Model Timing Agreement for Merger Reviews involving Efficiencies

On this page:

  1. Introduction
  2. The efficiency exception
  3. Information requirements to test efficiencies
  4. Conclusion

1. Introduction

Consistent with the Commissioner of Competition’s (the "Commissioner") commitment to transparency, this document is intended to inform businesses and their advisors of the Competition Bureau's (the "Bureau") approach to analysis of efficiencies in accordance with section 96 of the Competition Act (the "Act") and in what circumstances the Bureau will conduct an assessment of merging parties' efficiencies claims.Footnote 1

The vast majority of merger transactions do not raise concerns under section 92 of the Act. The Bureau's approach is to expeditiously identify those few transactions that may raise material competition concerns and provide timely clearance for the remaining transactions to provide commercial certainty. For the small number of cases that do raise material competition concerns, the focus of the Bureau's review is to determine whether the proposed transaction is likely to substantially prevent or lessen competition in one or more relevant markets in Canada through investigative steps such as requiring the production of documents and data pursuant to a Supplementary Information Request ("SIR") or an order of the Court pursuant to section 11 of the Act.

In certain of these cases, the merging parties may assert during the course of the Bureau's review of the proposed transaction that the efficiency exception set out in section 96 of the Act applies. The Bureau may engage with the merging parties to consider whether there is adequate evidence to support that the efficiencies exception is met in formulating a recommendation to the Commissioner on whether to file a section 92 application where: sufficient evidence and information is provided to the Bureau for it to assess the efficiency claims; and the merging parties commit not to complete the proposed transaction during the period that efficiencies are being evaluated. The process described herein is intended to apply to this small subset of cases.

2. The efficiency exception

Section 92 of the Act allows the Tribunal to make an order when it finds that a merger "prevents or lessens, or is likely to prevent or lessen, competition substantially." A substantial prevention or lessening of competition ("SPLC") results only from mergers that are likely to create, maintain or enhance the ability of the merged entity, unilaterally or in coordination with other firms, to exercise market power. In any case brought before the Tribunal pursuant to section 92, the Commissioner bears the burden to prove, on a balance of probabilities, that the proposed transaction is likely to prevent or lessen competition substantially in one or more relevant markets in Canada.

Section 96 of the Act provides an efficiency exception to the provisions of section 92. Where efficiency gains that are likely to be brought about by the merger are greater than, and offset, the anti-competitive effects, the Tribunal shall not make an order under section 92.Footnote 2 The merging parties bear the burden to establish, on a balance of probabilities, any relevant efficiency gainsFootnote 3 and that such efficiency gains are likely to be greater than, and will offset, the likely anti-competitive effects of the merger.Footnote 4 This trade-off analysis involves a cost benefit analysis that assesses whether the alleged efficiency gains from the merger owing to the integration of resources outweigh the anti-competitive effects that result from the decrease in or elimination of competition that arises due to the merger.

Given that efficiency analyses are forward looking estimations that are associated with varying degrees of uncertainty, testing claimed efficiency gains and conducting the trade-off analysis is typically a complex process that involves the review of significant amounts of documents and data from the merging parties and requires engagement between the Bureau and the merging parties, their counsel, businesspeople and their experts.

In the Bureau's experience, merging parties have often not been either willing or able to provide efficiencies-related information or submissions at an early stage of the review. This may arise because of information restrictions during the due diligence phase, which could result in parties having insufficient certainty relating to efficiencies to be in a position to make submissions to the Bureau, or because uncertainty about the appropriate remedy makes it inefficient to prepare detailed efficiencies submissions early in the review process. Instead, merging parties have waited for the Bureau to reach a definitive conclusion that the merger is likely to result in an SPLC before providing detailed information regarding efficiencies. As a result of the efficiencies information not being received at an early stage of the review, the analysis of the merging parties' claimed efficiencies has been shifted late into the Bureau's review of the transaction, when the Bureau's resources are focused on assessing the anticompetitive effects of a merger in order to make a determination of whether enforcement action is required. In addition, when merging parties seek to have their efficiencies claims assessed by the Bureau when the Bureau's analysis of potential competitive harm is ongoing, significant time of the Bureau team and the merging parties could be spent assessing efficiencies claims that would not be affected by a remedy.

