Divestiture Relief in Merger Cases: An Assessment
of the Canadian Experience
Margaret Sanderson* and Ann Wallwork*
Divestiture is the most common form of
relief used by antitrust authorities to address
anti-competitive mergers. In this article, the
authors discuss whether competition authori-
ties, in using this tool, have achieved effective
relief to anti-competitive mergers. Effective
relief is defined to be the prevention of anti-
competitive effects.
Three criteria are identified as being essen-
tial to ensuring effective relief. First, the assets
chosen for divestiture must comprise a viable
entity. Second, the independence and compet-
itive significance of the purchaser must be
assured. Third, the time taken to complete the
divestiture should not be prolonged. These cri-
teria are used to assess Canadian and Ameri-
can antitrust authorities’ experience with di-
vestitures.
It is the authors’ opinion that, not unlike the
American experience, the initial use of divesti-
tures as a remedy to anti-competitive mergers
in Canada was characterized by a number of
problems which resulted in early relief likely
being less effective in certain cases. Efforts to
improve the effectiveness of the process were
undertaken as experience with the process was
gained. Nonetheless, the authors recommend
that Canadian authorities further formalize
their procedures in respect of divestiture relief,
on the premise that increased standardization
of the process will ensure that viable asset
packages are sold to competitive entities in a
timely fashion.
Lors d’un fusionnement jug6 anti-concur-
rentiel, la sanction la plus courante consiste A
demander A la partie principale de se d~partir
d’une partie de l’entreprise nouvellement for-
me. Dans cet article, les auteures examinent
l’efficacit6 de cette approche en se demandant
si elle russit a prdvenir les effets anti-concur-
rentiels.
Les auteures prrsentent trois crit~res d’effi-
cacit6. D’abord, les actifs choisis doivent cons-
tituer une entit6 viable. Deuxi~mement, l’ind6-
pendance et Ta situation concurrentielle de
l’acheteur doivent entrer en ligne de compte.
Enfin, la vente doit se faire dans un drlai rai-
sonnable. A la lumihre de ces crit6res, les au-
teures portent un jugement sur l’exprrience ca-
nadienne et am~ricaine en Ia mati6re.
Les auteures sont d’avis qu’au Canada corn-
me aux Etats-Unis, l’approche sous 6tude s’est
d’abord butre h certaines difficultrs qui ont
nui A son efficacit6. Avec le temps, l’exp6-
rience a permis des amliorations utiles. N~an-
moins, les auteures sugg~rent que les autorits
canadiennes adoptent des procedures plus uni-
formes pour que dans tous les cas on parvienne
a vendre des actifs viables b un concurrent
dans les plus brefs drlais.
*Bureau of Competition Policy.
**Bureau of Competition Policy.
The authors would like to thank George Addy, Milos Barutciski, Madeleine BWlanger, Cal
.Gundy, Peter Humber, Don McFetridge, Beth Riley, and Michael Sullivan for their assistance. Any
errors or omissions are, however, solely those of the authors. The views expressed herein are those
of the authors and are not necessarily those of the Director of Investigation and Research, Bureau
of Competition Policy.
McGill Law Journal 1993
Revue de droit de McGill
To be cited as: (1993) 38 McGill L.J. 757
Mode de rdf~rence: (1993) 38 R.D. McGill 757
McGILL LAW JOURNAL
[Vol. 38
Synopsis
Introduction
I.
The Goals of Merger Relief
II. Academic Literature
III. Canadian Divestiture Experience
A. Viability of Assets
B. Prospective Purchasers
C. Period of Time Taken to Complete Divestiture
D. Monitoring of Undertakings
IV. American Divestiture Procedures
A. Viability of Assets
B. Prospective Purchasers
C. Period of Time Taken to Complete Divestiture
Conclusions
Introduction
Since the enactment of Canada’s Competition Act’ in 1986, the Bureau of
Competition Policy has examined hundreds of mergers. To date, thirty-three
transactions have been found by the Director of Investigation and Research to
be likely to substantially lessen or prevent competition. Of these, thirteen were
abandoned by the parties in light of the Director’s concerns. Of the twenty
mergers which proceeded, seventeen were subject to certain modifications, gen-
erally involving divestiture.
Divestiture is the most common form of relief sought by antitrust author-
ities in anti-competitive merger cases. As a remedy, divestiture has at least three
theoretical advantages. It is flexible, relatively easy to enforce, and generally
effective in redressing the market structure which gave rise to the competitive
concern. Whether enforcement agencies utilize this form of relief in an appro-
priate manner is another matter.
‘Competition Act, R.S.C. 1985, c. C-34, as am. by R.S.C. 1985 (lst Supp.), c. 27, ss. 187, 189,
R.S.C. 1985 (2d Supp.), c. 19, Part II, R.S.C. 1985 (3d Supp.), c. 34, s. 8, R.S.C. 1985 (4th Supp.),
c. 1, s. 11, R.S.C. 1985 (4th Supp.), c. 10, s. 18, S.C. 1990, c. 37, ss. 29-32, S.C. 1991, c. 45, ss.
547-550, S.C. 1991, c. 46, ss. 590-594, S.C. 1991, c. 47, ss. 714-717, S.C. 1992, c. 1, ss. 44-46,
145, S.C. 1992, c. 14, s. I, S.C. 1993, c. 34, ss. 50-51 [hereinafter the Act].
1993]
DIVESTITURE
This paper will address this latter issue in the context of the Bureau of
Competition Policy’s experience with divestitures in merger cases. The paper
begins by briefly reviewing the goals of merger relief (part I), following which
there is a brief summary of the academic literature on the subject of divestitures
(part II). Part I discusses the Canadian merger cases which required some form
of divestiture and part IV reviews the present practices of American federal anti-
trust authorities. We close with our conclusions.
