),
CT-91/1, #8 at 4 (Consent Interim Order) (Comp. Trib.)).
“Hillsdown, supra note 2 at 311.
121bid, at 298.
13Southant, supra note 3 at 177.
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HILLSDOWN AND SOUTHAM
significantly deviate from the underlying analytical process set out in the
Merger Enforcement Guidelines.”4 However, the Tribunal declined to employ
a specific time period or price increase to test the limits of the geographic mar-
ket.15
In fact, the Tribunal declined to specify a geographic market and empha-
sized that “market boundaries cannot and will not in many instances be precise.”
In this regard, the Tribunal added that “[a]s long as market share statistics are
not taken as the only indicators of the existence of market power, the exact loca-
tion of those boundaries becomes less important. Restraints on a merged firm’s
(alleged) market power can come from both inside and outside the market as
defined.”‘ 6
The Tribunal did decide that the Canada-United States border did not limit the
market because competitors close to the border could provide effective compe-
tition to the merged firm, but also held that renderers located over 200 – 250
miles from the merged company’s facilities should not be included in the rele-
vant market.’7 In effect, the Tribunal defined the relevant geographic market to
extend beyond Canada’s borders but, in so doing, it did not provide explicit
guidance as to the principles governing its decision on this issue.
2.
Possible Market Power
The Tribunal acknowledged that market share data can be a prima facie
indicator of market power and noted that, based on pre-merger volumes of ren-
derable material processed in Southern Ontario, Rothsay and Orenco together
accounted for approximately sixty-two to sixty-three per cent of the Southern
Ontario “market,” with the two next largest firms accounting for about twelve
per cent each. The Tribunal noted that the four-firm concentration ratio and the
Herfmdahl-Hirschman Index (EHI)” were referred to in evidence. The four-
‘ 4H.I. Wetston, Q.C., “Decisions and Developments: Competition Law and Policy” (Address to
the Canadian Institute, Toronto, 8 June 1992) at 3 [hereinafter “Decisions and Developments”].
15The Guidelines (supra note 4), which were released in April 1991, apply a “hypothetical
monopolist” analysis and suggest that a one-year time period and a 5% price increase should usu-
ally be employed in determining the market in which a hypothetical monopolist could impose a
significant and non-transitory price increase above levels that would likely exist in the absence of
the merger (s. 3.1). It may be noted that in the earlier case of Canada (Director of Investigation
and Research) v. Laidlaw Waste Systems Ltd. ((1992), 40 C.P.R. (3d) 289 (Comp. Trib.) [herein-
after Laidlaw]), under the abuse of dominant position provisions of the Act, the Tribunal also sug-
gested that it did not necessarily accept that the “5% price rise criterion [was] necessarily a useful
one even in a merger case” (ibid. at 320).
16Hillsdown, supra note 2 at 310.
17Ibid. at 311.
‘5The HIl is an index utilized in the horizontal merger guidelines of the United States Depart-
ment of Justice and Federal Trade Commission released on April 2, 1992 (Antitrust & Trade Reg-
ulation Report (2 April 1992) Special Supp. [hereinafter U.S. Guidelines]) and which was also used
in earlier U.S. guidelines. The HI is calculated by summing the squares of the individual market
shares of all market participants and, as noted in the U.S. Guidelines, “[u]nlike the four-firm con-
centration ratio, the HHI reflects both the distribution of the market shares of the top four firms
and the composition of the market outside the top four firms. It also gives proportionately greater
weight to the market shares of the larger fins, in accord with their relative importance in com-
petitive interactions” (ibid., s. 1.5). For a more detailed discussion of the Hi, see PA. Pautler,
REVUE DE DROIT DE McGILL
[Vol. 38
firm concentration ratio for the total non-captive red meat renderable materials
processed in Southern Ontario increased from 90.4% to 91.6% as a result of the
merger. Although these figures demonstrated how highly concentrated the mar-
ket was, the Tribunal indicated that this information “tells little about the effects
of the merger” and “demonstrates the inadequacies of the four-firm concentra-
tion ratio as a measure of increased concentration, in a case such as the present
where the changes resulting from the merger are primarily occurring among the
top four firms.”‘ 9 The Tribunal also referred to evidence that the HHI for non-
captive red meat renderable material processed by Ontario renderers increased
by 1,526 points to a market total of 3,791.20 It may, however, be noted that the
Director’s Guidelines do not adopt the HHI. The Guidelines provide thresholds
relating to the market share of the merged entity, and the combined market share
of the four largest firms in the market below which the Director generally will
not challenge a merger.” Both of these thresholds were clearly exceeded in this
case. The Tribunal also stated that calculations of HI-I
indexes based on plant
capacity under a number of different market assumptions did not appear to “add
much” to the case.22
On the basis of the various measurements of market share referred to in its
decision, the Tribunal found that the merger significantly increased the concen-
tration in an already concentrated industry, and gave rise to an initial concern
that the merger would likely lessen competition substantially.
3.
Limits on Market Power
However, as noted above, the Tribunal stated that “market share is not nec-
essarily a reliable determinant of market power.”’24 (Indeed, subsection 92(2) of
the Act specifically directs the Tribunal not to find that a merger is likely to pre-
vent or lessen competition substantially solely on the basis of evidence of con-
centration or market share.) The Tribunal examined whether excess capacity in
the industry, possible expansion of existing facilities or the areas they serve,
potential new entrants or other factors were likely to constrain the merged firm’s
ability to exercise its apparent market power. Once again, the Tribunal’s focus
on excess capacity ‘is not consistent with the approach taken in the Director’s
Guidelines, where excess capacity is not referred to at all as a qualitative assess-
ment factor2
“A Guide to the Herfindahl Index for Antitrust Attorneys” (1983) 5 Research in L. and Econ. 167.
t9Hillsdown, supra note 2 at 316 (footnote omitted).
2 Ibid. The U.S. Guidelines indicate that the U.S. antitrust agencies regard markets with post-
merger HHIls above 1,800 to be “highly concentrated” and that, in such markets, “it will be pre-
sumed that mergers producing an increase in the HHI of more than 100 points are likely to create
or enhance market power or facilitate its exercise” although this presumption may be overcome by
a consideration of the other factors outlined in the U.S. Guidelines, such as the likelihood of new
entry into the market (supra note 18, s. 1.51).
refer to the Guidelines, supra note 4, s. 4.2.1.
21For more information.on the precise numerical value of these thresholds, the reader should
22Hillsdown, supra note 2 at 318.
2Ibid.
24Ibid.
2It may be noted that in the congultation process leading up to the issuance of the Guidelines,
some competition counsel had suggested that this factor be specifically addressed.
19931
HILLSDOWN AND SOUTHAM
The Tribunal found that the volume of renderable material available in
Southern Ontario was declining and excess capacity in the industry could be
expected to increase over time, and this would promote competition between
renderers. The Tribunal also found that “it is fairly easy for renderers to increase
their capacity or when they are a multi-plant firm to shift the renderable material
among different plants to open up capacity at a given plant when it is needed”
and “[t]he excess capacity of firms both within and outside the relevant market
will provide a degree of competitive pressure on the merged firm and restrain
to a considerable extent its ability to raise prices.”26 The Tribunal concluded that
it was similarly feasible for slaughterhouses (which are major suppliers of ren-
derable material) to enter the rendering business, although entry by existing ren-
derers in adjacent regions was held to be the most probable source of entry in
response to a price. increase.27
The Tribunal characterized the barriers facing a de novo entrant in this
industry to be moderately high and commented that “[t]he regulatory and envi-
ronmental approvals which are required together with the construction time
involved … would probably mean that approximately 18 months would be
required to effect entry.” In addition, the “obtaining of sufficient volumes” and
the sunk costs required led the Tribunal to conclude that “given the state of this
market one would not expect de novo entry.”2
4.
Substantial Lessening of Competition
The Tribunal found that a lessening of competition clearly would result
from the merger, but said that it did not find it useful to apply “rigid numerical
,criteria” to determine whether the lessening of competition was likely to be
“substantial” for the purposes of the merger provisions of the Act. In this regard,
the Tribunal noted that a lessening of competition was occurring as a result of
changes in the market independent of the merger, such as the closing of a com-
petitor’s plant and the expropriation of Rothsay’s Toronto facility.29
The Tribunal also took note of Hillsdown’s argument that the Tribunal
should consider whether any market power acquired by the merged firm as a
result of the merger would likely be eliminated within five years, rather than the
two-year period that is specified in the Guidelines. Hillsdown argued that, given
the declining state of the market, within five years the red meat renderable mate-
rial available in Southern Ontario would support only one plant and some
smaller specialty fringe firms in the area.3″ The Tribunal said that, in light of
these considerations and the competitive discipline provided by fimns bordering
on the Southern Ontario market, it was not convinced, on a balance of proba-
bilities, that a substantial lessening of competition was likely to result from this
merger. It noted, however, that this was a “borderline” decision which was influ-
26 Hillsdown, supra note 2 at 320-21.
271bid. at 327-28.
281bid. at 327.
291bid. at 328-29.
3Ibid. at 330-31.
McGILL LAW JOURNAL
[Vol. 38
enced by dynamic changes occurring in the market.3′ At the same time, the Tri-
bunal did not explain the specific principles it applied to determine whether a
substantial lessening of competition arises in a merger case.