In notifiable transactions, the Bureau will utilize the second statutory waiting period following issuance of a SIR to assess the anticompetitive effects of a merger. If merging parties anticipate raising an efficiencies defence and would like the Commissioner to consider their efficiencies claims before making an enforcement decision, they may enter into a timing agreement, which provides for analysis of efficiencies and the resulting trade-off to occur after the end of the second waiting period, and for merging parties not to close their transaction while this analysis is underway.Footnote 5

2.1 The Model Timing Agreement

Given that the Model Timing Agreement includes terms relating to timing of SIR compliance, it is contemplated that merging parties would enter into a timing agreement prior to the beginning of the second statutory waiting period. Entering into a timing agreement would not be perceived as a concession that a merger will give rise to a SPLC, but rather as a recognition that a matter involves complex competition issues that will require detailed analysis, including the quantification of a range of anticompetitive effects by the Bureau.

The Model Timing Agreement provides for opportunities for merging parties to receive updates from the Bureau in respect of its analysis of anticompetitive effects, including with respect to its empirical analysis. These updates are intended to enable merging parties to understand the scope of the Commissioner's concerns and the estimated range of anticompetitive effects, based on the Bureau's analysis at that time. Where updates pertain to the Bureau's empirical analysis, the Bureau will be willing to engage in a discussion with merging parties and economic experts they have retained regarding the empirical methodology used, including providing references to any academic literature relevant to that methodology, as well as a description of the inputs and assumptions relied on as part of the Bureau's modelling work.

As set out in paragraph 8 of the Model Timing Agreement, the efficiencies submissions made by the merging parties should relate to the efficiencies that would be lost if a remedial order were made in respect of the concerns identified by the Bureau. Depending on the nature of the concerns and the markets involved in the transaction, the particular remedial order that would be required in response to the concerns identified by the Bureau might not always be straight-forward, or in certain matters, there may be several possible remedial orders that would resolve the concerns. In such cases, merging parties should make submissions on their efficiencies claims based on candidate remedial orders addressing the Bureau's concerns. It will be necessary for the efficiencies submission to explain why the claimed efficiencies would be lost as a result of the remedial order, with reference to the specific integrations necessary to achieve the efficiencies which would no longer be possible.

Though the Model Timing Agreement lengthens the Bureau's review process beyond statutory waiting periods, efficiencies are not a factor for the Bureau to assess in determining whether a merger is likely to give rise to a SPLC, but rather a defence that merging parties may raise in respect of an anticompetitive merger. Without certainty that the Bureau will have sufficient time to assess merging parties' claimed efficiencies, the Bureau's resources will be focused on working toward litigation in the case of a merger that is likely to give rise to an SPLC. However, should a commitment be in place such that sufficient time is provided to the Bureau to conduct a detailed assessment of the merging parties' efficiencies claims, the Commissioner will consider efficiencies in assessing the need for, or the extent of, enforcement action in respect of a merger.

3. Information requirements to test efficiencies

The merging parties bear the burden of proof for any claimed efficiencies and are uniquely situated to provide this evidence and information as only they have access to the information necessary to estimate and evaluate efficiencies projections, including access to company employees with responsibility for planning and implementation of current and prior merger integrations. To conduct the trade-off analyses with sufficient rigour such that the Commissioner may make an informed enforcement decision, evidence and information supporting efficiency claims should be provided on a with prejudice basisFootnote 6 and be sufficiently detailed to enable the Bureau to ascertain the nature, magnitude, likelihood and timeliness of the asserted gains, and to credit (or not) the basis on which the claims are being made.