I. The Goals of Merger Relief
Remedies for anti-competitive conduct have not been subject to a great
deal of debate in Canada. This may stem from the difficulties in defining the
goal of antitrust relief in general. Is deterrence, restitution or penalty the aim of
the remedies? Will this vary with the offence? While recognizing the intellec-
tual debate surrounding these questions, we believe that the appropriate goal for
merger relief is the prevention of anti-competitive effects. Pursuit of this goal
by enforcement agencies will also serve to deter anti-competitive mergers. This
line of reasoning is also taken by Kenneth Elzinga:
an effective antimerger statute requires effective relief … [I]f mergers which vio-
late the standards of the law are not subjected to meaningful relief, two results will
follow: first, competition will not be restored in those markets where antimerger
cases have been brought and, second, the law will not be a bar to those potential
mergers which might have a deleterious effect on competition.2
Mergers in Canada are subject to administrative law standards, and as such,
are not within the framework which traditionally exacts punishment for criminal
infractions. Restitution is also inappropriate in light of the prospective nature of
assuming the transaction has not been consummated (or has
merger review –
been so only recently), then no market power has been exercised (or only min-
imally so), and consequently “victims” have little claim to damages. Prevention
is then the logical aim of relief for anti-competitive mergers. Inherent in these
standards is the restoration of competition in the affected markets.
There are numerous means of preventing anti-competitive mergers. From
an economic standpoint, behaviour is altered when the respective costs and ben-
efits of alternative courses of action are changed. To deter a particular activity
one must make the expected costs of that activity greater than the expected ben-
efits. The net gain from an anti-competitive merger is equal to the expected
value of the additional profits accruing to the merged entity from the exercise
of its market power, in the event that the merger is not successfully challenged,
less the costs imposed on the merging parties by the enforcement authorities, in
the event that the merger is successfully challenged. The enforcement authori-
ties can reduce the net gain from anti-competitive mergers by increasing either,
or both, the probability of successful challenge and the costs imposed in the
event of successful challenge.
The probability of successful challenge is a function of enforcement effort.
A larger financial and human resource budget for antitrust authorities would,
2K. Elzinga, “The Antimerger Law: Pyrrhic Victories?” (1969) 12 L L. & Econ. 43 at 44.
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[Vol. 38
ceteris paribus, increase the probability that anti-competitive mergers would be
challenged successfully. Efficient resource allocation requires that, at the mar-
gin, the enforcement costs of challenging anti-competitive mergers just equal
the costs to society of allowing such transactions.
The costs imposed by enforcement officials upon the firm for an anti-
competitive merger may take a variety of forms. For example, fines equal to the
additional profits realized by the merged entity from exercising market power
could, under some circumstances, deter anti-competitive mergers. The required
conditions include the following: First, enforcement officials will successfully
challenge all anti-competitive mergers (i.e. the probability that an anti-
competitive merger is successfully challenged is equal to one). Second, no
socially benign merger will be challenged (i.e. this probability is equal to zero).
Third, the merger will not generate any synergies or cost savings. Not only
would such cost savings change a firm’s incentives to engage in anti-
competitive mergers, but these cost savings may be of sufficient magnitude to
offset the anti-competitive effects. Where any of these conditions do not hold,
the calculation of a fine which will effectively deter anti-competitive (i.e.
welfare-reducing) mergers will be considerably more complex A simpler alter-
native that has traditionally been adopted by antitrust authorities has been the
elimination of the merged entity’s sources of market power through total or par-
tial divestiture.
The Competition Tribunal has recently dealt with this issue in its decision
on remedies in Canada (Director of Investigation and Research) v. Southam
Inc.4 In this case, the Tribunal was presented with two possible goals for dives-
titure. The Director argued that the remedy must restore, to the extent possible,
the level of competition which existed prior to the anti-competitive merger.5 The
respondents argued that the remedy must resolve the likely substantial lessening
of competition identified and, furthermore, that the remedy should be restricted
from going beyond what is necessary or practicable to deal with that likely sub-
stantial lessening of competition.6 The Tribunal’s decision states that “[i]n con-
tested proceedings, the appropriate test is whether the proposed remedy will
restore the pre-merger competitive situation in the market in question.”7 To
accomplish this, the Tribunal has available to it the remedies of dissolution, total
divestiture of assets or shares, or partial divestiture of assets or shares!s
3See G.S. Becker, “Crime and Punishment: An Economic Approach” (1968) 76 J. Pol. Econ.
169, for an economic discussion of the issue of optimal fines in criminal cases.
4(10 December 1992), CT-90/1 (Comp. Trib.) [hereinafter Southam Remedy]. Note that this deci-
sion is under appeal by Southam.
51bid. at 8.
6lbid. at 9.
71bid. at 10.
8S. 92(l)(e) of the Competition Act states:
(1) Where, on application by the Director, the Tribunal finds that a merger or proposed
merger prevents or lessens, or is likely to prevent or lessen, competition substan-
tially … the Tribunal may, subject to sections 94 to 96,
(e) in the case of a completed merger, order any party to the merger or any other
person
(i) to dissolve the merger in such manner as the Tribunal directs,
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DIVESTITURE
The Tribunal has confirmed the view that orders in merger matters should
be designed solely as remedies and not as punishment.’ However, if a remedy,
to be effective, goes beyond the market where the substantial lessening of com-
petition occurs, this does not imply that it is necessarily punitive.'” The Tribunal
goes further to pronounce that considerations of harn or inconvenience to the
respondents or third parties are not relevant to assessing the effectiveness of the
proposed remedy.” This approach is fully consistent with that taken in the
United States. For example, in the duPont-GM remedy case, the U.S. Supreme
Court stated that: “Courts are not authorized in civil proceedings to punish anti-
trust violators, and relief must not be punitive. But courts are authorized, indeed
required, to decree relief effective to redress the violations, whatever the
adverse effect of such a decree on private interests.” [emphasis added]’
In keeping with this view, the Antitrust Division of the U.S. Department
of Justice articulates the goal of merger relief as the restoration or maintenance,
within a reasonable time period, of the competition that existed prior to the
merger. 3 Similarly, officials at the Federal Trade Commission state the purpose
of divestiture as ensuring the continuation of the assets or the business as ongo-
ing, viable businesses engaged in the market, and remedying any lessening of
competition resulting from the acquisition. 4
To be an effective remedy, the divestiture must be to a viable, competitive
entity, and must be completed in a timely fashion. In light of this standard we
ask: How effective has divestiture relief been in Canadian merger cases? And
by extension, what changes would we recommend when dealing with future
cases requiring divestiture?
II. Academic Literature
The effectiveness of divestiture relief in merger cases has been detailed in
three academic studies undertaken by Elzinga, 5 Pfunder, Plaine and Whitte-
more, 16 and Rogowsky.17 All three studies are highly critical of the divestiture
(ii) to dispose of assets or shares designated by the Tribunal in such manner
as the Tribunal directs, or
(iii) in addition to or in lieu of the action referred to in subparagraph (i) or (ii),
with the consent of the person against whom the order is directed and the
Director, to take any other action …
9Supra note 4 at 11.
