Newsletter | Competition Law

Canada Repeals Statutory Efficiencies Defense

February 16, 2024

Authors:

Oguz Erkan
Partner
Mergers & Acquisitions
Capital Markets
Competition Law
Sports Law

Canada repealed statutory efficiencies defense that was in force since 1986 in
efforts to align its competition policy with the big jurisdictions.

1) What is Statutory Efficiencies Defense?

In Canada, the statutory efficiencies defense was a provision within the competition regime that
allowed merging parties involved in an otherwise anticompetitive merger to proceed if they could
demonstrate that the efficiency gains resulting from the merger are greater than and offset any
negative impact on competition caused by the merger. This defense was a distinctive feature of
Canada's competition law and sets it apart from other major jurisdictions.

The efficiency defense essentially provides a legal basis for allowing mergers that might otherwise
be considered anti competitive if the efficiency gains are substantial enough to outweigh the
potential harm to competition. This provision had been subject to criticism, particularly in recent
years, and there have been calls to either remove it from the Competition Act or relegate it from a
statutory defense to just one of many factors considered in merger assessments.
The Canadian government had initiated a comprehensive review of the Competition Act, and the
efficiency defense was a focal point of this examination.

2) Why was the Statutory Efficiencies Defense Was Problematic?

The Competition Act in Canada allows the Tribunal to dissolve or prohibit a merger if it
substantially prevents or lessens competition. The Bureau, when challenging a merger, bears the
burden of proving the anti-competitive effects. Merging parties could defend the merger by
invoking the efficiencies defense, requiring them to demonstrate that the merger would bring about
efficiencies greater than and offsetting proven anti-competitive effects.

The efficiencies defense involved a trade-off analysis by the Tribunal, weighing anti-competitive
effects against presented efficiencies. Five screens determine allowable efficiencies, including
productivity benefits, likelihood due to the merger, non-redistribution of income, accrual to
Canada or Canadians, and loss in case of Bureau's order.

The defense originated in 1986, aligning with the economic context of a small, export-dependent
Canadian economy. Critics argued that it was outdated, emphasizing the changing economic
landscape. The defense's focus on total welfare as opposed to consumer welfare set Canada apart
from other jurisdictions. Supporters connected the defense to the Act's purpose clause,
emphasizing efficiency and adaptability for the Canadian economy.

On the other hand, it was criticized for its impact on consumer welfare. The Bureau had long
argued that difficulties in quantifying anti-competitive effects and the defense's role made it
challenging to successfully challenge mergers, leading to inefficiencies in administrative
proceedings and distortion of the Act's administration.

3) What Now?

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Despite only a small number of litigated cases involving this defense, the Bureau and the
Commissioner had long advocated for its repeal. After long accumulation of these critiques,
Canada finally repealed the efficiency defense with the recently passed Bill C-56. Elimination of
the statutory defense doesn’t mean efficiency gains can no longer be used to defend concentrations;
it means now efficiency gains can be considered as one of the factors that should be assessed, just
like in other major jurisdictions like the EU and US.

Additionally, another remarkable change has been made by the Bill. Previously, the Commissioner
had up to one year to challenge a completed acquisition transaction after its closing. With the
recent amendments, the Commissioner now has up to three years to challenge completed
transactions that are not notified to the Competition Bureau or made the subject of a request for an
advance ruling certificate.

Furthermore, the amendments introduced an automatic prohibition against closing a transaction

once the Commissioner files an application for an injunction. This means that the parties involved
cannot proceed with the transaction until the injunction application has been decided, which could
take weeks or even months.

When read together, all these herald a new era of merger control in Canada where the Competition
Bureau will be much more alert and skeptical against concentrations and will perhaps more
aggressive steps to prohibit that, which is not the common practice in the Antitrust enforcement
culture in North America.

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