Notes for an Address by Howard I. Wetston, Director of Investigation and Research, Consumer and Corporate Affairs Canada

To the International Bar Association
Hong Kong

October 1, 1991

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I am pleased to have the opportunity to speak to you today about Canadian merger policy in an increasingly integrated world economy. What I would like to do is to provide a brief overview of Canadian merger law, and then focus on a number of international developments which will likely shape Canadian merger policy in the future.

Historical Overview

Competition law has had a long history in Canada, going back to 1889 when the first legislation prohibiting combinations in restraint of trade was passed -- one year before the passage of the Sherman Act in the United States. Anticompetitive mergers were first prohibited in Canada in 1910 under the combines provisions of the former Combines Investigation Act. From 1910 to 1986, mergers were reviewed under a criminal law standard when they operated to the detriment of the public interest.

The difficulties inherent in evaluating mergers under a criminal law standard became increasingly apparent over time. In recognition of these difficulties, and with a view to focussing on the economic effects of potentially anticompetitive mergers, the Government of Canada introduced the new Competition Act in 1986, repealing the criminal prohibition of anticompetitive mergers and enacting new civil provisions respecting mergers and acquisitions. The clear focus of the new legislation is on the economic effects of potentially anticompetitive mergers.

The Competition Act of 1986

The new merger provisions incorporate many of the insights of what is often called the "new learning" in economics, particularly in the field of industrial organization. One of the principal aims of the Act, as highlighted in the purpose clause, is to promote the efficiency and adaptability of the Canadian economy. Competition is protected not as an end in itself but rather to promote a diverse number of objectives, including those of efficiency and adaptability.

The importance of international considerations to Canadian competition policy is also underscored in the purpose clause of the Act, which states specifically that competition is to be encouraged in order to expand opportunities for Canadian participation in world markets while at the same time recognizing the role of foreign competition in Canada. It is in the context of these objectives that the Bureau of Competition Policy administers the merger provisions of the legislation.

As Director of Investigation and Research of the Bureau of Competition Policy, I am charged with administering the Competition Act including the merger provisions. The Act requires the Bureau to examine mergers to determine whether they will, or are likely to, substantially reduce competition and so likely raise prices, without offsetting efficiency benefits. If such a determination is made I may apply to the Competition Tribunal for remedial relief. I should stress that the Director does not approve or disallow mergers, but only decides whether they will be challenged; it is the Competition Tribunal, an independent legal body, that ultimately decides whether a challenged merger can proceed.

Merger Enforcement Guidelines

The Competition Bureau's approach to merger assessment has been captured in Merger Enforcement Guidelines which were released in April 1991. An important reason for issuing the Enforcement Guidelines was the need to communicate to the public -- and particularly to the business and legal communities -- the essential elements of the analytical framework that we use in the merger assessment process. These Enforcement Guidelines were developed after an extensive consultation process both in Canada and abroad, and within the public and private sectors.

As you will gather from my remarks today, the concept of market power is at the very heart of the assessment exercise. The Enforcement Guidelines attempt to articulate that concept within a single analytical framework that, while not cast in stone, provides the conceptual basis for merger assessments. We expect that the Enforcement Guidelines will promote a better understanding of the merger review process and thereby reduce uncertainty in order to facilitate business planning and practices.

Application of Canadian Merger Law Since 1986

I would now like to provide you with a brief overview of the approach that we take to assessing the competitive impact of a merger, particularly one with transnational elements. To determine whether a merger will substantially lessen competition we first undertake a market analysis. In the emerging global economy, the relevant market may well extend beyond Canada to include other countries or regions beyond our borders. In particular, it will not be a surprise that the relevant market often includes parts or all of the United States in view of the increasing integration of our two economies.

It is important to note that we do not automatically presume increased market power and ability to raise prices based on increased concentration or the post-merger share of the merged entity. Indeed, the Act explicitly provides that mergers are not to be prohibited solely on the basis of structural characteristics such as market share and concentration; what matters is whether competition would likely be substantially decreased and prices increased.