“lbid. at 13.
“Ibid.
12United States v. E.I duPont de Nemours & Co., 366 U.S. 316 at 326 (1961).
13C.K. Robinson, “Merger Remedies: Policies and Procedures at the Department of Justice” in
The Antitrust Division and the Federal Trade Commission Speak on Current Developments in Fed-
eral Antitrust Enforcement (New York: Practicing Law Institute, 12-13 November 1992) 331.
14D.p. Ducore, “Antitrust Compliance Issues at the FTC: Selected Topics” in The Antitrust Divi-
sion and the Federal Trade Commission Speak on Current Developments in Federal Antitrust
Enforcement and Consumer Protection (New York: Practicing Law Institute, 14-15 November
1991) 193 [hereinafter Antitrust Division and FTC Speak].
15 Supra note 2.
16M.R. Pfunder, D.J. Plaine & A.G. Whittemore, “Compliance with Divestiture Orders under
Section 7 of the Clayton Act: An Analysis of the Relief Obtained” (1972) 17 Antitrust Bull. 19.
17R.A. Rogowsky, “The Economic Effectiveness of Section 7 Relief’ (1986) 31 Antitrust Bull.
187.
McGILL LAW JOURNAL
[Vol. 38
relief obtained by both the U.S. Department of Justice and the Federal Trade
Commission during the periods examined. Each study is discussed in more
detail below.
Elzinga covers the merger cases filed by the U.S. government after 1960
which had been settled either by consent order or decided for the government
by the end of the calendar year 1969 (thirty-nine cases).”5 Effective relief
occurs, in Elzinga’s opinion, when the acquired firm is re-established as an
independent, viable firm within the market in a timely fashion. 9 Cases are
divided into the four categories of successful, sufficient, deficient or unsuccess-
ful based upon the three conditions of independence, viability and time taken.2”
Using these criteria Elzinga finds that only four of the thirty-nine cases
studied resulted in either successful or sufficient relief.2′ The total time taken
from acquisition to divestiture averaged sixty-six months, with the average time
from acquisition to the complaint taking fifteen months. Consequently, some
fifty-one months, or four and one-quarter years, were required to complete the
divestiture relief sought by enforcement officials.22
Rogowsky extends Elzinga’s analysis by including both a larger sample of
cases (104 cases covering the period 1968-1980), and by examining whether or
not competitive injury requiring divestiture existed.23 The welfare effect of
18Supra note 2 at 46.
191bid. at 47.
20lbid. at 46. Elzinga is strict in his disposition of cases. The U.S. emphasis on collusive exer-
cises of market power, as opposed to a unilateral exercise by a dominant firm, results in a pref-
erence for purchasers who are both new to the industry and “not large conglomerates” (ibid. at
47-48). To qualify as a successful divestiture in Elzinga’s terms, a “viable center of initiative” must
be re-established with no loss of competition, actual or potential, in the process (ibid. at 47). A case
drops from successful to sufficient when the independence criterion is compromised due’ to either
a sale to a small horizontal competitor, a sale to a vertical competitor with no foreclosure problems,
a sale representing a market or product extension with no obvious loss in potential competition,
or a sale to a “very large” conglomerate competitor (ibid. at 49). The deficient category includes
sales which were either incomplete or where the assets fell into less-than-desirable hands, but
where the assets represent a viable entity (ibid. at 50). Unsuccessful relief includes cases where
no structural relief was obtained, where divestiture was insignificant or was made to a significant
horizontal competitor or a vertical competitor with foreclosure problems, or where the divested
assets were found to be non-viable (ibid.). Cases are dropped one ranking (e.g. from “successful”
to “sufficient”) where structural relief took place at least three years after the date of acquisition,
and are dropped two rankings (e.g. from “successful” to “deficient”) when structural relief
occurred five or more years after the date of acquisition (ibid. at 51-52).
2’1bid. at 52.
22Ibid.
213Supra note 17. Rogowsky essentially maintains Elzinga’s four categories, but with a separation
between orders and compliance (ibid. at 192). He is somewhat less strict than Elzinga when exam-
ining partial divestitures, recognizing that “on efficiency grounds partial relief may be considered
successful if the benefits of early relief outweigh the costs of prolonged litigation” (ibid. at 191).
Like Elzinga, Rogowsky also factors in the time taken to complete the divestiture, dropping an
order one ranking (e.g. from “successful” to “sufficient”) where divestiture takes place more than
two years following the acquisition and two rankings (e.g. from “successful” to “deficient”) where
divestiture does not occur until after four years. Compliance falls one ranking if a divestiture agree-
ment is reached after one year of the order being made, and two rankings if it requires more than
two years (ibid. at 193-94).
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DIVESTITURE
divestiture is analysed for those cases which Rogowsky finds offered successful
or sufficient relief.24 Like Elzinga, Rogowsky concludes that U.S. divestiture
relief was not a success prior to 1980. He finds that two-thirds of the divestitures
undertaken provided either deficient or unsuccessful relief. Furthermore, of the
one-third of the cases providing successful or sufficient relief, more than sev-
enty per cent of these cases were found to have presented no likelihood of a sub-
stantial lessening of competition.’
The Pfunder, Plaine and Whittemore study,26 while also attempting to mea-
sure the effectiveness of the divestiture relief in U.S. merger cases, adopts a
slightly different approach from that of Elzinga and Rogowsky. The Pfunder et
al. study focuses on isolating elements of the dive stiture process which, if pres-
ent, may render the remedy less effective. These include the following: identity
of the purchaser; viability of the assets chosen for divestiture; price at which the
assets are divested; time taken to complete the divestiture; which party is
responsible for compliance; and whether the matter is litigated or settled by con-
sent.27 The sample includes all cases initiated after the 1950 Celler-Kafauver
amendments to section 7 of the Clayton Act,2″ up to January 1, 1970 (114 cases).
