Mergers of Transportation Undertakings 

publication 

June 2003

Lang Michener In Brief

The federal Minister of Transport introduced legislation in March 2003 that would require a double review process for mergers involving transportation undertakings. The original Bill C-26 was shelved upon the federal election of June 28, 2004.  The bill resurfaced, largely unchanged, when it passed First Reading on March 24, 2005, where it now stands.  If enacted in its present form, parties engaged in such mergers will have to abide by prolonged lead times in closing such transactions and may have to overcome some potentially challenging obstacles.  The process is more, rather than less, politicized than it would be if left to independent agencies, and certainly further from judicial review. 

History

Until 1996, parties acquiring a transportation undertaking (the value of the sales or assets of which exceeded $10 million) were required to notify the Canadian Transportation Agency to allow it to determine whether the acquisition was in the public interest, a relatively broad scope of review. The Competition Bureau had jurisdiction to review such mergers on the basis of its effect on competition, a much narrower scope of review. In 1996, the jurisdiction to review such mergers was taken away from the Agency, leaving the Competition Bureau with sole authority to do so.

Air Canada and Canadian Airlines

In 1999, the Minister of Transport suspended the application of the Competition Act so that the Competition Bureau was not able to review the effects of a proposed merger between Air Canada and Canadian Airlines, despite the obvious merger-to-monopoly the transaction entailed. Once the Minister had the opportunity to deal with the ramifications of a single national airline, the suspension was lifted. On December 21, 1999, the Commissioner of Competition announced that it would not oppose the acquisition of Canadian Airlines by Air Canada and that Air Canada had signed undertakings designed to enhance the competitive climate in the airline industry in Canada.

Parliament then imposed on the Competition Bureau legislative requirements to review the conduct of Air Canada after its merger with Canadian Airlines. Perhaps the best way to justify the Minister's decision to intervene in a quasi-judicial forum to the point of allowing a merger-to-monopoly is to consider that some industries, such as transportation, are so fundamental to Canada's well-being that the entire public interest, and not just the effects of a particular transaction on competition, should govern the outcome. Although controversial, the process demonstrated the willingness of the Minister to intervene despite the available mechanisms to deal with what appeared to be a problem merger.

CN and BNSF

Also in 1999, Canadian National Railway Company and Burlington Northern Santa Fe Corporation surprised the rail world by announcing a proposed merger that would create the largest railway in North America. To the dismay of those concerned about the effects of the merger, the only venue available to contest the merger in Canada was at the Competition Bureau. Meanwhile, the U.S. Surface Transportation Board (STB) held lengthy hearings and received submissions from many affected parties, including Canadian parties. In the end, the STB imposed a moratorium on mergers to allow time to develop rules for what many surmised would be the final consolidation of the continent's seven remaining large railways, a decision which was upheld on appeal. The parties called off the proposed merger. The result in Canada was awkward, to say the least, and eventually resulted in submissions by Canadians advocating a forum for the review, on broad public interest grounds, of transactions like these that have such a clear and direct impact on Canadians generally and persons operating transportation undertakings specifically.

The new legislation

The new legislation builds on and institutionalizes the process used in reviewing the Air Canada/Canadian Airlines merger, and addresses the deficiencies of the aborted CN/BNSF merger. Rather than assign responsibility for reviewing mergers of transportation undertakings to an expert body such as the Canadian Transportation Agency, as was the case up until July 1996, the Minister has appropriated the task of such review to the ministerial level, ultimately making such determinations essentially a political decision rather than a quasi-judicial or even an administrative one. The Competition Bureau will continue to have jurisdiction to apply the merger provisions of the Competition Act to assess such proposed mergers in light of the competitive factors outlined in the statute administered by the Competition Bureau, subject to appeal to the Competition Tribunal and on through the court system, but the Minister will have the broad charge of reviewing, assessing and determining the public interest.

Transportation undertakings and the public interest

The new legislation represents a new way of dealing with mergers that at present will require substantial lead time and significant submissions in any merger involving "transportation undertakings," an undefined term which at the very least concerns the air, rail, marine, buses, trucks, airports and marine ports industries, but presumably only those "under the legislative authority of Parliament."

Notification rules

The rules provide that parties to a proposed transaction that involves a transportation undertaking and that are required to pre-notify under section 114 of the Competition Act also must notify the Minister of Transport (and the Canadian Transportation Agency, in the case of air transportation undertakings) adding a submission with respect to the public interest. If the Minister is of the opinion that the proposed transaction does not raise issues with respect to the public interest as it relates to national transportation, the Minister must give notice of that opinion within 42 days. If public interest is raised, the Minister is given some discretion as to further examination (seeking further reports from the Agency or third parties), but ultimately, the Governor-in-Council must approve the transaction.

Meanwhile, the Commissioner of Competition must, within 150 days after the original filing date, or any longer period the Minister allows, report to the Minister and the parties to the transaction on "any concerns regarding potential prevention or lessening of competition that may occur," immediately after which the report must be made public. This component of the process is new to the Bureau. One assumes that the language used as criteria for the Commissioner is simply a reference to existing tests for merger clearance used by the Bureau and not a broader test introducing new elements.

In any event, in a part of the process that has no time limits, the Minister must:

  • consult with the Commissioner about overlap between concerns raised by them, and
  • consult with the parties to address with the Minister and the Commissioner the public interest and the competitive concerns, respectively, after which the parties must inform the Minister and the Commissioner, of any measures they are prepared to undertake to address those concerns, including revisions to the transactions.

The Minister then obtains the Commissioner's assessment of the adequacy of those undertakings and the effects of any proposed revisions to the transaction on those concerns. If satisfied that it is in the public interest to approve the proposed transaction, the Governor in Council may, on the recommendation of the Minister, approve the transaction and specify any terms and conditions that the Governor in Council considers appropriate.

This new process is certain to add considerable challenges to parties and practitioners attempting to conclude such transactions. The timing alone may constitute a bit of a barrier, even to efficient mergers, and in any event the substantive review is likely to disarm parties' abilities to engage in "done deals" and hostile bids.