However, in applications under the merger provisions for orders which
have been consented to both by the Director and the persons against whom the
order was sought (i.e. “consent applications”), as well as applications under
other provisions of the Act, the Tribunal has been more willing to conment on
the criteria it has employed to assess whether a substantial lessening of compe-
tition is likely to occur. The Imperial Oil case, 2 which proceeded to the Tribu-
nal pursuant to an application for a consent order, involved the merger of Impe-
rial Oil Ltd. and Texaco Canada Inc., two major integrated oil companies. -The
three-member Tribunal focused its attention on the divestiture of a refinery, sev-
eral terminals and a large number of retail service stations in the Atlantic region,
which were required by the proposed consent order. Two of the three members
were of the view that “[w]here the pre-merger situation was highly uncompeti-
tive, any solution, short of restoring to the fullest extent possible the pre-merger
market situation, may have difficulty falling within the acceptable range” of
consent orders.3 While the majority did not expressly state its reservations in
terms of whether the merger, as modified by the proposed consent order, would
still result in a substantial lessening of competition, the decision could be inter-
preted as an indication that, in the context of a pre-merger market which is
highly uncompetitive, the threshold for establishing a substantial lessening of
competition should be very low.’
In contrast, Dr. Frank Roseman, the dissenting member of the Tribunal in
Imperial Oil on this issue, found that the proposed consent order would have
resulted in a situation in which there may be “some lessening of competition”
in the Atlantic region, “but not to an extent that can be considered substantial.”35
With regard to the effect of the merger on competition at the wholesale level of
the gasoline industry, Dr. Roseman focused on whether there would continue to
be an independent source of wholesale supply of gasoline in the Atlantic region
and concluded that foreign imports represented a wholesale supply alternative
to Texaco’s refinery. Dr. Roseman’s reasoning implied that the replacement of
the Texaco refinery with an import option did not give rise to a substantial les-
sening of competition.36
In the context of an application made against Chrysler Canada Ltd. under
the “refusal to deal” provisions in paragraph 75(1)(a) of the Act,37 the Tribunal
CT-89/3, #390 (Comp. Trib.) [hereinafter Imperial Oil].
31Ibid.
32Canada (Director of Investigation and Research) v. Imperial Oil Ltd. (26 January 1990),
331bid. at 16.
34See also the separate opinion of Marie-H61ne Sarrazin, ibid. at 145ff. For a discussion of this
consent order proceeding and its implications, see “Merger Resolution Process,” supra note 7 at
18-37.
351niperial Oil, ibid. at 129.
361bid, at 131-33.
37Canada (Director of Investigation and Research) v. Chrysler Canada Ltd. (1989), 27 C.P.R.
(3d) 1 (Comp. Trib.) [hereinafter Chrysler]. An appeal and cross-appeal to this decision were dis-
1993]
HILLSDOWN AND SOUTHAM
was required to determine whether a former customer of Chrysler Canada was
substantially affected in his automotive parts export business due to Chrysler’s
refusal to continue selling Chrysler automative parts to him and his inability to
obtain adequate supplies of such parts elsewhere in Canada on usual trade
terms. In this context, the Tribunal commented that “‘substantial’ should be
given its ordinary meaning, which means more than something just beyond de
minimis. While terms such as ‘important’ are acceptable synonyms, further clar-
ification can only be provided through evaluations of actual situations.”3
In the NutraSweet39 case, the Tribunal was required to determine whether
certain provisions in supply agreements entered into between The NutraSweet
Company and its customers were likely to have the effect of preventing or les-
sening competition substantially in a market for the purposes of the “abuse of
dominant position” provisions in section 79 of the Act. The inclusion of these
provisions in NutraSweet’s supply contracts was found to constitute a practice
of anti-competitive acts. For example, NutraSweet’s contracts required that the
customer buy all of its aspartame (an artificial sweetener) from NutraSweet, and
Canadian customers were provided with substantial discounts or allowances in
return for using NutraSweet’s trademark or logo on the customer’s products and
in its advertising. In deciding whether competition had been, or was likely to be,
lessened substantially, the Tribunal indicated that “[i]n essence, the question to
be decided is whether the anti-competitive acts engaged in by NSC [Nutra-
Sweet] preserve or add to NSC’s market power.”4
The Tribunal addressed this issue by examining the degree to which the
anti-competitive acts added to the barriers to entry in the Canadian market for
aspartame, thus preserving or adding to NutraSweet’s market power. The Tribu-
nal found that, as a result of NutraSweet’s supply contracts, any new supplier
would have to be able to meet all of a customer’s requirements, or at least all
of its requirements for a product line.4 In addition, the Tribunal concluded that
NutraSweet’s customers would be unable or unwilling to meet the costs of
removing NutraSweet’s logo from their products, or to risk the possible negative
impact on sales that might result from removal of the logo. Evidence before the
Tribunal indicated that NutraSweet’s contracts covered over ninety per cent of
the Canadian market for aspartame, leaving “little room for entry by a new sup-
plier.”42 The Tribunal concluded that NutraSweet’s practices “have had and are
having the effect of preventing or lessening competition substantially.”43
In the context of the “conspiracy” provisions of section 45 of the Act, the
Supreme Court of Canada has recently indicated in the Nova Scotia Pharmaceu-
missed ((1991), 38 C.RR. (3d) 25 (F.C.A.)), and leave to appeal to the Supreme Court of Canada
was refused ([1992] 1 S.C.R. vi).
3 Ibid. at 23.
39Canada (Director of Investigation and Research) v. NutraSweet Co. (1990), 32- C.P.R. (3d) 1
(Comp. Trib.) [hereinafter NutraSweet].
4Ibid. at 47.
4 11bi d. at 47-48.
421bid. at 48-49.
4 3Ibid. at 52.
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tical Society decision that market power is an essential element of the commis-
sion of an offence under paragraph 45(1)(c) and that “market power is the abil-
ity to behave relatively independently of the market.”‘ The Court added that
paragraph 45(1)(c) does not necessarily “presuppose” a degree of market power
as high as that contained in the abuse of dominant position provisions in section
79 of the Act, which apply only if one or more persons “substantially or com-
pletely control” a class or species of business in an area of Canada. The Court
stated that “[w]hat is more relevant is the capacity to behave independently of
the market, in a passive way. A moderate amount of market power is required
to achieve this … “4
While the Supreme Court indicated that “[t]he level of market power nec-
essary to trigger the application of [paragraph 45(1)(c)] is not necessarily the
same as for other sections of the Act,” it would be surprising if the degree of
market power required to constitute a substantial lessening of competition for
the purposes of the merger provisions of the Act were higher than the threshold
for unduly lessening competition pursuant to paragraph 45(1)(c). Although the
Supreme Court’s reference to behaving independently of the market “in a pas-
sive way”” is not entirely clear, it may reflect a different threshold for market
power than that applied by the Tribunal in the Hillsdown decision.
The Tribunal in Hillsdown did comment that “[m]arket power in the eco-
nomic sense is the ability to maintain prices above the competitive level for a
considerable period of time without such action being unprofitable,”47 an
approach generally consistent with the Director’s discussion of the anti-
competitive threshold in the Guidelines. However, in reaching its decision in
Hillsdown, the Tribunal did not refer to its discussions of either market power
or substantial lessening of competition in earlier cases. In fact, the Tribunal
stated that “what will constitute a likely ‘substantial’ lessening will depend on
the circumstances of each case.”4
With regard to the particular facts in the Hillsdown case, the Tribunal com-
mented that the expropriation of Rothsay’s Toronto facility had made it impos-
sible to return the parties to their pre-merger positions and accepted Hillsdown’s
argument that the declining market made it less attractive to construct a new
plant to handle materials now being processed in the Orenco facility. The Tri-
bunal was “not convinced that issuing an order which depends for its effective-
ness on one of the parties constructing additional facilities in a market where
there is already excess capacity and shrinking volumes would accomplish a pro-
competitive result.”49 These two factual considerations may have been the fun-
damental reasons why the Tribunal ultimately declined to issue a remedial order
in this case. As a .result, the decision may be of limited precedential value with
CP.R. (3d) 1 [hereinafter Nova Scotia Pharmaceutical Society cited to S.C.R.].
44R. v. Nova Scotia Pharmaceutical Society, [1992] 2 S.C.R. 606 at 653, 93 D.L.R. (4th) 36, 43
451bid. at 654.
461bid.
47Hillsdolw, supra note 2 at 314.
41bid. at 328.
491bid. at 345.
1993]
HILLSDOWN AND SOUTHAM
respect to the assessment of whether a lessening of competition is substantial in
future cases where similar circumstances are absent.
Given that the Tribunal did not choose to endorse the Director’s Guide-
lines, it would have been more helpful if the Tribunal had built on the founda-
tion of its earlier decisions, such as Imperial Oil and NutraSweet, to develop a
“common law” of principles which businesspersons and counsel could apply to
advise on future mergers.
5.
The Efficiency Exception
Although the efficiency exception in section 96 of the Act was apparently
not a factor in the Tribunal’s decision not to issue an order in this case, the Tri-
bunal nevertheless provided a detailed discussion of this issue and the particular
efficiencies claimed by Hillsdown.