The results of the Pfunder et al. study are fully consistent with those of Elzinga
and Rogowsky, namely, that the
[g]ovemment has directed the bulk of its resources toward the challenge and lit-
igation stages of enforcement, but has lost the benefit of those efforts through
orders that are unworkable or unresponsive to the illegality charged, through inad-
equate supervision of compliance, and through subsequent modifications which
nullify the effective remedial elements of the original order.29
The reasons for this failure are examined by all three studies, although the
study by Pfunder et al. is the most comprehensive in its narration and recom-
mendations. Ineffective relief results from three broad problems: (1) failure ‘to
designate a viable asset package for divestiture; (2) failure to divest to a com-
petitive entity; and (3) failure to complete the divestiture in a timely fashion.
The three categories are by no means distinct, with each having an influence
upon the others.
A careful economic analysis must be undertaken of any assets to be
divested. The package should be viable, and hence capable of being profitably
24Ibid. at 216.
25Ibid. at 228. Competitive injury resulting from each case where either successful or sufficient
divestiture is found to occur is examined by Rogowsky using two general methods (ibid. at
220-28). First, where sufficient time has elapsed, Rogowsky investigates whether the post-
acquisition firm’s market share erodes, industry concentration decreases, or significant entry occurs
before the divestiture is completed. In such circumstances, he infers that the effects of the merger
on competition, and hence the government remedy, were not substantial. Second, when unable to
observe the post-acquisition market over an acceptable period of time, Rogowsky examines the
likelihood that the structure and performance of the industry support the theory of the case. Owing
to differences across cases, he focuses on entry barriers, biasing the analysis in the government’s
favour.
26Supra note 16.
271bid. at 43-45.
2815 U.S.C. 18 (1988).
29Supra note 16 at 40.
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[Vol. 38
operated as a going concern. Where only a single asset, such as a brand-name,
is to be divested, the purchasing firm must necessarily bring greater resources
(i.e. financial, managerial, production facilities, sales organization etc.) with it,
if it hopes to successfully utilize the asset. This will limit the group of potential
buyers available, affecting both the likelihood that the assets are ultimately via-
ble and the competitive influence of the purchaser. Pfunder et al. advocate sup-
plementing asset packages where necessary in order to make them attractive to
pro-competitive purchasers.3″
The value of any particular asset package depends upon the discounted
future stream of profits the purchaser expects to receive from its operation. This
is necessarily higher for anti-competitive purchasers. When evaluating potential
purchasers, Pfunder et al. criticize the government for too often being concerned
with whether the purchaser is less anti-competitive than the defendant.” Termi-
nation of ownership rather than the restoration of a viable competitive market
structure becomes the principal focus.
Any fear that a prospective purchaser will liquidate the package is
unfounded if a proper selection of the assets has taken place. The assets should
be chosen with a view to having a greater value as an operating concern than
in liquidation and hence rational purchasers will not liquidate. Therefore, there
is no need for “fair price” provisions within divestiture orders. Too often par-
ties’ claims of being unable to locate a purchaser were found to be synonymous
with an inability to find a purchaser at the desired price. Searches for higher
bids will also lengthen the time taken to complete the divestiture.
Time limits were characterized as arbitrarily chosen and laxly enforced.
Any lengthening of the time taken to complete a divestiture will increase the
gain to the defendant when the merger has not been enjoined. Atrophy of the
asset package soon results. As time progresses, any chosen divestiture package
will become less viable. Pfunder et al. also find that the longer the period taken
to finalize the divestiture, the more likely it is that the government will not
oppose a purchaser it finds anti-competitive.32 This further compromises the
limited standards applied to relief and may ultimately end with no sale being
made.
Fundamental to correcting any of the above, Pfunder et al. identify the
need for a change in the underlying perception of the government players
involved in the divestiture process.33 They conclude that too often officials
defined the notion of “penalty” broadly and so refrained from imposition of an
order which looked to them like a penalty, but which in reality was only effec-
tive relief. Any reluctance to acknowledge that divestitures are “forced sales”
gives defendants an inordinate amount of power in negotiating the terms by
which divestitures will take place. In such circumstances it is not surprising that
the government’s interests are subsumed by those of the defendant.
3 Ibid. at 62-63.
311bid. at 53-54.
321bid. at 50.
331bid, at 40-41.
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DIVESTITURE
I. Canadian Divestiture Experience
As outlined in the Pfunder, Plaine and Whittemore study, it is difficult to
assess whether, in the case of individual divestitures, the relief obtained was
truly responsive to the underlying illegality of the original merger. “An order
which is superficially responsive to the underlying illegality may be rendered
ineffective by changes in the acquired entity, in the market, in the industry, and
in the economy.”‘
In light of this, the divestiture cases which have been handled
by the Bureau of Competition Policy were assessed by reference to the three cri-
teria identified above as essential to ensuring effective relief; namely, the via-
bility of the assets chosen for divestiture, the independence and competitive sig-
nificance of the purchaser, and the period of time taken to complete the
divestiture. We also look at efforts by the Bureau to ensure the parties’ compli-
ance with the divestiture process.
Thirteen divestiture cases were examined in the course of this analysis. In
chronological order, by date of the Bureau’s first awareness of the proposed
acquisition, these cases are: Cineplex Odeon Corporation/Compagnie France
Film (certain assets); Canada Safeway Limited/Woodward Stores Limited (cer-
tain assets); Trailmobile Group of Companies Ltd./Fruehauf Canada Inc.; CBR
Cement Canada Limited/Revelstoke Concrete Investment Inc.; Provigo Distri-
bution Inc./Steinberg Inc. (certain assets); Hostess Food Products Limited/Frito-
Lay Division of Pepsi-Cola Canada Ltd.; Maclean Hunter Limited/Selkirk
Communications Limited; Imperial Oil Limited/Texaco Canada Inc.;35 Laidlaw
Inc./Tricil Limited; Tree Island Industries, Limited/Davis Wire Industries Ltd.;
Great Atlantic & Pacific Company of Canada, Limited (A&P)/Steinberg, Inc.
(certain assets); Maple Leaf Mills Limited/Ogilvie Mills Ltd.; and, Southam/
Lower Mainland Publishing Limited (LMPL).36 Of the above cases, only the
Imperial Oil divestiture was in the form of a consent order, and the Southam
divestiture followed contested proceedings which are under appeal. Undertak-
ings, agreed upon by the parties and the Bureau, were used in all the remaining
cases, although never implemented in Maple Leaf Mills as the parties chose to
abandon the proposed transaction.
A. Viability of Assets
Any forced divestiture of assets will be effective only where the package
to be divested forms a viable business.