As you know, as business becomes increasingly multinational in scope, the assessment of the effect of the merger on national markets from a competition perspective must consider, among other things:

• how much competition there is, and likely will be, from foreign companies;
• whether substitutes for the products/services are available domestically or from foreign suppliers; and
• what barriers to entry exist.

Of course, to obtain a proper basis on which to assess these international matters can raise troublesome questions of "fact-gathering." The assessment may only be as good as the information available, which may not be readily accessible or discoverable, especially from foreign third parties.

In addition, the Canadian Competition Act also provides for an absolute override to otherwise anticompetitive mergers where the transaction is likely to bring about gains in efficiency that will be greater than the potential losses to consumers. This is particularly significant in the context of transactions aimed at rationalizing production to become more competitive in a liberalized trade environment. Therefore, when reviewing a merger transaction, the Bureau directs its enforcement policy toward maximizing the total welfare of both buyers and sellers within the Canadian economy.

In adopting this approach, the Competition Bureau recognizes that rationalization of production may contribute significantly to the increased productivity of the Canadian economy. This is an important consideration for a small, open trading economy like Canada's which often has high levels of concentration as compared with our larger trading partners.

In practice, the transactions which are assessed by the Competition Bureau as being likely to prevent or lessen competition substantially have not been large in number. Of the more than 5 000 mergers which have taken place since 1986, only 28 -- that is, approximately five per year -- have been assessed as being likely to lessen competition substantially. Of that number, thirteen were allowed to proceed with modifications agreed to by the parties and the Competition Bureau.

International Merger Trends

Having provided a brief overview of the Competition Bureau's merger review process, I would now like to touch on some of the future challenges that we are likely to face as a result of on-going economic developments both in Canada and internationally.

As economic activity becomes more international in scope, merger policy may find itself increasingly under review by national governments. In this regard, research conducted for the Competition Bureau suggests that mergers and acquisitions activity in Canada -- and particularly mergers involving foreign firms -- will continue at a strong pace throughout the 1990s. Indeed, despite the business downturn of the past year, our latest information indicates that over 530 mergers have occurred in Canada during the first nine months of 1991, of which more than 72 percent have involved acquisitions by foreign firms. By contrast, during 1990, there were approximately 950 mergers, 72 percent of which involved acquisitions by foreign firms.

The vast majority of M&A activity is expected to involve horizontal mergers, as companies continue to return to their core lines of business and attempt to restructure their operations in response to increased global competition. An increasing number of mergers appear to be motivated by the desire to acquire the so-called "soft assets" -- the highly skilled people, management expertise, specialized technologies, goodwill, brand names, and intellectual property rights -- of the target company.

In order to ensure positive economic outcomes, both the merger laws and review process of the major industrialized countries will need to respond to the forces of freer international trade and reduced barriers to international investment. Clearly, globalization has brought about a growing number of international mergers, many of which will be familiar to you, such as Gillette/Wilkinson, ABB/Westinghouse, Connaught/Institut Mérieux, Schneider/Square D, and ATR/de Havilland.

While competition authorities world-wide already have experience with multi-jurisdictional transactions, our experiences thus far have raised important issues of coordination and jurisdiction which are likely to be addressed in the near future.

As governments seek control over the naturally acquisitive habits of companies wishing to strengthen their market position, international merger review is likely to become a major item on the international competition policy agenda over the next decade. One important question which will receive considerable attention is whether better decisions can be made faster and more economically with enhanced consultation and information exchange. While on particular cases some countries have relied on existing Memoranda of Understanding (MOUs), co-operation has been necessarily constrained by confidentiality provisions in the various national merger laws and, with some exceptions, to matters which are more procedural than substantive.

One question which could be addressed further is whether industrialized countries are making the most effective use of existing international arrangements to coordinate international antitrust enforcement activity. A subsidiary issue is whether the existing arrangements can be expanded upon to mutual benefit.