Section 96 of the Act provides for an efficiency gains exception with
respect to a merger that is otherwise found to prevent or lessen competition sub-
.stantially. Pursuant to section 96, the Tribunal cannot make an order under the
merger provisions of the Act if it finds that (i) the gains in efficiency likely to
be brought about by the merger will be greater than, and will offset, the effects
of any prevention or lessening of competition that are likely to result from the
merger, (ii) the claimed efficiency gains would not likely be attained if the order
were made, and (iii) the efficiency gains would not be brought about by reason
only of a redistribution of income between two or more persons.50
The Tribunal determined that Hillsdown had the onus of proving the like-
lihood of efficiencies which satisfied section 96 and concluded that it had not
met this burden. The Tribunal stated that many of the claimed efficiencies had
5sS. 96 of the Act reads as follows:
96.(l) The Tribunal shall not make an order under section 92 if it finds that the merger
or proposed merger in respect of which the application is made has brought
about or is likely to bring about gains in efficiency that will be greater than, and
will offset, the effects of any prevention or lessening of competition that will
result or is likely to result from the merger or proposed merger and that the
gains in efficiency would not likely be attained if the order were made.
(2) In considering whether a merger or proposed merger is likely to bring about
the Tribunal shall consider
gains in efficiency described in subsection (1),
whether such gains will result in
(a) a significant increase in the real value of exports; or
(b) a significant substitution of domestic products for imported products.
(3) For the purposes of this section, the Tribunal shall not find that a merger or pro-
posed merger has brought about or is likely to bring about gains in efficiency
by reason only of a redistribution of income between two or more persons.
The purpose clause in s. 1.1 of the Act reads as follows.
1.1 The purpose of this Act is to maintain and encourage competition in Canada in
order to promote the efficiency and adaptability of the Canadian economy, in order
to expand opportunities for Canadian participation in world markets while at the
same time recognizing the role of foreign competition in Canada, in order to ensure
that small and medium-sized enterprises have an equitable opportunity to partici-
pate in the Canadian economy and in order to provide consumers with competitive
prices and product choices.
McGILL LAW JOURNAL
[Vol. 38
not been proven to arise out of the merger, but were instead more likely to have
resulted from the restructuring caused by the expropriation of Rothsay’s facil-
ity.” The Tribunal made it clear that efficiency gains which will be recognized
in the balancing process under section 96 do not have to be proved to arise
uniquely from the merger; rather, it will be sufficient if it can be shown that they
are likely to occur as a consequence of the merger. The Tribunal also questioned
whether it was appropriate to take into account efficiency gains which Hills-
down had claimed with respect to products, such as renderable grease, that were
not included in the relevant product market.52
Furthermore, the Tribunal stated that Hillsdown had based its analysis on
an incorrect legal interpretation of section 96.” Both the Director and Hillsdown
had argued that section 96 directs the Tribunal to balance the gains in efficiency
likely to arise from a merger against the misallocation of resources or loss to
society as a whole (the “deadweight loss”) resulting from the increased prices
which the merged firm is able to impose as a result of the merger (i.e. the “total
welfare” approach). 4 In this regard, the Tribunal referred to the following state-
ment which appears in the Guidelines:
55
Where a merger results in a price increase, it brings about both a neutral redistri-
bution effect and a negative resource allocation effect on the sum of producer and
consumer surplus (total surplus) within Canada. The efficiency gains described
above are balanced against the latter effect, i.e. the deadweight loss to the Cana-
dian economy.
The Tribunal suggested, however, that section 96 could be read to permit
it to take into account a broader range of effects: “Certainly, one interpretation
which is open on the basis of the wording of s. 96(1) is to weigh any alleged
efficiency gains against the degree of likelihood that detrimental effects (both
wealth transfers and allocative inefficiency) will arise from the substantial les-
sening of competition.”56
In this regard, the Tribunal also commented that:
If only allocative inefficiency or the deadweight loss to the Canadian economy
was intended by Parliament to be weighed in the balance then one would have
51Hillsdown, supra note 2 at 335-36.
52Ibid.. at 332.
531bid. at 335-36.
541bid. at 336. Paul S. Crampton explains the concept of the “deadweight loss” in terms of its
implications for the general welfare of society as a whole: “This loss is labelled ‘deadweight’
because it is something buyers lose that sellers do not gain. It is therefore a measure of the amount
by which society as a whole is worse off from having less than the competitive level of output of
goods and/or services.” (Mergers and the Competition Act (Toronto: Carswell, 1990) at 514 note
73).
55Guidelines, supra note 4, s. 5.5 (footnote omitted). This position was confirmed by the Senior
Deputy Director of Investigation and Research, George N. Addy, in a speech delivered shortly
before the release of the Hillsdown decision in which he indicated that the efficiency exception in
the Act evaluates whether the merger will “likely result in gains in efficiency that will compensate
for the reduction in competition …” and that “these gains do not have to be passed on to consum-
ers.” He described the Director’s analysis as a “total welfare” approach. (G.N. Addy, “International
Coordination of Competition Policies” (Paper presented to the HWWA –
Institut ftir Wirtschafts-
forschung – Hamburg, 9-11 October 1991) at 14 [unpublished]).
56Hillsdown, supra note 2 at 343.
1993]
HILLSDOWN AND SOUTHAM
thought that the section would have been drafted to specifically so provide. The
interpretation which both the Director and the respondents put on s. 96 requires
a reading down of the phrase “effects of substantial lessening of’ so that it does
not include the transfers from consumers to producers which will generally be the
largest effect of the substantial lessening.5 7
The Tribunal then reviewed the legislative history of the efficiency excep-
tion and noted that, in contrast to the legislation that was ultimately passed, ear-
lier proposed amendments had “made it clear that efficiency gains were to be
given precedence without any necessity to weigh them against the total effects
arising out of a substantial lessening of competition occurring by reason of the
merger. 5′ The Tribunal also considered “the various purposes served by com-
petition law in relation to efficiency gains,” as described in an English text by
Richard Whish,59 and made thefollowing remarks:
It is noted that one traditional purpose has been to protect the consumer from being
charged supra-competitive prices. While one can argue that this is insignificant
from the point of view of loss to the economy as a whole, Whish notes that there
is a powerful political argument for preventing such accretions of wealth at the
consumer’s expense. Another purpose which has traditionally been seen as served
by competition law is to encourage the dispersal of power and the distribution of
wealth … A third objective of competition law is seen as that of protecting the
small firm against more powerful rivals … These objectives can run counter to the
fourth ob’ective which is that of furthering the efficiency of the economy as a
whole …
Section 1.1 indicates that the purpose of the Act is
to maintain and encourage competition in Canada in order to promote the effi-
ciency and adaptability of the Canadian economy, … expand opportunities for
Canadian participation in world markets, … ensure that small and medium-sized
enterprises have an equitable opportunity to participate in the Canadian economy
and … provide consumers with competitive prices and product choices.
The Tribunal characterized the interpretation of section 96 adopted by the
Director and Hillsdown as requiring that it give precedence to the efficiency
objective in the purpose clause over the provision of “competitive prices” and
“equitable opportunit[ies]” for small and medium-sized enterprises. The Tribu-
nal commented that “there is nothing in the text of the purpose section which
indicates that such preference is to be given” and noted that, at the time the cur-
rent legislation was passed, the Minister responsible for the Act stated in debates
in the House of Commons that providing consumers with competitive prices
and product choices was the “ultimate objective” of the Act or, as the Tribunal
characterized it, the “overriding concern.”61
In its decision, the Tribunal indicated that “[t]o the extent that the effi-
ciency gains would be likely to lead to lower prices for consumers this would
likely be determinative.”’62 It is not clear whether the Tribunal thereby intended
57Ibid. at 337.
58Ibid.
59Ibid. at 338-39, citing R. Whish, Competition Law (London: Butterworths, 1985) at 12-15, 30.
60Ibid.
61Ibid. at 339-40, citing House of Commons Debates (7 April 1986) at 11927.
621bid. at 343.
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[Vol. 38
to suggest that such a price standard is the definitive test for section 96, or was
merely observing that in such a situation the efficiency gains would clearly out-
weigh any detrimental effects of the merger. However, it is. difficult to imagine
circumstances in which a merger which is likely to lead to lower prices could
be considered likely to lessen competition substantially in the first place, and if
there is no likely substantial lessening of competition, then resort to the effi-
ciency exception would not be necessary.
Finally, the Tribunal raised “as a question” whether wealth transfers are
always neutral and posed the following two examples: (i) a merger of two drug
companies where the relevant product is a life-saving drug, and (ii) a merger
resulting in a dominant firn which charges supra-competitive prices resulting
in all the wealth transfer leaving Canada.63 These examples suggest that the Tri-
bunal may be willing to consider a very broad range of possible negative effects
of a merger, in addition to the deadweight loss, which must be demonstrated to
be offset by efficiency gains before section 96 will apply. In fundamental terms,
the broader the range of negative effects considered by the Tribunal, the more.
difficult it will be for merging parties to satisfy the test in section 96 of the Act.
It has been suggested that the combined effect of the deadweight loss and
the neutral wealth transfer resulting from a price increase typically far exceeds
any efficiencies which may be brought about by a merger.’ The Direct6r has
also stated that he is not aware of any merger that would have generated effi-
ciencies sufficient to outweigh the sum of the likely wealth transfer and the
deadweight loss of the merger, and that he does not believe that such a merger
will likely present itself in the future.65 This is a most significant observation as
it implies that the approach suggested by the Tribunal in the Hillsdown case
would leave the Act’s efficiency exception as a largely academic possibility. It
may be argued that by including section 96 in the Act, Parliament did not intend
such a result and that it is therefore inappropriate to apply an overly narrow
reading which, for all practical purposes, renders the efficiency section ineffect-
ive. This is particularly the case at a time when Canadian industry is confronted
with real and pressing demands to become more efficient in order to maintain
a competitive position in increasingly global markets.