Effective structural relief is a function of, first, formulation of an order which
imposes upon defendant the obligation to divest a strong, viable competitor, and
second, supervision of compliance to guarantee accomplishment of its terms and
its spirit. An entity ordered divested must be a complete economic package, to
attract a wide range of potential purchasers, rather than a more limited group seek-
ing an anticompetitive advantage.37
CT-89/3 (Comp. Trib.).
341bid. at 35-36.
35Canada (Director of Investigation and Research) v. Imperial Oil Ltd. (26 January 1990),
36Canada (Director of Investigation and Research) v. Southam Inc. (2 June 1992), CT-90/1
37Supra note 16 at 130-31.
(Comp. Trib.).
McGILL LAW JOURNAL
[Vol. 38
Rational behaviour dictates that, given the opportunity, firms will choose to
divest a less than complete package of assets. It would seem self-evident, then,
that the Bureau must carefully scrutinize the proposed divestiture package, test-
ing its viability by reference to existing industry practice when anything less
than a fully operational unit is to be sold.
Full divestiture of the entire acquired firm has only been required in the
case of Davis Wire.38 All other divestitures have been sales of a portion of the
assets originally acquired, although these partial divestitures have frequently
been stand-alone operating entities.39 The effectiveness of divestiture in a couple
of the early cases, where single or selected assets were sold which did not com-
prise an independent, fully profitable component of the existing firm, is ques-
tionable. In later cases, when the ramifications of all viable solutions were con-
sidered early in the review process, the asset package ultimately chosen for
divestiture was considerably strengthened.
An absence of market interest in the assets to be divested has often been
because the package lacked viability. Limited interest was expressed in assets
where, for example, supply contracts left the purchaser unable to have a com-
petitive impact. In the recent Southam Remedy case, the Tribunal echoes the
concern that “a remedy that depends, for its possible success, on supply con-
tracts between the only competitors in the market is somewhat suspect.”‘
In
such circumstances, “the small accommodations and goodwill that are required
to make a long-run supply relationship work would not create the kind of cli-
mate that is desirable and necessary to restore the competitive situation dis-
rupted by the merger.”‘”
To assure itself that assets to be divested remain viable, the Bureau has
made use of hold separate undertakings when firms close the original transac-
tion prior to completing the divestiture. Note, however, that it is the Bureau’s
practice to only require the alleged anti-competitive portion of the transaction
to be held separate and apart by the acquiror, in contrast to the American prac-
tice.42
In the application for a consent interim order in Southam, the Director
argued that the public interest could be injured if divestiture of an acquired busi-
ness were ordered, but, in the interim, the viability of the relevant assets was
allowed to decline, causing harm to both independent units and competition. As
stated, this damage arises from the fact that “the more integrated and coordinated
38Tree Island and its American parent, Georgetown Industries, Inc., agreed to sell all Davis Wire
shares to a person who would carry on its business as an independent manufacturer.
39 Cineplex Odeon/Compagnie France Films, Safeway/Woodward, CBR/Revelstoke, Maclean
Hunter/Selkirk, Provigo/Steinberg, LaidlawlTricil, A&P/Miracle Mart, Imperial Oil/Texaco Can-
ada, and Southam/LMPL.
4Supra note 4 at 24. The Tribunal was responding to the respondents’ proposed remedy
whereby a limited number of the originally acquired assets would be divested by the parties, with
contractual arrangements entered into by the proposed purchaser and the respondents for distribu-
tion, composition and printing services.
411bid. at 25.
42See Part IVA, below, for a description of U.S. hold separate orders.
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are the operations [of the defendants] … the less they are actively competing in
their markets.”43 The Tribunal stated that “[p]rotecting divestiture as a valid reme-
dial option will always be a strong impetus for interim relief in merger cases. The
futility of attempting to ‘unscramble the eggs’ upon a later finding that the
merger will indeed likely lessen competition substantially is apparent.”‘ The Tri-
bunal’s decision in Canada (Director of Investigation and Research) v. Hillsdown
Holdings (Canada) Ltd. confirms its reluctance to impose a remedy when the
merging parties have significantly combined operations prior to the interim order
being granted.45 This decision appears to be a signal that the Director should seek
interim orders earlier in the litigation process.
The importance of an effective hold, separate agreement is accepted both
within the Bureau and the Tribunal. Hold separates were put into effect in six
of the Bureau’s divestiture cases. However, the success of the hold separate
clauses varies, and is closely linked, with the period of time during which the
divestiture took place. Clearly, it is difficult to fully ensure that personnel and
customers do not move to the acquiror, and that there is no flow of information,
and any such concerns will be exacerbated with the passage of time.
In attempting to address these concerns, the Bureau has realized varying
degrees of success. While some hold separates, such as that undertaken by Trail-
mobile, were quite specific and complete, others have been less successful, dog-
ged by Bureau concerns over the possibility that flows of information and cus-
tomers were, in fact, taking place between the parties, or that, despite the hold
separate, the viability of the assets to be divested was being permitted to decline.
The strongest language used in a hold separate to date is that found in the
Southam Consent Interim Order case.” Among other things, the parties are lim-
ited in their ability to issue additional equity securities, amend articles or
by-laws, terminate lines of credit or financial guarantees, curtail marketing,
engage in sales of promotional activities, and terminate or alter current employ-
ment, salary or benefit agreements for key personnel. In addition, the parties
cannot enter into or withdraw from contracts, or change their operations in any
way that would materially inhibit or delay the divestiture or reduce the value of
the business. Southam is not to be involved, in any way, with decisions involv-
ing the assets to b& divested, with reference to a range of specified areas such
as advertising rates. A monitor has been appointed who is required to act inde-
pendently of Southam or any member of the Southam group. The Director has
the right to request written reports from the monitor to determine whether com-
pliance with the hold separate order is being met.
Notwithstanding the well-crafted nature of the order in this case, it must be
recognized that a hold separate is effective only as a short-term measure. Its
43Canada (Director of Investigation and Research) v. Southam Inc. (1991), 36 C.P.R. (3d) 22
at 26 (Comp. Trib.) [hereinafter Southam Consent Interim Order]. This order was subsequently
updated on March 8, 1993: Canada (Director of Investigation and Research) v. Southam Inc.
(1993), 48 C.P.R. (3d) 224 (Comp. Trib.) [hereinafter Southam Divestiture].
