Towards an efficiencies standard that benefits Canadians

This commentary offers an alternative economics-based rationale for the adoption of a consumer welfare standard for the assessment of mergers under Section 96 of the Competition Act that is not based on ‘fairness’ considerations, or any of the other objections recently voiced by the Competition Bureau in response to Senator Howard Wetston’s consultation. Our main conclusion is that if the purpose of the merger provisions of Canadian competition law is to regulate mergers to the benefit of Canadians, and if Canada’s national treatment obligations under international treaties prevent the differential treatment of Canadian and foreign shareholders in the efficiencies trade-off, then the consumer welfare standard may offer advantages over the current total welfare standard. Our observations are based on an economic analysis that demonstrates the extent to which Canadians benefit from merger efficiencies (and wealth transfers) generally depends almost exclusively on the extent to which merging firm profits flow to Canadian shareholders and does not depend on whether or not a merger reduces costs at operations located in Canada. This economic analysis is consistent with the Competition Tribunal’s fourth efficiencies filter in Tervita. In its earlier Superior Propane Redetermination decision, however, the Competition Tribunal concluded that the Competition Act mandates that merger efficiencies should be included as a benefit in the efficiencies trade-off only if they reduce costs at operations located in Canada regardless of shareholder nationality, which would preclude the application of the fourth filter in Tervita. We show that if future transactions subject to Canadian merger law are expected to involve firms with substantial non-Canadian shareholdings – as has historically been the case – and if discrimination against foreign shareholders is not feasible, then a consumer welfare standard may maximize benefits to Canadians. If discrimination against foreign shareholders is feasible, as implied in Tervita, then a total surplus standard that includes efficiencies (and welfare transfers) as a benefit only to the extent that merging firms’ profits flow to Canadians, maximizes benefits to Canadians. Given the ambiguity in Tribunal decisions regarding the treatment of efficiencies that flow to foreigners, future amendments to the Act should clarify the efficiencies exception to better reflect its intent.