However, it remains to be seen how the positions taken or suggested by the
Tribunal in this decision, with regard to the efficiency exception, will be
resolved in future cases, and, in the interim, how Hillsdown will affect the
administrative practices of the Director. The Tribunal, for the most part, only
raised questions instead of offering an alternative approach to the interpretation
63Ibid.
64A.A. Fisher & R.H. Lande, “Efficiency Considerations in Merger Enforcement” (1983) 71
Calif. L. Rev. 1580 at 1644-45, where the authors observe that: “Giving any weight at all to redis-
tribution would greatly affect the welfare tradeoff, because in general the redistribution effect …
is many times greater than the deadweight loss …” The authors are of the opinion that in most
mergers “the redistribution effect is likely to be between approximately four and forty times the
deadweight loss.”
65These comments were made by the Director in a panel discussion during the conference on
Competition Law and Competitive Business Practices, organized by The Canadian Institute and
held in Toronto on June 8, 1992.
1993]
HILLSDOWN AND SOUTHAM
of the section 96 efficiency exception. At this point, the Director has described
the Tribunal’s discussion of the efficiency exception as obiter dictum and has
commented that “from an enforcement perspective, it is preferable not to depart
at this time from the approach adopted in the Merger Enforcement Guide-
lines.”‘
B. Southarn
On June 2, 1992, the Tribunal released its decision in respect of an appli-
cation by the Director pursuant to the merger provisions of the Act for orders
requiring Southam Inc. and various related companies to divest themselves of
two community newspapers and one real estate publication in the Lower Main-
land region of British Columbia (which includes Vancouver). While this paper
summarizes the Tribunal’s decision and discusses several aspects of the decision
which may be of general interest for future cases, it may be noted that the
266-page decision includes extensive and detailed discussions of much of the
evidence put before the Tribunal, including the testimony of individual wit-
nesses.67 In addition, the Tribunal frequently commented that more evidence
with respect to certain points would have been helpful. Shortly after the decision
was released, the Director noted, by way of “preliminary” comments on the
Southam case, that as a result of this decision:
The Bureau will need to study both the scope and type of information which we
gather during our review process, and the manner in which we gather it. For exam-
ple, do we need to undertake major pricing research and other analytical studies
during our merger review, which would, of course, extend the time and cost nec-
essary to resolve difficult merger cases? I believe it would be difficult to balance
such a requirement with the need for expeditious merger review.68
1.
The Acquisitions
In a series of acquisitions between January 1989 and February 1991, Sou-
tham, which already owned the two Vancouver-area daily newspapers, The Van-
couver Sun and The Province, acquired controlling interests in thirteen commu-
nity newspapers, a real estate advertising publication, three distribution
businesses and two printing businesses in the Vancouver area. Pursuant to an
application filed on November 29, 1990, the Director sought the divestiture of
two of the community newspapers, The Vancouver Courier and the North Shore
News, and the real estate publication, the Real Estate Weekly.69
66″Decisions and Developments,” supra note 14 at 5. For a more detailed discussion of the Tri-
bunal’s discussion of the efficiency exception in Hillsdown, and the issues that have been raised
in this regard, see P.S. Crampton, “The Efficiency Exception for Mergers: An Assessment of Early
Signals from the Competition Tribunal” (1993) 21 Can. Bus. L.J. 371.
67As the Tribunal decision indicates, the case took 40 days of hearings during which 50 wit-
nesses were called (Southam, supra note 3 at 165).
68″Decisions and Developments,” supra note 14 at 2-3.
69By way of further background, on March 6, 1989, the Director sent Southam a “no-action” let-
ter with respect to its January 27, 1989 acquisition of the North Shore News. The Director, how-
ever, later challenged not only that acquisition, but also the May 8, 1990 acquisition of the Real
Estate Weekly and the Courier (see Canada (Director of Investigation and Research) v. Southam
Inc. (1991), 38 C.P.R. (3d) 68 at 73 (Comp. Trib.)). In June 1990, the Director announced that he
McGILL LAW JOURNAL
[Vol. 38
The Courier was published twice a week in the City of Vancouver and the
North Shore News was published three times a week throughout the North Shore
area of the Lower Mainland. The Real Estate Weekly had fourteen “zoned” edi-
tions devoted exclusively to real estate advertising which were distributed to
individual homes in each zone, including one in the North Shore area.
The Director argued that Southam’s control of the Courier, the North Shore
News, the Real Estate Weekly and the two Vancouver dailies would likely permit
Southam to raise prices for newspaper advertising services in several markets
in the Vancouver area and would preclude a new entrant from starting a daily
newspaper in Vancouver by expanding the Courier or the North Shore News.”
(Both the Courier and the North Shore News were acknowledged to be superior
quality community newspapers.)
In contrast to the Hillsdown case, the Tribunal indicated in Southam that
the central issue was the determination of the relevant product market, and there
was “no difference between the parties with respect to the geographic mar-
kets.’
2.
The Community Newspapers
With regard to the community newspapers, the Director argued that the rel-
evant product market consisted of newspaper retail advertising services pro-
vided by the two daily papers and the community newspapers in the Lower
Mainland and parts thereof. Southam argued, firstly, that dailies and community
papers are not close substitutes and therefore should not be included in the same
product market, and, secondly, that if the product market were enlarged to
include both dailies and community newspapers, then it would also be appropri-
ate to include many other advertising media, such as television, radio and free-
standing flyers.72
Furthermore, in defining the market likely to be affected by the acquisi-
tions of the community papers as consisting of newspaper “retail” advertising
services, the Director distinguished between “retail” and “national” advertisers.
The Director’s notice of application described retail advertisers as “suppliers of
products who have one or more retail outlets in the primary circulation area of
the newspaper,” while national advertisers are “suppliers of products who may
not have a retail outlet in the primary circulation area of a newspaper and usu-
ally place their newspaper advertising through an advertising agency.”73 Gov-
had obtained undertakings from Southam to hold separate certain of its recently acquired publish-
ing operations. The Director subsequently applied for an interim hold separate order and the under-
takings were replaced by a consent interim order issued by the Tribunal on March 18, 1991. The
Director evidently concluded that the undertakings were not sufficient to preserve the acquired
assets separate and apart pending the Tribunal’s final determination of whether divestiture would
be appropriate. The interim consent order and the undertakings in the Southam case are discussed
in Competition Law of Canada, supra note 7 at 10.07[l][iv], 10.07[2].
7Southanm, supra note 3 at 178.
7 11bid.
721bid. at 178-79.
73Canada (Director of Investigation and Research) v. Southam Inc. (29 November 1990),
CT-90/l, #1(a) at 19-20 (Notice of Application) (Comp. Trib.).
1993]
HILLSDOWN AND SOUTHAM
ernments and non-profit organizations were excluded from the-market. In addi-
tion, based on evidence that some retailers, such as travel agents and automobile
dealers, were not charged the retail rate by daily papers, the Tribunal also
excluded those advertisers from the relevant market.74
a. Lessening of Competition
The Director alleged that Southam’s acquisitions of the community news-
papers would enable it to raise prices for advertising services in the Lower
Mainland because advertisers perceived the daily and community papers to be
effective substitutes, especially in light of the fact that community papers in dif-
ferent areas had formed groups that offered to sell advertising in some or all of
their papers in one “group buy” transaction. On the other hand, other media
were not effective substitutes for retailers who, the Director said, relied on
advertising containing price and product information for a number of items,
which cannot be effectively conveyed other than in newspapers and flyers.75
Counsel for the Director called representatives of a number of corporate
advertisers in the Vancouver area, some of whom had switched their advertising
from the daily papers to the community papers.76 However, the Tribunal found
that “[tlhe changes in newspaper use were not prompted by any discernible
change in pricesI77 and further commented that “[t]here is in fact no evidence
before the Tribunal that advertisers are highly sensitive to the relative prices of
the dailies and the community newspapers.78 In fact, the Tribunal noted that the
retail advertisers had switched from daily to community papers because of their
greater penetration or “coverage” of areas from which the advertisers drew their
customers, given that community papers were distributed to every home in their
respective communities. The Tribunal also found it unlikely that such advertis-
ers wofild switch back, even if the cost of advertising in the dailies went down.79
On the basis of the evidence before it, the Tribunal decided that
the community newspapers and the dailies are very weak substitutes: small
changes in relative prices are not likely to induce a significant shift by advertisers
from one type of newspaper to the other. Although community newspapers have
over time succeeded in attracting business from the dailies, this has been caused
more by changes in the conditions facing advertisers than by their responses to
changes in price.80
As a result, the Tribunal concluded that “[e]xamined solely as an unchanging
product at a given point in time, the dailies and the community newspapers are
too weak substitutes to be considered part of the same market.”‘”
74Southam, supra note 3 at 182.
75Ibid. at 224.
76Ibid. at 226.
771bid. at 238.
781bid. at 277.
791bid.
8Ibid. at 278.