A very recent development in this direction is the agreement signed last week by the European Community and the United States concerning the application of their competition laws. This agreement supplements the 1986 OECD Recommendation on International Anti-trust Coordination. The agreement breaks new ground in the field of international antitrust by going beyond a statement of general obligation on each party to take the interests of the other into account in carrying out its antitrust enforcement activities; it also articulates some of the factors that should be considered in accommodating the interests of each country. For example, the parties have agreed to consider:

• the relative significance to the anticompetitive activities involved, of conduct within the parties' respective territories;
• the presence or absence of a purpose on the part of the firms targeted by enforcement activities to affect consumers, suppliers or competitors within the enforcing party's territory;
• the relative significance of the effects of the anticompetitive activities on the respective interests of the parties; and
• the degree of conflict or consistency between the enforcement activities in question and the other party's laws or economic policies.

It would be worthwhile for governments to examine closely the approach of the European Community and the United States in articulating the factors to be taken into account in considering the extra-territorial impact of enforcement activity. Such provisions could be particularly significant for a small, open economy like Canada's, where the extra-territorial impact of foreign antitrust enforcement may be greater than in a larger economy.

It is encouraging to note that these issues are currently receiving considerable attention by the private sector as well as governments. For example, during the past year we participated in the deliberations of the American Bar Association's Special Committee on International Antitrust toward the preparation of an extensive report which was presented to the Chairman of the ABA's Section on Antitrust Law on September 1, 1991 and is now publicly available.

The Committee's report is a valuable contribution to the discussion of these complex issues, and I commend it to your reading. The report illustrates that considerable differences remain among the merger laws of the major industrialized countries with respect to both substantive and procedural matters. To cite a few examples: merger law in Canada, Germany, Japan and the U.S. is underpinned mainly by competition policy concerns, while in other jurisdictions the orientation involves a mix of competition, industrial and other broader public policy interests; Canada is the only country with a statutory exception based on offsetting efficiency gains and a statutory failing firm factor. Whereas the failing firm factor is an important one in the Canadian merger review process, and is also recognized in U.S. merger policy, it does not appear to form any part of the European Community's merger regulation. Also, both the E.C. and the U.S. appear to treat the welfare impact of efficiency gain s differently than Canada.

Among the issues highlighted by the Special Committee on the procedural side is the burden of satisfying the considerably different information requirements and time limits of different reviewing authorities when a merger becomes subject to multi-jurisdictional review.

These kinds of issues, which are likely to arise more and more often with the process of globalization, can only be resolved through careful analysis and consultations among the effected jurisdictions.

In a somewhat different vein, we will also need to address the antitrust implications of the emerging "global" corporation. The implications of this evolving international corporation are truly challenging for antitrust authorities throughout the world. When two international corporations merge or enter some other form of cooperative arrangement, they are no longer bringing together just their tangible assets, but rather their ideas, personnel, and network of business relationships throughout the world. Indeed, their tangible assets may only be a small part of the deal. Under these circumstances it is much more difficult to address the competition effects of the transaction, just as it is probably more difficult for the parties to identify long-term benefits from the transaction.

Concerns have also been expressed that the new international corporation -- with its interlocking directorships, network of contacts and alliances, and ability to segment markets through voluntary export restraints, licensing agreements and intellectual property rights -- are often in a very good position to control supply and, therefore, prices in the global marketplace. As noted by the ABA Special Committee and others in recent work, the international antitrust community may not be particularly well organized to address effectively the competition issues arising from multinational cartels, arrangements or mergers. As such, we must continuously examine our analytical tools, keep what is still good and discard what is not; but, at least, we must discuss these issues.

A further issue that will require analysis from an antitrust perspective is the relationship between the national "global" corporation and the tendency -- shared by many countries, including Canada -- to allow "national" corporations to come together in the form of R&D joint ventures, export consortia, production sharing or specialization agreements, designed to allow them to reap efficiencies and, therefore, be more competitive in the international marketplace. These provisions are often based on the premise that any losses of competition in the domestic market will be more than compensated by the production efficiencies which would in turn benefit the national economy.