Although the evidence and information required to assess merging parties' efficiencies claims will vary depending on the structure of the parties' businesses, how they plan to integrate them and the particular industry involved, there are certain pieces of information that are likely to be required. These categories of information are set out in Appendix II. Typically, this information will be provided alongside a submission provided to the Bureau by the merging parties, which describes the efficiencies they expect to realize through a transaction. Efficiencies should be quantified where reasonably possible, and supported by a clear methodology described in detail in the submission such that the Bureau has a sufficient degree of certainty that the efficiencies are likely to be achieved over the time period claimed. Parties seeking to rely on qualitative efficiencies as part of a section 96 defence will need to explain why they are not reasonably measurable. Any assumptions being relied upon should be clearly set out and explained in detail, including why the assumptions are reasonable (or, if asserted, conservative). The Bureau will also require schedules and spreadsheets detailing any calculations made in the submission.

Along with submissions, it is important that the underlying evidence is also provided to the Bureau, including all supporting documentation, models and calculations, such that the Bureau is able to verify how efficiencies were calculated and perform sensitivity tests on any models or forecasts used to derive the estimates. This underlying evidence should include any documents relied upon by the merging parties in analyzing potential efficiencies, which could include internal analysis leading to the decision to undergo a merger, internal efficiencies projections, third party studies, and any relevant due diligence materials. Where the merging parties have relied on business or operational planning models in their calculations, this needs to be brought to the Bureau's attention as the Bureau will likely require access to these models and information related to the models' reliability, such as information regarding the past application of these models by the parties (or others), and the predictive success. Further examples of the materials that are typically provided by merging parties to substantiate claims made in their submission are also set out in Appendix II.

While it is the Bureau's expectation that all supporting information relied on in the creation of the merging parties' efficiencies submission will be provided with the submission, paragraph 9 of the Model Timing Agreement states that the Bureau will send requests for information ("RFIs") to the merging parties in respect of the efficiency claims and supporting evidence within 7 days of receipt of the efficiencies materials provided by the merging parties. The RFIs sent to the merging parties are not intended to further probe the claimed efficiencies or to seek further substantiation of the claims. Rather, the RFIs will seek to clarify or confirm assumptions made or the Bureau's understanding of the evidence being relied upon for the efficiencies submissions, with a goal of increasing the probative value of the examinations of the merging parties' representatives by answering any narrow questions beforehand.  

Following the review of the merging parties' submissions and the accompanying evidence on efficiencies, the Bureau will likely have further questions for merging parties related to their claims. In order to ensure that accurate and complete responses to these questions are provided, the Model Timing Agreement contemplates the examination of representatives of the merging parties after an efficiencies submission and the supporting evidence has been provided to the Bureau. In addition to engaging with merging parties and experts retained by the parties, the Bureau also may use its own outside experts, including industry, economic or accounting experts, to advise on potential efficiencies arising from the merger.

4. Conclusion

The process set out in this document, and outlined in further detail in the Model Timing Agreement, for merger reviews involving the assessment of merging parties' efficiencies claims has been informed by the Bureau's recent experience with such cases. As noted, these cases account for a small proportion of the merger matters reviewed by the Bureau in a given year, however, these merger reviews involve resource intensive analysis, both in relation to the assessment of anticompetitive effects as well as the assessment of efficiencies. The Model Timing Agreement provides that merging parties can make efficiencies submissions with sufficient understanding of the concerns with a transaction identified by the Bureau such that they may focus on the efficiencies that would be lost in the event of an order in the markets of concern. In addition, the Model Timing Agreement provides the Bureau with sufficient time to assess the Parties' claimed efficiencies such that the Commissioner may be in a position to decide whether to exercise enforcement discretion by not challenging a transaction that is likely to substantially prevent or lessen competition.

Given that each merger matter where parties raise an efficiencies defense presents new issues to evaluate, the Bureau's approach will continue to be refined going forward. The Model Timing Agreement sets out a framework under which merging parties' efficiencies claims may be assessed by the Bureau, however this framework may need to be adapted depending on particularities of a certain case, such as when parties seek to enter into a timing agreement. In addition, as the Bureau gains further experience with the Model Timing Agreement, it will continually reassess its process for analyzing efficiencies in merger reviews for whether there is a more effective manner to undertake this analysis. Accordingly, the Bureau remains open to receiving feedback in relation to the Model Timing Agreement, and will update this guidance as the process continues to evolve.