8 Ibid.
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[Vol. 38
The Tribunal did, however, comment that Southam and the community
papers had been competing by modifying their product offerings. For a time,
Southam had offered a combination of flyer inserts to the Sun and free-standing
flyer delivery to households that did not subscribe to that newspaper. However,
the flyer service was terminated because it was not financially viable. 2 Another
measure taken by Southam in 1988 to compete with the North Shore News was
the inclusion of a “zoned” bi-weekly supplement to the Sun that was also dis-
tributed free to homes in the North Shore area which did not subscribe to the
Sun. This venture also lost money and was discontinued in April 1990, after
Southam acquired its initial forty-nine per cent interest in the North Shore
News,83 but before the Director filed the application with the Tribunal.
However, the Tribunal did not consider that Southam’s flyer delivery ser-
vice, the Sun’s publication of the North Shore supplement, nor Southam’s plans
to introduce other supplements, constituted evidence that dailies and community
papers were in the same market. Rather, the zoned supplement in the North
Shore was found to be a separate product that “did not add value to the Sun
since it was delivered to all households and not just to daily subscribers.”‘ Hav-
ing found that the Sutn’s zoned supplement and the community newspapers con-
stituted a relevant product market, the Tribunal noted that “[w]hile the dailies
clearly are potential entrants into the narrower geographic markets occupied by
individual community newspapers, the Director did not deal with this aspect of
the dailies’ relationship with the community newspapers at any point in his
pleadings or his final argument.”8”
Finally, the Tribunal concluded that the existence of groups of community
newspapers did not change the conclusion that daily and community newspa-
pers were not close substitutes. Neither the ability to make a “group buy” nor
the availability of higher discounts for using more community papers in the
group was found to have had a significant effect on competition between daily
and community papers. 6
Daily papers were found not to meet the needs of most flyer advertisers
because such advertisers often desire saturation of a complete community or
parts of a community. In any event, presumably, the Tribunal’s comments that
zoned supplements are a separate product from and do not add value to a daily
paper since they were delivered to all households and not just subscribers for
the daily paper, would apply equally to exclude the flyer service from the same
market as daily papers. The Tribunal found very little substitutability between
inserts in dailies and other forms of flyer delivery.87
With regard to other forms of media, the Tribunal concluded that the evi-
dence had not demonstrated that television and radio were close substitutes for
display advertising or flyers and noted that the witnesses appearing before the
82Ibid. at 286.
83Southam subsequently acquired the remaining 51% on February 1, 1991.
84Southan, supra note 3 at 274.
851bid. at 275.
86Ibid. at 278-79.
87Ibid. at 250.
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HILLSDOWN AND SOUTHAM
Tribunal did not refer to a single case of an advertiser switching between these
media because of a change in prices, as opposed to a change in advertising strat-
egy.88
b. Prevention of Competition
As noted above, the Director also alleged that Southam’s acquisitions had
prevented competition by precluding the possibility of another person acquiring
the Courier or the North Shore News and using one of those papers as a “spring-
board” to launch a new daily paper in Vancouver. This possibility was a con-
cern, and a reason for supporting Southam’s acquisitions, expressed in an inter-
nal memorandum prepared by a Southam executive. However, the Tribunal was
not convinced that this was a likely scenario because the Southam memorandum
was “virtually the only evidence in support of this allegation.” In addition, the
Director had referred to only one example of a community newspaper being
converted to a daily paper, and several recent daily paper entries in major cities
in Canada were not in any way connected with community newspapers. 9
Consequently, the Tribunal concluded that Southam’s acquisitions of the
community newspapers were not likely to prevent competition in the daily
newspaper market in any part of the Lower Mainland.90
c. Entry
Although apparently not necessary for its decision with regard to commu-
nity newspapers, the Tribunal discussed at length the conditions affecting entry
into community newspaper publishing. The Tribunal noted evidence to the
effect that it was “easy to get in” to this business –
the required capital was
“modest” – but “difficult to survive” because of “persistent economies of scale
in producing and distributing additional pages and more copies” and the need
to establish credibility with advertisers.91 Notwithstanding the existence of
many would-be entrants, economies of scale92 normally resulted in only one or
two community newspapers in communities within the Lower Mainland. In the
Tribunal’s view, the need to establish credibility required significant “sunk
costs” to create and maintain acceptable appearance, editorial content and
advertising content. The last requirement itself “depends on the newspaper’s
Is1bid. at 224.
891bid. at 287-88. Following the release of the Tribunal’s decision in Southam, Senior Deputy
Director George N. Addy contrasted this decision with the 1990 decision of the Tribunal in a con-
sent order proceeding under the merger provisions of the Act (Imperial Oil, supra note 32 at 90).
Mr. Addy indicated that, in that case, the Tribunal clearly placed great weight on the views of mar-
ket participants and criticized the reliance by the parties on the views of expert economists. He
commented that the Tribunal apparently de-emphasized the views of market participants in Sou-
tham. (These remarks were made in a panel discussion during the June 8, 1992 conference on Com-
petition Law and Competitive Business Practices (see supra note 65)).
90Southam, supra note 3 at 288.
91Ibid. at 279-80.
92The Tribunal made a point of stating that, contrary to the opinion of an expert witness called
by Southam, economies of scale qualify as entry barriers, at least if they are accompanied by sunk
costs (ibid. at 282).
McGILL LAW JOURNAL
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success in attracting advertising” and may take some time during which the
paper incurs significant losses.93
The prices paid by purchasers to acquire community newspapers in the
past were held to be evidence of significant barriers to entry. The Tribunal found
that Southam and Trinity Holdings Inc., another major operator of community
newspapers in the Lower Mainland, had made a practice of entering markets by
acquisition and had paid “premium” prices. 4 The Tribunal also commented that
the acquired companies consisted almost entirely of intangible assets and con-
cluded that an experienced community newspaper operator would not pay pre-
mium prices for goodwill that could, if entry were easy, quickly be eroded by
new competitors.95
The Tribunal concluded that:
There is no evidence that the fact that it is easy to start a community newspaper
has a disciplining effect on the prices charged. However, it is very likely that dis-
cipline is exercised on the conduct of incumbents with respect to appearance and
editorial content. An ambitious entrant can quickly show that he or she can put out
a more attractive and interesting product if the incumbent has let things slide.96
However, it is difficult to determine the significance of this finding given that
the Tribunal concluded that daily newspapers and community newspapers were
not in the same relevant product market.
d. Market Power
As was noted above, the Tribunal in Southam adopted the same approach
to market definition as it did in Hillsdown, and stated.that relevant markets are
ones in which the merging firms acting alone or in concert with other firms
could likely exercise market power. However, in Southam, the Tribunal further
commented that:
Market power is the ability of a firm or group of firms to maintain prices above
the competitive level. Market power may also be exercised by offering, for exam-
ple, poor service or quality or by restricting choice. When used in a general con-
text, “price” is thus a shorthand for all aspects of firms’ actions that bear on the
interest of buyers.97
The Tribunal later indicated that the Director’s arguments in this case had
focused on the price effects of the merger and had not emphasized other possi-
ble negative effects, such as effects on product choices.9″ This emphasis was
consistent with the Director’s Guidelines which, although acknowledging that
market power refers to the ability of firms to profitably influence quality, vari-
ety, service, advertising, innovation and other dimensions of competition as well
931bid. at 282-83.
94Ibid. at 280.
95lbid. In addition, the Tribunal suggested that an apparent lack of due diligence by Southam in
assessing the business of the North Shore News before its acquisition evidenced the “strategic
value” of that acquisition (ibid. at 206).
961bit. at 284.
97Ibid. at 177.
9 Ibid. at 270, 286.
1993]
HILLSDOWN AND SOUTHAM
as price, state that “the focus is normally on the price dimension of competi-
tion.”99 These comments by the Tribunal may encourage the Director to exam-
ine more closely the non-price dimensions of competition in future mergers.
3.
Real Estate Advertising
The Director alleged that Southam’s acquisition of the Real Estate Weekly
would likely prevent or lessen competition substantially in the market for print
real estate advertising services (a) in the Lower Mainland and (b) on the North
Shore, because the Sun competed actively for new home advertising with the
Real Estate Weekly. His position was that if new home advertising was a distinct
market, then the acquisition substantially lessened competition, but if new home
and resale home advertising were both in the same market, then competition
would have been prevented because Southam was the most likely entrant into
the resale advertising portion of a combined market and the merger would have
foreclosed that possibility.” (The real estate supplement of the North Shore
News also competed with the North Shore edition of the Real Estate Weekly and
the Tribunal commented that there was “no question that these two publications
are in the same market.”‘O’ However, the Tribunal’s analysis focused on the
extent of competition between the Sun and the Real Estate Weekly.)
The Tribunal found that advertising homes for resale was a different mar-
ket from advertising new homes.” The Tribunal commented that advertising
for resale serves the dual purpose of selling the particular properties in the
advertisements and obtaining additional listings for the agent. Agents placing
the advertisements generally want their pictures (together with a picture of the
home) in the advertisement and such an advertisement was affordable in the
Real Estate Weekly, but prohibitively expensive in the Sun. In addition, the evi-
dence indicated that most purchasers of resale homes in the North Shore already
lived in the North Shore area and thus the North Shore edition of the Real Estate
Weekly was a more efficient advertising vehicle than the Sun for resale homes
in that area. Accordingly, the Tribunal concluded that, with respect to older
homes, the Sun and the Real Estate Weekly were not close substitutes for print
real estate advertising. 3
However, the Tribunal found that new homes are generally located in very
large developments and the sheer size of the developments means that develop-
ers must draw from a large area in order to sell all the units. Developers were
also found not to be concerned about obtaining new listings or having their pic-
tures appear prominently in advertisements. On the basis of these observations,
the Tribunal concluded that the Sun and the zoned editions of the Real Estate
Weekly were the closest available substitutes for the advertising of new homes
in the Lower Mainland.”