For the most part this may be true. However, as the traditional national corporation is transformed into the very different "stateless" corporation, it becomes less obvious which national economy will reap the benefits from these production efficiencies. In short, we are dealing with a new phenomenon both for antitrust agencies and governments, generally, in ensuring the appropriate trade-off or balance between domestic and international competition.

In Canada, I believe we are well positioned to respond to the global forces that will shape merger review in the future. The merger provisions of Canada's 1986 Competition Act are well adapted to deal with the expansion of international trade and investment. Indeed, Canadian merger policy has already played an important role in facilitating the restructuring of Canadian industry in response to global change, and this role can only increase in the future. However, we will need to expand our understanding in the areas of international merger policy, the "global" corporation and the growing linkages between competition policy and other economic policy fields.

The Broader International Context for Merger Review

The trends that I have described may also be placed in the broader context of the growing role of competition policy on the international agenda and the increasing interactions between competition policy and other economic policy areas. Competition policy has become an integral part of many countries' broader industrial policy initiatives.

The links between competition and trade policy have been recognized for a long time. In response to the use of international cartels before and during the Second World War, the Havana Charter of 1947 -- which was intended to lead to the establishment of an International Trade Organization -- included specific competition policy provisions. These provisions were designed to prevent business practices among firms which restrain competition, restrict market access, and foster monopolistic control in international trade. In the final analysis, the U.S. Congress opposed the International Trade Organization as too ambitious, and the international community settled for the GATT, which focussed on more traditional government-imposed trade barriers and, thus, largely ignored the area of private restraints to market access.

However, more recently, through the work of the OECD and other international bodies, we have continued to explore the overlaps between competition and trade policy. As well, the growing importance of competition policy was recognized by the leaders of the G-7 at the Toronto Economic Summit in June 1988. At that Summit, the G-7 committed itself to intensified efforts to promote the efficiency and adaptability of their respective economies through reliance on competitive market forces and structural reforms.

The G-7, like the drafters of the Havana Charter before them, recognized the important role of competition policy in complementing the efforts of the international community to reduce trade barriers. Competition policy and trade liberalization share broadly similar goals. Both seek to ensure that artificial barriers to the competitive process are removed to the greatest extent possible in order to encourage efficiency in the production and allocation of goods and services and to provide consumers with competitive prices and broader product choices. Trade liberalization focusses on government created barriers, whereas competition law deals with privately created barriers to the competitive process. Indeed, it could be that weak competition law enforcement is now seen as an unfair trade practice and, therefore, a form of protectionism in itself.

Given these pressing issues, the time is fast approaching when policy makers will need to address the extent of convergence and compatibility in competition policy and law required to facilitate international coordination and reduce trade distortions caused by antitrust differences.

Complete harmonization obviously is not feasible. The antitrust statute of each state reflects a host of country-specific factors, including its legal system, current stage of economic development, its business culture, and its past experience with antitrust law and enforcement. While full harmonization may not be possible, or even desirable, better coordination between antitrust authorities is possible, and may even be necessary to address the challenges facing us in the 1990s and beyond.

Canada has proposed that these and other issues be the focus of the future work of the OECD Competition Law and Policy Committee over the next two years. The proposal would entail, among other initiatives, discussion of a number of matters that are becoming increasingly important to competition policy in the global economy, including:

• the objectives of competition policy;
• strategic alliances;
• market definition;
• the role of foreign competition;
• the failing firm factor; and
• economic linkages between trade and other economic policies.

This would form the basis of a broader review of the consistency of policy principles and enforcement practices in member countries, and possibly the consideration of improvements to the 1986 Recommendation on International Anti-trust Cooperation. In addition, the Canadian proposal recommends that the Competition Law and Policy Committee continue its efforts with respect to the interface between competition policy and other social and economic policy areas. The OECD Committee's medium-term work program in this regard is expected to be finalized during its meeting next month.

I look forward to our further discussions on these matters during the rest of the proceedings and in the future. Thank you.