“Southam Consent Interim Order, ibid.
45(1992), 41 C.P.R. (3d) 289 (Comp. Trib.).
46Supra note 43.
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value, and the viability of the firms involved, declines as the permitted time
period increases. Thus, the length of time involved in some divestiture cases
meant the hold separates became decreasingly useful. While the gains made
through the Southarn order are important, in future proceedings the Bureau must
continue to work to also convince the Tribunal of the need for an expeditious
divestiture in addition to an effective hold separate order.
B. Prospective Purchasers
Of primary importance to the outcome of any divestiture is the identity of
the purchaser. As noted earlier, the potential value of the assets to a pro-
competitive purchaser will be lower than to an anti-competitive purchaser who
anticipates realizing monopoly profits. In addition, it is in the divesting party’s
interest to sell to a less than vigorous competitor, thereby reducing any potential
threat in terms of future prices and market shares. Thus, while it is rational
behaviour on the part of the firm to seek a purchaser with the incentive to pay
a higher price and provide less competition, it is the responsibility of the
enforcement agency to counter these threats to competition.47
The Bureau has always insisted on approving the final purchaser. However,
in some early cases, the divesting parties so controlled the process by which
information about the divestiture was disseminated that they ultimately limited
the number of prospective purchasers. Where parties control the means by
which purchasers are made aware of the availability of assets, they also control
the choice of purchasers. Likewise, when the parties are permitted to choose,
and sometimes manipulate, the information which is provided to purchasers,
they have the ability to filter more or less information as will best suit their pur-
pose. Consequently, situations have developed where potentially pro-competi-
tive purchasers were either refused information or provided with only sketchy
details of the sale. In contrast, the most open process is one of public bidding,
as occurred in the Imperial Oil divestiture. A number of other divestitures have
also included clauses within the undertakings which provided for the sales pro-
cedure to be accomplished by tender, bidding or other similar procedure to
allow fair opportunity to all prospective purchasers. The Bureau’s insistence on
wide-scale advertising in cases such as A&P and Imperial Oil has been an
important development in alleviating these concerns.
The Director’s most recent request for a more transparent process was
recently supported by the Tribunal in the Southam/LMPL divestiture order. The
order provides that “[t]he divestiture shall be carried out in a manner that pro-
vides a fair opportunity to potential purchasers to obtain notice of the sale ….,4.
Subject to the execution of a customary confidentiality agreement, bona fide
47 1n keeping with this, the Southam/LMPL divestiture order stipulates that the notice of pro-
posed sale from the trustee or respondents must include the agreement of the proposed purchaser
that it will respond within seven days to a request by the Director for additional information regard-
ing the proposed divestiture or Trustee Sale (Southam Divestiture, supra note 43). This provides
the Director with increased access to vital information regarding the ability of the proposed pur-
chaser to reintroduce competition in the market.
481bid. at 226.
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purchasers are to be provided with all information required to assess the finan-
cial viability and prospects of the business, with copies of the information pro-
vided also sent to the Director. In the case of Imperial Oil, all interested parties
were also provided with identical information packages, with copies of all cor-
respondence provided to the Bureau.
The price at which the assets are divested has also been, in some cases, a
stumbling block to successful completion of the process. At times the parties
have insisted that they should not be forced to sell the assets at an “unfair” price.
There are a variety of incentives which encourage a firm to market assets at a
price which is ultimately unrealistic for a forced sale, beyond the obvious incen-
tive of realizing a high return on their purchase. For instance, delay of a dives-
titure, as a result of an unreasonably high asking price, may permit the parties
to eventually claim changed market conditions in an effort to avoid divestiture
entirely.
C. Period of Time Taken to Complete Divestiture
In those circumstances where the process becomes mired forctack of a pur-
chaser, enforcement officials tend to accept compromises, especially in terms of
timing. Paul Crampton states that “delay is the enemy of divestiture,”’49 and
quotes the Director as considering timely divestitures to be necessary “because
commercial, labour and market conditions can often change rapidly. Moreover,
the economic or competitive viability .of a product line or a company can be
quickly dissipated without active or secure management.”‘5 Clearly, enforce-
ment officials are aware of the importance of controlling the time period during
which the merger must be completed. This has been reflected in the designated
deadlines for completing divestiture sales, as set out in the undertakings, which
have ranged from two to twenty-four months.
Where timing has been of particular concern is with regard to deadline
extensions. Requests for extensions have coloured the Bureau’s experience with
divestitures ever since its first merger case. In more than half of the divestiture
cases, extensions have been requested and, in most cases, granted. The result
has been that, excluding the few remaining unsold assets in the A&P and Impe-
rial Oil cases, the average time taken to complete divestitures in Canada is six-
teen months from the point where the undertakings are signed, ranging from a
low of two months to a high of thirty-four months.”1
The reasons behind requests for extensions have varied. They have
included claims by parties that they could not divest due to their inability to find
an interested purchaser; the claim that the divesting firm was involved in ongo-
ing negotiations with potential purchasers; claims of changed market conditions
arising from factors such as the Canada-U.S. Free Trade Agreement or the
49Mergers and the Competition Act (Toronto: Carswell, 1990) at 608, quoting C.F. Rule, Assist-
ant Attorney General, U.S. Department of Justice.
50Ibid.
51Of the 9 relevant cases, 2 were completed in less than 3 months, 4 took between 11 and 18
months, and the remaining 3 cases took over 22 months.
McGILL LAW JOURNAL
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recession, and a resulting need for adjustment in the package of assets for which
divestiture was required; dissatisfaction at the price which prospective purchas-
ers were prepared to offer; and environmental liability problems. In some cases,
as the time period involved in the divestiture lengthened, there appeared to be
some validity to the parties’ claims and some justification for the Bureau to
yield. However, the occasional validity of parties’ claims must be weighed
against the costs of allowing the divestiture process to be slowed or altered and
the resultant cost to the economy of postponing an effective remedy.
In an effort to alter firms’ incentives to complete a timely divestiture sale,
the Bureau has increasingly included a trustee clause in the undertakings. Par-
ties are provided with an opportunity to sell the asset package on terms and to
a purchaser approved by the Director within a set time frame, following which
the package will be transferred to a trustee for sale to the highest bidder. Trustee
clauses have been written into the six most recent undertakings entered into by
the Bureau, as well as two earlier cases. Only once, in the case of A&P, have
assets been placed in the hands of a trustee as a result of undertakings between
the Bureau and parties. The periods of time permitted for completion of the
trustee sale, as stated in the undertakings, have ranged from sixty days to eight-
een months.