9 9Guidelines, supra note 4, s. 2.1.
‘0’Southam, supra note 3 at 288.
1O’Ibid. at 289.
“’21bid. at 298.
‘0 31bid, at 296.
‘4Ibid. at 299.
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The Tribunal reached this conclusion notwithstanding (a) a significant dif-
ference in the cost of what the Tribunal appeared to characterize as equivalent
advertisements in the Sun and zoned editions of the Real Estate Weekly ($1,642
in the Real Estate Weekly and $3,700 in the Sun)”0 5 and (b) the lack of any
“direct” evidence of new home advertisers switching between the Sun and the
Real Estate Weekly in response to price changes. In this regard, the Tribunal
commented that:
They [the Sun and the Real Estate Weekly] are probably as close substitutes as one
can expect such differentiated products to be. Even though there is no direct evi-
dence regarding the likely effects of price changes on expenditures in either vehi-
cle, the indirect evidence favours this conclusion. Advertising of developments is
directed at a wide geographic audience and can effectively be placed in the Sun,
which clearly provides broad coverage, or the Real Estate Weekly, by using a com-
bination of zones to achieve the same result.1 6
Having established that the Sun and the Real Estate Weekly were the clos-
est available substitutes, the Tribunal commented that the probability of Sou-
tham’s acquisitions having the effect of substantially lessening or preventing
competition depended “in large measure on the relative difficulty of entry into
the real estate newspaper market.”‘”
The Tribunal recognized that a new real estate publication, although not
containing significant editorial content, must still establish credibility with
advertisers and attract numerous individual real estate agents. The Tribunal
reviewed several failed attempts to introduce new real estate advertising publi-
cations in the Vancouver area and commented that Southam paid “an apprecia-
ble amount for the goodwill of the Real Estate Weekly,” which, in the Tribunal’s
view, indicated that entry was “not easy.”‘0 8
In light of these findings, the Tribunal briefly stated its conclusions about
the effects of Southam’s acquisitions on new home advertising in the North
Shore area as follows:
On the North Shore the acquisitions have resulted in the elimination of all existing
competition … There are no other acceptable substitutes for print real estate adver-
tising; whether one focuses on the North Shore News or the Real Estate Weekly,
an effective competitor has been eliminated, and there is no effective competition
remaining … In the light of the fact that all the other relevant elements clearly
point to a substantial lessening of competition, the question is whether entry bar-
riers are sufficiently low that actual entry or the threat of entry can be relied on
to conclude that the acquisitions have not lessened competition substantially and
are not likely to do so.
The mixed picture of entry conditions already reviewed hardly supports such a
conclusion … For all these reasons, there is likely to be a substantial lessening of
competition in the print real estate advertising market on the North Shore. Ao
It appears that the Tribunal considered that it did not have sufficient evi-
dence to reach a finding that there was a substantial lessening of competition in
105lbid. at 298.
1061bid. at 299.
107 bid.
101bid. at 305.
091bid. at 306.
19931
HILLSDOWN AND SOUTHAM
any area other than the North Shore.”0 To the date of writing, this is the only
finding the Tribunal has made of a substantial lessening of competition in a con-
tested merger case.
4.
Remedial Order
In its decision of June 2, 1992, the Tribunal did not issue a remedial order,
but indicated that a special hearing would be convened to consider possible
remedies.”‘ In this regard, the Tribunal noted that the North Shore edition of the
Real Estate Weekly and the real estate section of the North Shore News each
accounted for only ten to fifteen per cent of their respective revenues”1 and that
“[t]he challenge will be to devise an effective remedy that does not harm the
interests of the respondents in a disproportionate way.”..3
Pursuant to paragraph 92(1)(e) of the Act, the Tribunal is empowered to
dissolve a merger, order disposition of any assets or shares or, with the consent
of the person against whom the order is made, order any other action. The com-
ment by the Tribunal that it desired a remedy that did not disproportionately
harm the respondents suggested that it might have been satisfied to make an
order short of divestiture, particularly if Southam could have demonstrated that
new home advertising represents a relatively small proportion of the real estate
advertisements carried in the Real Estate Weekly. However, on December 10,
1992, the Tribunal, following a hearing, indicated that it would issue an order
requiring Southam to sell either the North Shore News or the Real Estate
Weekly. In so doing, the Tribunal found in favour of the Director and proceeded
to issue a more traditional divestiture order, as opposed to any of the other more
behaviourial types of orders which had been the subject of some speculation fol-
lowing the Tribunal’s comment in its decision of June 2, 1992.”‘
In its reasons issued on December 10, 1992, the Tribunal distinguished its
statements made in earlier cases on the criterion for the issuance of a consent
order. In the Gemini case, the Tribunal expressed the test to be “whether the
merger, as conditioned by the terms of the consent order, results in a situation
where the substantial lessening of competition, which it is presumed will arise
from the merger, has, in all likelihood, been eliminated.””.5 In the Southam case,
“0See e.g. ibid. at 295-96.
.. Ibid. at 307.
“2The Director grouped both real estate advertisements for resale homes and new homes in his
allegations, and there was no evidence before the Tribunal that advertising of new homes formed
even a substantial part of the market for print real estate advertising services. In the Tribunal’s
opinion, the evidence suggested that resale advertising probably accounted for a larger share of the
market (ibid. at 299).
113lbid. at 307.
” 4Canada (Director of Investigation and Research) v. Southam Inc. (1992), 47 C.P.R. (3d) 240
(Comp. Trib.) [hereinafter Southam (Remedy)]. The actual order was issued on March 8, 1993:
Canada (Director of Investigation and Research) v. Southam Inc. (1993), 48 C.P.R. (3d) 224
(Comp. Trib.).
5 Canada (Director of Investigation and Research) v. Air Canada (1989), 27 C.P.R. (3d) 476
at 514 (Consent Order) (Comp. Trib.) (better known as the Gemini case, for the common computer
reservation system which resulted from the merger of the systems respectively operated by Air
1
McGILL LAW JOURNAL
[Vol. 38
the Tribunal stated that: “[i]n contested proceedings, the appropriate test is
whether the proposed remedy will restore the pre-merger competitive situation
in the market in question.””‘ 6 It further commented that:
In summary, the Tribunal concludes that its paranfount goal when fashioning rem-
edies in contested proceedings under section 92 is to restore the pre-merger com-
petitive situation in the affected market. As long as the remedy does not seek to
go beyond the pre-merger situation, it cannot be considered punitive. This is true
even when parts of the merged businesses outside the market are affected. Consid-
erations of harm or inconvenience to the respondents or third parties or other fac-
tors are not relevant in assessing the effectiveness of a proposed remedy. Once the
Tribunal has concluded that the result of a merger is a substantial lessening of
competition in a market or a likely substantial lessening of competition in a mar-
ket, the remedy to be ordered must restore the pre-merger competitive situation in
the market. In appropriate circumstances, the Tribunal may, of course, be per-
suaded to choose to do nothing.1 7
Southam had argued that the appropriate remedy would be an order requir-
ing divestiture of only the real estate supplement of the North Shore News
(known as “HOMES”) and indicated that it would offer potential buyers the
opportunity to obtain certain rights from Southam, including the right to contin-
ued distribution as a supplement to the North Shore News.”‘
The Tribunal agreed with the Director’s submission that section 92 of the
Act did not permit it to order terms such as those proposed by Southam without
the consent of both the Director and Southam, and, in this case, the Director did
not so consent.” 9 Nevertheless, the Tribunal indicated that it “must … take into
account the possibility that the kinds of arrangements outlined in [Southam’s
proposal] would be entered into if the Tribunal ordered the sale of the supple-
ment.” 20
However, the Tribunal further stated that “a remedy that depends, for its
possible success, on supply contracts between the only competitors in the mar-
ket is somewhat suspect” and it did not believe that a divestiture of the HOMES
supplement dependent on such supply contrafts would “effectively restore com-
petition” in the real estate advertising market in the North Shore. The Tribunal
commented that:
the fact that … [the HOMES supplement] no longer would have the sales and cost
advantages of association with the North Shore News is of critical importance. The
evidence points away from HOMES being a vigorous competitor. There is no mar-
Canada and Canadian Pacific Airlines Ltd.). See also the Tribunal’s comments on the appropriate
test to apply in considering proposed consent orders (Imperial Oil, supra note 32 at 14-17; Canada
(Director of Investigation and Research) v. Palm Dairies Ltd. (1986), 12 C.P.R. (3d) 540 at 547-48
(Comp. Trib.)).
’16Southam (Remedy), supra note 114 at 245.
“”Ibid. at 246. The Tribunal expressly disagreed with the Director’s position that it did not have
the discretion to “leave the situation as it found it” and “not make any order” once it had concluded
that a substantial lessening of competition was likely to occur as a result of the merger (ibid. at
12-13).
“‘lbid. at 242.
119Ibid. at 243.
12bid. at 251.
1993]
HILLSDOWN AND SOUTHAM
12 1
ket anywhere in the Lower Mainland in which there are two stand-alone real estate
publications.