Appendix I: Model Mergers Timing Agreement

This TIMING AGREEMENT is made as of [date] between [Purchaser] and [Vendor/Target] (collectively the "Merging Parties") and the Commissioner of Competition (the "Commissioner").

Recitals

  1. Purchaser proposes to acquire [describe the proposed transaction] (the "Proposed Transaction").
  2. The Commissioner is of the view that the Proposed Transaction may result in a substantial [prevention and/or lessening] of competition in [describe relevant markets], and desires to complete his assessment and, if necessary, implement an appropriate remedy, before the Merging Parties close the Proposed Transaction.
  3. The Merging Parties expect that the Proposed Transaction will generate efficiencies and desire that the Commissioner assess those efficiencies for the purpose of s. 96 of the Competition Act (the "Act") before filing any application under s. 92, s. 100 or s. 104 of the Act.
  4. The Merging Parties and the Commissioner desire to establish a schedule for the expeditious resolution of this matter with a view to avoiding, or narrowing the scope of litigation if appropriate.

Agreement

In consideration of the terms set out in this agreement, the sufficiency of which is acknowledged, the Parties agree as follows:

  1. The Merging Parties shall provide at least [30 days'] notice before closing the Proposed Transaction or any part of the Proposed Transaction, unless the Commissioner has issued a no action letter. The Merging Parties shall not provide such notice until at least 30 days after complying with the supplementary information requests pursuant to s. 114(2) of the Act (the "SIRs"). After the Merging Parties have provided such notice, the Commissioner and Competition Bureau shall have no further obligations under this agreement, and apart from observing the notice period before closing the Proposed Transaction, the Merging Parties shall have no further obligations under this agreement.
  2. The Commissioner shall not file an application under s. 92, s. 100 or s. 104 of the Act unless the Merging Parties have provided the notice described in paragraph 1 of this agreement or waived compliance with this provision.
  3. The Merging Parties shall respond to the data specifications of the SIRs as soon as possible, and in any event no later than 30 days before full compliance with the SIRs. If a complete response to the data specifications is received within 60 days after the SIR was issued, Instruction A.1.(c)(ii) (Continuing Production Requirement) shall not apply.
  4. The Mergers case team shall provide an update on the status of their review, including a response to any requests [made prior to or in the 7 days following issuance of the SIRs] to modify the scope of the SIRs, no later than 30 days after SIR issuance.
  5. No later than 45 days after receipt of the data described in paragraph 3 of this agreement and provided that the merging parties have not fully complied with the SIRs until at least 30 days after responding to the data specifications, the Mergers case team shall provide an update on its quantitative assessment, including a description of the empirical methodology, model and preliminary findings.
  6. No later than 30 days after full SIR compliance, Mergers management and the case team will be available to meet with the Merging Parties (by phone or at the Bureau's Gatineau office, at the Merging Parties' option) and provide an update on its assessment including
    1. its assessment to date in respect of each market where Mergers' preliminary view is that a remedy may be required (a "market of concern");
    2. identifying any additional information or analysis likely to be of assistance in completing its assessment; and
    3. a preliminary quantification of the range of deadweight loss in respect of each market of concern.
  7. At any time, the Merging Parties may, on a without prejudice basis, propose remedies to address any or all of the Bureau's concerns. If, following the meeting described in paragraph 6 of this agreement, the Merging Parties request that Mergers provide feedback on its assessment of the sufficiency of one or more proposed remedies, Mergers shall provide its assessment to date of those proposed remedies within [30 days] after the request. At the time of the request, the Merging Parties shall identify any confidentiality concerns regarding the proposed remedies, and the Bureau shall consider those concerns in market testing the proposed remedies. The Merging Parties acknowledge that a full assessment of proposed remedies may not be possible without market testing, and that nothing in this agreement restricts the Bureau's ability to communicate confidential information pursuant to section 29 of the Competition Act.
  8. Following the meeting described in paragraph 6 of this agreement (and, at the Merging Parties' option, following receipt of the feedback requested pursuant to paragraph 7), the Merging Parties shall provide their submission on efficiencies that would be lost if a remedial order were made in respect of the concerns identified by Mergers management, together with all supporting documents and data. The Merging Parties acknowledge that the extent to which the Bureau is prepared to accept claimed efficiencies will depend on the quality of information in support of those claims, and that it is incumbent on them to provide complete information at this stage.Footnote 7
  9. No later than 7 days after receiving the information described in paragraph 8 of this agreement, the Mergers case team shall provide a request for information seeking clarifications regarding the claimed efficiencies. The Merging Parties are encouraged to discuss this request for information and their responses, including potential rolling production.
  10. No later than 30 days after providing complete responses to the Bureau's request described in paragraph 9 of this agreement, each Merging Party shall identify and make available a representative to meet with the Mergers case team and be examined under oath on any matter relevant to the claimed efficiencies. Such examinations will be conducted no later than 40 days after the Merging Parties have provided complete responses to the Bureau's request described in paragraph 9.
  11. No later than 30 days after the interviews described in paragraph 10 of this agreement, Mergers management and the case team will
    1. identify the markets in which a remedy is required;
    2. provide an updated anticompetitive effects quantification and
    3. on a without prejudice basis, quantify the efficiencies that Mergers believes have been substantiated as likely to be lost in the event of a remedy.
  12. After the information described in paragraph 11 of this agreement has been provided, the Merging Parties may propose a meeting with the Commissioner, and the Parties shall make reasonable efforts to schedule that meeting at a mutually convenient time. The Parties acknowledge that it may be productive to advance settlement negotiations and consent agreement drafting as far as reasonably possible before such meeting.
  13. Nothing in this agreement precludes the Parties from communicating more frequently or earlier than required by this agreement. The Parties may amend any time periods in this agreement on consent, such consent not to be unreasonably withheld.
  14. For greater certainty, information described in this agreement as being without prejudice is intended to be protected by settlement privilege. Other information exchanged pursuant to this agreement is confidential, but will typically not be subject to settlement privilege. Any positions or conclusions of the Merging Parties or the Commissioner expressed in relation to this agreement may change as they obtain new information or refine their assessments.