The Bureau first introduced the trustee requirement in replacement under-
takings in one of the early mergers, adding a clause stating that, should the
trustee fail to complete the sale within the designated time period, a consent
order attached to the undertakings would enable the Tribunal to order the sale
of the relevant assets within an additional three months. There was also refer-
ence to a trustee sale in another early case, although there was no clarification
regarding the consequences should the trustee fail to complete the divestiture.
The trustee clause was not acted upon in this case, so the potential outcome of
this structural weakness was not addressed at the time.
The trustee clause written into another case in this time period proved to
be a bone of contention in the case of a failure to divest. In this case, the Direc-
tor wanted to be able to take such action as he would deem appropriate, includ-
ing extending the term of the Trustee’s appointment. However, the Bureau sub-
sequently agreed to release the parties from these obligations regarding
appointment of a trustee, having received a commitment from the divesting
party that the relevant assets would be divested within six months or the under-
takings would be made part of a consent order.
The trustee requirements have been strengthened somewhat in the recent
Southam Divestiture case.52 Application for the appointment of a trustee is to be
made to the Tribunal seven days before expiry of the 180-day period allowed
for Southam to complete the sale on its own. The trustee then has sixty days to
complete the divestiture on the most favourable price, terms and conditions
available. Separate records documenting the trustee’s efforts are to be main-
tained with reports delivered to the Director and respondents every thirty days.
Should the trustee fail to sell the business, a report is to be filed with the Tri-
52Supra note 48.
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bunal, Director and parties, explaining why the trustee has failed to complete
the sale, and giving recommendations as to future action. The respondents can
object to the trustee sale only on the grounds of malfeasance, gross misconduct
or contravention of the order by the trustee.
Six divestiture cases have included clauses which would enable the Direc-
tor to include the terms of the undertakings in a consent order, where, in the
Director’s opinion, the parties fail to abide by the terms of the undertakings. In
the event that the undertakings do not result in a successful divestiture, there is
a logical progression from undertakings to the Tribunal hearing, with a commit-
ment from the parties as to their obligations. However, the clause is effective
only in the context of undertakings which have been correctly structured and
enforced.53 Use of the clause has yet to be tested.
D. Monitoring of Undertakings
In order to ensure that the divestiture process moves quickly, and that all
Bureau requirements are respected, monitoring clauses have been written into
many of the undertakings. These clauses were included in eight of the thirteen
relevant divestitures. With the exception of Safeway/Woodward, all of the cases
where monitoring was required have been recent ones. Monitoring has taken
several forms, including reports upon request, quarterly reports, and monthly
reports.
The type and detail of information required in the monitoring reports has
varied according to the nature of the individual divestiture. As a result of earlier
experiences, one recent case was particularly effective in addressing the ques-
tion of monitoring. In addition to the requisite information detailing the dives-
titure process (e.g. access to bids, etc.), the Director could request an audit of
the operating condition of the assets at the parties’ expense. The Director could
also have access, upon thirty days’ notice, to all documents and personnel. In
addition, an independent auditor could be required.
In the Southam Divestiture order, monitoring reports are to be provided to
the Director in three instances: first, upon the Director’s request, by the monitor,
appointed under the hold separate interim order, detailing the firms’ compliance
with the terms of the order; second, by the respondents, within three days of a
request by the Director, giving a full description of all substantive contracts,
negotiations and offers in respect of their attempt to divest the assets; and, third,
by the trustee, every thirty days, detailing the same information as required of
the respondents in documenting the trustee’s efforts to sell the business. While
these compliance efforts are all case-specific requirements, they demonstrate a
determination to ensure that the parties adhere to the divestiture process set out
by the Bureau or the Tribunal.
A formalized monitoring requirement should focus parties on completing
the divestiture, and also serves to forewarn the Bureau of any difficulties or
53For example, if the Bureau has permitted the marketing of assets which lack viability, the Tri-
bunal may be less than enthusiastic about endorsing the undertakings in the form of a consent
order.
REVUE DE DROIT DE McGILL
[Vol. 38
weaknesses with the process. The specificity of the requirements may continue
to be determined by the nature of the divestiture and the industry, but the trend
within the Bureau has been toward a more formalized monitoring clause,
including, wherever necessary, data provided by external experts, at the parties’
expense. Monitoring of the parties’ progress serves to increase the probability
of effective completion of the divestiture and, where the parties appear not to
be respecting their undertakings, allows the Bureau to respond quickly to these
concerns.
IV. American Divestiture Procedures
A number of changes have been made to the divestiture procedures
invoked by U.S. enforcement officials to address the earlier concerns raised in
the academic studies summarized above. The process is now considerably less
ad hoc and more formalized than that which existed in the 1960s and 1970s.
Of notable importance is the passing of the Hart-Scott-Rodino Antitrust
Inprovements Act of 1976,14 requiring parties to prenotify the U.S. antitrust
agencies of particular transactions prior to their consummation. Through this
process, the antitrust authorities are provided with a means of effectively
enjoining entire transactions pending resolution of their competition concerns.
By making use of this ability, in conjunction with more standardized divestiture
procedures which alter the parties’ incentives to complete the sale, divestitures
have become self-realizing. This is reflected in a greatly improved timeliness of
the settlement process.
Both the Antitrust Division of the U.S. Department of Justice (“Antitrust
Division”) and the Federal Trade Commission (“FTC”) prefer a “fix-it-first”
remedy to anti-competitive mergers, thereby eliminating any need to proceed
with court action. Post-acquisition divestitures will be agreed to when the
defendant can satisfy the Antitrust Division or the FTC that the assets to be
divested can be sold and operated by the purchaser as a viable, long-run com-
petitive entity. All U.S. divestiture settlements are accomplished by consent
decree in the case of the Antitrust Division, and by consent order before the
Commission of the FTC, an important difference from the Canadian practice of
undertakings.