Accordingly, the Tribunal concluded that Southam must sell, at its option,
either the North Shore News or the Real Estate Weekly, and not just the HOMES
supplement of the North Shore News.”‘
II. Implications of the Decisions
Both the Hillsdown and the Southam decisions clearly demonstrate that the
Competition Tribunal is prepared to adopt an analytical approach which some-
what differs from that set out in the Director’s Guidelines. In particular, the Tri-
bunal has adopted a case-by-case approach to the analysis of relevant markets
and the time frame in which the effects of a merger should be assessed, rather
than the more specific analytical framework proposed by the Guidelines.” As
stated by the Director following the issuance of the Southam decision, the Tri-
bunal appears to have made “differing assumptions as to what constitutes a sub-
stantial lessening of competition. The Tribunal did not offer any guidance in
respect of the magnitude at which a price increase would be deemed to be sub-
stantial.” 24 In many cases, theTribunal’s approach in this regard may be helpful
to parties proposing a merger that raises issues under the merger provisions of
the Act, given its greater potential latitude and flexibility. This choice involves
an inevitable trade-off in that less certainty also means less guidance for busi-
ness planners acting on the advice of legal counsel. Moreover, if the Tribunal
intends to take a case-by-case approach, then it would be of more assistance if
principles established in the earlier Tribunal decisions, with respect to concepts
such as substantial lessening of competition, were more expressly applied in
subsequent Tribunal decisions.
The Tribunal’s rejection of the Director’s “total welfare” approach and the
other questions raised by the Tribunal in Hillsdown with regard to the efficiency
gains exception have created considerable uncertainty about the application of
section 96 of the Act and may have significantly limited the circumstances in
which the efficiency gains exception will be available. The Tribunal’s comment
that the interpretation of the term “effects” in section 96 proposed by both the
Director and the respondents would give one clause in the purpose section of
the Act precedence over another is particularly troublesome. Section 96 itself
represents an express indication that efficiency gains are to be weighed in a
merger assessment, and the Tribunal’s suggested interpretation equally gives
one clause precedence over another in section 1.1 of the Act, insofar as it effec-
tively negates the ability of parties to make any realistic case for the application
of the efficiency gains exception. However, the Tribunal’s comments in this
121Ibid. at 252.
12Ibid. at 253. Southam’s counsel has advised the authors that its client intends to appeal this
decision.
123However, in Hillsdown, the Tribunal stated, without further explanation, that while it was not
prepared to apply “rigid numerical criteria” for assessing the degree of lessening of competition
that would be considered substantial, such criteria “may be useful for enforcement purposes”
(Hillsdown, supra note 2 at 329).
124″Decisions and Developments,” supra note 14 at 3.
REVUE DE DROIT DE McGILL
[Vol. 38
regard were obiter dicta and the Director has indicated that he will not be
changing the enforcement approach of the Bureau at this time. It remains to be
seen whether this issue will materialize into a concrete obstacle to businesses in
Canada making any effective use of the efficiency exception.
The Southam decision may also indicate a receptiveness on the part of the
Tribunal to giving more weight to the non-price elements of competition in
assessing the effects of a merger than is suggested by the Guidelines. As a
result, it may be that future merger assessments by the Bureau will examine
more closely the likely effects of a merger or proposed merger on service, prod-
uct quality, selection and other non-price aspects of competition. Furthermore,
as noted above, the Tribunal’s indication that it would have preferred more
detailed evidence with regard to a number of points may lead to longer and
more detailed investigations of proposed mergers by the Bureau. That could
prove even more onerous not only for the Bureau, but also for merging parties,
especially in time- or cost-sensitive situations.
The Tribunal’s discussion in Hillsdown of the need for its orders to be
effective, and its disinclination to issue an order which would be effective only
if one of the parties chose to construct additional facilities, may be relevant
beyond the particular facts of that case, particularly as many Canadian manufac-
turing facilities become integrated with affiliated U.S. facilities. However, it is
not yet clear whether the Tribunal’s decision on the appropriate remedy in Sou-
tham was intended to retreat from this position, insofar as the Tribunal stated
in that case that “consideration of harm or inconvenience” is not relevant to the
effectiveness of a proposed remedy and the Tribunal’s order should restore the
pre-merger competitive situation in the market.”
In Hillsdown, the Tribunal
focused to some extent on the expropriation of the Rothsay facility in Toronto;
however, that situation is not materially different from a situation where a plant
has been shut down and dismantled prior to the order. To its credit, the Tribunal
recognized the practical difficulties of making a remedial order on the facts of
the Hillsdown case, but it remains to be seen whether it intended to establish a
firm precedent which would preclude orders requiring, as a practical matter, the
construction or purchase of a new facility.’26
The Tribunal may very well be called upon to address similar issues in the
context of transborder mergers. There may be many situations in which a Cana-
dian subsidiary could not survive as a stand-alone operation and thus divestiture
of only the Canadian facility would not result in the entry of an additional effec-
tive competitor. In these circumstances, the Tribunal may be left with a choice
between making an order with extraterritorial scope, and not making any at all,
because an order restricted to Canadian assets would not be effective. At the
same time, the Tribunal will have to consider whether such an extraterritorial
order could disproportionately harm the parties to the merger’27
1
25Southam (Remedy), supra note 114 at 246.
126 1t should be noted that the Tribunal has the statutory authority under paragraph 92(e) of the
Act to require only dissolution or divestiture (unless the parties consent to other terms).
127For a more detailed discussion of extraterritorial enforcement of Canadian competition law,
1993]
HILLSDOWN AND SOUTHAM
It is noteworthy that both Hillsdown and Southam involved transactions
which had closed before they were challenged by the Director. Parties to a pro-
posed merger, particularly a multinational merger, may be understandably reluc-
tant to delay a transaction pending a hearing before the Tribunal. They may
decide to take the risk of integrating the businesses rather than agree to an under-
taking or hold separate order. In these circumstances, the Director’s staff may
become more vigilant and seek hold separate commitments at earlier stages than
has generally been the case since 1986 in respect of both notifiable and non-
notifiable transactions which raise serious primafacie issues under the Act. How-
ever, in a non-notifiable merger, which is not likely to come to the Bureau’s atten-
tion before closing, less use may be made of the open-door voluntary compliance
approach by parties who otherwise would have contacted the Bureau. The end
result may mean a more litigious approach to the merger review process from the
outset, which is more akin to the current practice in the United States.
The decisions in Hillsdown and Southam are likely to be regarded as
defeats for the Director, and may lead to some expectations of an increased will-
ingness by parties to a merger to close a transaction (in the absence of an interim
injunction) and proceed to a hearing before the Tribunal rather than provide
undertakings or restructure a transaction to address concerns expressed by the
Director. However, it remains to be seen whether these decisions will affect the
Director’s enforcement policy. In fact, by showing that parties appearing before
the Tribunal may face a lengthy hearing, in addition to extensive pre-hearing
discovery proceedings, 2′ the Hillsdown and Southam cases may discourage pri-
vate parties from pursuing a case before the Tribunal. The Southam case, in par-
ticular, demonstrates that a contested merger proceeding before the Tribunal
may give rise to extensive and time-consuming litigious steps comparable to
those in any other contested commercial case.’29
More generally, the failure of the Tribunal to expressly endorse, or in the
Southam case even refer to, the Director’s Guidelines may very well diminish
the predictability of the enforcement of the merger provisions of the Act and
leave businesspersons with less certainty in their merger planning. 30
A number of additional implications arise from the Hillsdown and Southam
decisions. Some of these go beyond the issues which were specifically
see C.S. Goldman, Q.C., G.P. Cornish & R.F.D. Corley, “International Mergers and the Canadian
Competition Act” [1992] Fordham Corp. L. Instit. 217.
1 8Consent order proceedings before the Tribunal have similarly been characterized by signifi-
cant delays. For a detailed discussion of the Canadian experience with consent order proceedings
under the Act, see “Merger Resolution Process,” supra note 7 at 18-37.
129Attached as Appendices 1 and 2 to this paper are summaries of the proceedings in the Sou-
tham and Hillsdown cases, prepared by the authors on the basis of original documents obtained
from the Competition Tribunal.
1301n contrast, Steven A. Newborn, Director for Litigation, Bureau of Competition of the United
States Federal Trade Commission, and Virginia L. Snider, Director for Special Projects, Bureau of
Competition of the United States Federal Trade Commission, have indicated in a recent paper that,
since the issuance of the 1982 U.S. Guidelines, “[a]ll but a handful” of the opinions issued by
courts with respect to the preliminary injunctions sought by the government have mentioned the
Guidelines and over 75 cases have cited the Guidelines (“The Growing Judicial Acceptance of the
Merger Guidelines” (1992) 60 Antitrust L.J. 849 at 851).
McGILL LAW JOURNAL
[Vol. 38
addressed in those cases, but are currently the focus of some discussion among
competition law counsel in Canada. Notably, the following general questions
emerge from these decisions:
1. Does the fact that the Director has succeeded in the first two abuse of dom-
inance cases (NutraSweet’ and Laidlaw131), and the first two refusal to deal
cases (Chrysler’33 and Xerox”34), but, for the most part, failed to obtain the
orders that he sought in the first two merger cases, indicate that the Tribunal
will adopt a different approach or apply different standards in relation to
merger cases than it considers appropriate for an abuse of dominance or
refusal to deal case?