    DATED this day of space to insert month, 20space to insert year

    COMMISSIONER OF COMPETITION

    space to insert signature

    Name: Matthew Boswell
    Title: Commissioner of Competition

    [PURCHASER]

    space to insert signature
    I/We have authority to bind the corporation

    Name: space to insert full name
    Title: space to insert title

    [VENDOR/TARGET]

    space to insert signature
    I/We have authority to bind the corporation

    Name: space to insert full name
    Title: space to insert title

Appendix II: Efficiencies information requirements

Information requirements will be based on the particular efficiencies claimed and the industry that the parties operate in such that it is not possible to assemble a complete and exhaustive list of necessary information. That said, the categories of information to be sought are generally as follows:

  • Information on parties' operations and assets:
    • EXAMPLES: Information on assets and their locations, capacity utilization by product line and by facility, any constraints on production, and headcount information.
  • Plans for the merging parties' businesses in the absence of the merger:
    • EXAMPLES: Information on planned capital expenditures, cost savings plans, anticipated product introduction, and other strategies under consideration if the merger did not go forward.
  • Analysis and planning documents relating to the implementation of the merger:
    • EXAMPLES: integration plans such as Board presentations and all underlying data and calculations, forward-looking costing (fixed vs variable) and capital expenditures planned post-merger.
  • Analysis of merger efficiencies:
    • EXAMPLES: models or other analyses that quantify the efficiencies, as well as the documents or data relied upon in those analyses and support for any underlying assumptions.
  • Information from past comparable integrations:
    • EXAMPLES: Documents fitting in the categories above with respect to past transactions, and backward looking documents assessing efficiencies achieved and costs incurred.
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