2. What are the implications of the ruling in the Nova Scotia Pharmaceutical
Society’35 case in relation to the meaning of the term “unduly,” specifically
in respect of the Supreme Court of Canada’s comments on “market power”
as compared to the Tribunal’s discussion of “market power” in Southam
and its other decisions referred to above?
3. Why has the Tribunal not referred more extensively to the Director’s
Guidelines, as American courts have done in relation to the U.S. Depart-
ment of Justice Guidelines, given that the Director’s Guidelines serve as a
reference point for business planners and their counsel?
4. To what extent is the Tribunal prepared to attach weight to the views of
third party participants or to evidence of the parties pertaining to the mar-
ket, given its apparent willingness to accept third party views in the Impe-
rial Oil case, in contrast to its apparent unwillingness in the Southam deci-
sion to rely on certain market evidence (including Southam’s internal
memoranda)?
5. Ought there to be a minimum size for a merger (in dollar terms) before the
Bureau applies its limited resources to an investigation? Was the scope of
the evidence apparently desired by the Tribunal in Southam disproportion-
ate to the series of relatively small acquisitions involved in that case?
6. Will the Director be making greater use of section 11 orders such as the one
obtained in the Southam case, as he has suggested in a recent paper? 136
1
31Supra note 39.
132Supra note 15.
133Supra note 37.
134Canada (Director of Investigation and Research) v. Xerox Canada Inc. (1990), 33 C.P.R. (3d)
83 (Comp. Trib.). In 1988, Xerox Canada decided to refuse to sell its copier parts, manuals and
related resources to Canadian purchasers (except end users), so as to eliminate competition in the
parts and servicing markets for its copiers. In this case, the Director sought an order requiring
Xerox to accept Exdos, a company specialized in second-hand Xerox copiers, as a customer for
its copier parts and other equipment. The Tribunal held in favour of the Director and issued the
order. (Note that Xerox appealed the decision, but has not filed any documents in that case for over
two years.)
135Supra note 44.
136 “Decisions and Developments,” supra note 14 at 16. Pursuant to s. 11 oftheAct, the Director
may apply to the Federal Court for an order requiring a person to (i) be examined on oath or solemn
affirmation, (ii) produce a record or any other thing or (iii) provide a written return under oath or
solemn affirmation showing in detail such information as the order requires.
1993]
HILLSDOWN AND SOUTHAM
7. Should the Director continue to accept pre-closing or post-closing resolu-
tions, or should he be bringing more merger cases before the Tribunal,
given that without further opportunity to address these current issues, there
will continue to be significant uncertainty as to the manner in which the Tri-
bunal will approach a particular merger proceeding on either a consent or
contested basis?
8. Would more merger cases proceed to the Tribunal for resolution if the par-
ties were facing a much shorter administrative process, without the possi-
bility of extensive pre-trial proceedings and with limitations on the scope
and length of any hearing?
9. Why has the Tribunal adopted different standards for issuing consent orders
and orders which proceed to it under the merger provisions on a contested
basis, and is it appropriate that an order in a contested proceeding should
“restore the pre-merger competitive situation” in the relevant market, rather
than merely eliminate the “substantial lessening of competition”?
Since it is not anticipated that the Tribunal will be releasing any further
decisions in a contested merger case in the near future, the Hillsdown and Sott-
tham decisions can be expected to influence expectations for merger enforce-
ment in relation to contested proceedings before the Tribunal for some time to
come.’37 Their impact will be particularly important with regard to market def-
inition, the standard for. a substantial lessening of competition, the efficiency
exception and the criteria for the issuance of a remedial order in a contested
merger case.
13 7The only other outstanding application by the Director under the merger provisions of the Act,
which relates to the meat rendering business in Quebec, was filed in 1987 and has been delayed
by procedural and constitutional challenges since that time (see Canada (A.G.) v. Alex Couture Inc.
(6 August 1987), Quebec City 200-05-001361-877 (Motion to stay proceedings before Competi-
tion Tribunal) (Sup. CL), aff’d [1987] RJ.Q. 1971, 18 C.P.R. (3d) 382 (C.A.); [1990] R.J.Q. 2668,
69 D.L.R. (4th) 635, 30 C.P.R. (3d) 486 (Merits) (Sup. Ct.), rev’d [1991] R.J.Q. 2534, 83 D.L.R.
(4th) 577, 38 C.P.R. (3d) 293 (C.A.)). As well, there are currently no consent order applications
before the Tribunal other than an application to vary a previously issued order in connection with
the merger of the computer reservations systems of Air Canada and PWA Corporation (the “Gem-
ini” system) (Canada (Director of Investigation and Research) v. Air Canada & PWA Corp.
(1992), 46 C.P.R. (3d) 184 (Application for Intervener Status); (22 April 1993), CT-88/1, #800(a)
(Reasons and Order) (Comp. Trib.)).
REVUE DE DROIT DE McGILL
[Vol. 38
APPENDIX 1
DIRECTOR OF INVESTIGATION AND RESEARCH
HILLSDOWN HOLDINGS LTD.
V.
Date qf Order/Document*
1. February 15, 1991
2. February 21, 1991
3. March 18, 1991
4. March 21, 1991
5. April 2, 1991
6. May 23, 1991
7.
8.
June 5, 1991
July 11, 1991
9.
July 24, 1991
10.
July 26, 1991
11. August 27, 1991
12. August 29, 1991
October 10, 1991
March 9, 1992
March 13, 1992
Description
Notice of Application of Director and Statement
of Grounds and Material Facts.
Consent Interim Order
Response of Hillsdown Holdings et al.
Order regarding scheduling of pre-hearing proce-
dures and hearing.
Reply by Director.
Order regarding Confidentiality with attached
Confidentiality Agreement.
Order regarding Examination on Discovery.
Order regarding Scope of Discovery to be Pro-
vided by the Director of Investigation and Re-
search.
Direction regarding Pre-Hearing Conference, July
25, 1991.
Order regarding Examination for Discovery and
Related Matters.
Order Extending Dates for Filing of Supplemen-
tal Expert Affidavits.
Order Extending the Date for Serving and Filing
Expert Reply Affidavits.
Federal Court of Appeal Reasons for Judgment.
Reasons and Order of the Competition Tribunal.
Correction to Reasons and Order of the Competi-
tion Tribunal.
* This is a short-list of only the most substantNe Orders and other documents. There have
been many more documents filed with the Competition Tribunal in this matter.
(Source: Competition Tribunal documents)
1993]
HILLSDOWN AND SOUTHAM
APPENDIX 2
DIRECTOR OF INVESTIGATION AND RESEARCH
V.
SOUTHAM INC.
Date of Order!Document*
1. November 29, 1990
2. November 29, 1990
3. February 13, 1991
4. February 27, 1991
5. March 18, 1991
6. March 22, 1991
7. March 22, 1991
8. April 24, 1991
9. April 29, 1991
10. May 22, 1991
11. June 20, 1991
12. June 27, 1991
13. July 4, 1991
July 8, 1991
July 9, 1991
July 10, 1991
July 16, 1991
July 17, 1991
19. August 9, 1991
Description
Order regarding Confidentiality.
Notice of Application of Director and Statement
of Grounds and Material Facts.
Federal Court of Canada Trial Division, Order
and Reasons for Order Dismissing Application.
Order regarding Scheduling of Pre- Hearing Pro-
cedures and Hearing.
Consent Interim Order.
Correction to Consent Interim Order dated March
18, 1991.
Reasons for Consent Interim Order dated March
18, 1991.
Direction regarding Pre-Hearing Conference.
Order regarding Confidentiality with attached
Confidentiality Agreement.
Appeal of refusal of Stay –
Appeal.
Reasons and Order regarding use of Material
Obtained on Discovery and Criteria for Issuing
Confidentiality (Protective) Orders.
Order regarding Scope of Discovery to be pro-
vided by the Applicant.
Order granting leave to amend the Notice of
Application.
Amended Notice of Application.
Direction regarding Pre-Hearing Conference.
Order regarding Examinations for Discovery.
Order regarding Disclosure of Summaries.
Order regarding Disclosure of Summaries: Cor-
rection to Reasons.
Order Denying Request for Leave to Intervene.
Federal Court of
McGILL LAW JOURNAL
[Vol. 38
20. August 13, 1991
21. August 29, 1991
22. August 30, 1991
23.
June 2, 1992
24. Undated
25. November 4, 1992
26. November 6, 1992
27. November 24, 1992
28. December 10, 1992
29. March 8, 1993
Order Extending Filing Date: Joint Book of Doc-
uments, Agreed Statement of Facts, Memoranda
of Law and Authorities.
Reasons and Order regarding Documents to be
covered by a Confidentiality (Protective) Order.
Order Extending Filing Date for the Joint Book of
Documents.
Reasons and Order that parties re-attend to submit
evidence and argument on the appropriate remedy
re the print real estate advertising market on the
North Shor6.
Outline of Respondents’ Argument with respect to
Remedy and Rescission and Replacement of the
Consent Interim Order.
Applicant’s Outline of Preliminary Argument
Remedies Hearing, November 9, 1992.
Outline of Respondents’ Argument relating to
Applicant’s Motion for Interim Relief Pending
Appeal.
Order varying Consent Interim Order.
,Reasons and Decision Regarding Remedy.
Order regarding Divestiture.
* This is a short-list of the documents which have been filed with the Competition Tribunal.
(Source: Competition Tribunal documents)