Consent orders issued by the Commission, and clearly consent decrees
from the district courts, are enforceable through the courts with heavy fines (up
to $10,000 (US) per day for continuing violations) for failure to comply with the
terms of a particular order or decree. The FTC has sued for such fines in a
number of cases. In a recent case, the Court of Appeals for the Ninth Circuit
upheld an earlier district court decision requiring Louisiana-Pacific Corp. to pay
$4 million in fines for failure to comply with an FTC divestiture order.5′
For cases before the Antitrust Division, the actual terms of the decree are
usually negotiated by the defendants’ counsel and the Antitrust Division staff
5415 U.S.C. 1311-1314 (1988).
5 5United States v. Louisiana-Pacific Corp., 2 Trade Cas. 69,166 (D. Or. 1990).
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involved in the original investigation into the defendants’ activities. Likewise,
the FTC staff involved in the original investigation will negotiate the terms of
the order with the defendants’ counsel. The Office of Operations within the
Antitrust Division then drafts the decree. In FTC cases, the Office of Compli-
ance handles all subsequent compliance matters following the consent order’s
enactment. For both agencies, the terms of orders and decrees are highly stand-
ardized. Neither agency will deviate lightly from boilerplate provisions because
they ensure consistency and fairness in negotiating and entering consent pro-
ceedings.56
A. Viability of Assets
To ensure asset viability, U.S. enforcement officials insist upon the dives-
titure of an acquired, ongoing concern. Typically this means all the overlapping
assets acquired plus any additional assets required to make those assets an ongo-
ing concern. The language used, requiring the possible divestiture of additional
businesses or the effectuation of additional requirements to ensure viability, is
typically open-ended, and while this may be of concern to businesspeople, it is
believed to be insurance that the enforcement agency gets what it is ultimately
seeking –
given that it has less information about the
business than those with whom it is negotiating.57
a viable set of assets –
Generally, hold separate orders are used to assure authorities that asset via-
bility is maintained. There is no automatic preference for preliminary injunc-
tions where there are good signs of settlement. Note, however, that the hold sep-
arate arrangements affect a broader range of assets than that designated for
divestiture, including the identified “crown jewels” of the merger transaction.
This has been found to greatly improve the defendants’ incentives to quickly
complete any required divestiture.58
Explicit language is incorporated into hold separate orders to ensure that
the defendants maintain the marketability of assets by preserving the physical
condition of assets and by continuing to provide sufficient working capital for
their operation. Defendants are also prevented from terminating or altering any
5 6For examples of Antitrust Division and FTC divestiture and hold separate orders, see United
States v. Baker Hughes Inc., 2 Trade Cas. 69,149 (D.D.C. 1990); United States v. Archer-Daniels-
Midland Co.; 5 Trade Reg. Rep. 22,781 (1990).
57Note that despite this broad definition, these provisions have not yet been used. The threat of
their invocation is credible enough to persuade the parties to quickly complete the required dives-
titure. On a more specific level, the FTC order in United States v. Atlantic Richfield Company, 5
Trade Reg. Rep. 22,878 (1990) [hereinafter Arco Chemicals] defined viability to mean “the prop-
erty is capable of operating independently at the same output as currently (at competitive prices)
and is capable of functioning independently and competitively in the same business as the assets
are currently employed.” See M.G. Schildkraut, “FTC Consent Orders in Merger Matters” in Anti-
trust Division and FTC Speak, supra note 14, 85 at 91.
58M.B. Coate, A.N. Kleit and R. Bustamante find that where the competitive concern is only in
respect of a small portion of the overall transaction, but the entire transaction is being enjoined
pending resolution of the FTC concerns, this is the primary determinant of the parties’ willingness
to settle with-the FTC rather than litigate or abandon the transaction (Federal Trade Commission
Bureau of Economics, Fight, Fold or Settle?: Modeling the Reaction to FTC Merger Challenges
(Working Paper No. 200) (Washington, D.C.: Federal Trade Commission, February 1993)).
McGILL LAW JOURNAL
[Vol. 38
current employment, salary or benefit agreements. In general, defendants do not
manage the held separate assets in any fashion. Furthermore, the held separate
assets retain all earnings and profits from their operation as opposed to the
defendants. Signed affidavits of senior officials attesting to fulfillment of all
these conditions are required at the time the divestiture is completed.
B. Prospective Purchasers
The onus is on the defendant to prove the pro-competitive impact and via-
bility of the prospective purchaser to the enforcement agency for its approval.
While the process by which the defendant chooses to sell the asset package is
not dictated by either the Antitrust Division or the FTC, both agencies require
extensive reporting of efforts undertaken. Affidavits and full documentation of
all of the defendant’s activities to effect the divestiture must be filed with the
respective agency on a monthly basis. These efforts are routinely cross-checked
by compliance officials. Typically, Antitrust Division consent decrees also state
access requirements for information on the sale, and the time in which the
defendant must comply with all requests for information made by bonafide pro-
spective purchasers.
Prior to recommending approval of the final purchaser, an extensive exam-
ination of the competitive impact of the transaction is undertaken. The pur-
chaser must be fully independent, notionally and financially, from the defend-
ant. Full documentation of the purchaser’s business plans, and financial and
accounting information is required. Interviews are held with officials of banks
and other lenders, customers, and officials of the purchaser who will be respon-
sible for running the divested assets, to assist enforcement officials in judging
the purchaser’s viability. In cases where a purchaser is filed with the Federal
Trade Commission for approval, there is also a thirty-day public comment
period prior to final approval.
C. Period of Time Taken to Complete Divestiture
Extensions to the time periods which follow are very rarely granted by
either the FTC or the Antitrust Division. In cases before the FTC, divestiture
must be complete within twelve months of the order. This means final Commis-
sion approval of a signed-off deal, including the thirty-day public comment
period. In Antitrust Division cases, the defendant is usually given up to twelve
months to have a binding offer by an approved purchaser, although there have
increasingly been cases where firms are given only a six-month time frame.
Recent divestiture settlements by the Antitrust Division have been under the
twelve-month time frame. Fpr merger cases settled between 1981 and 1992, the
average time taken to complete the required divestiture, from the point of filing
the consent decree with the court, was eight months, ranging from a low of
under one month to a high of nineteen months.59 While the numbers are not
59In total, the Antitrust Division sought challenges or divestitures in 68 merger cases between
1981 and 1992. Of this total, 49 cases were settled by consent decree, of which 39 cases required
divestiture. Of the 39 cases requiring divestiture, divestiture had occurred in 31 cases by the end
of 1992.
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available for the FTC, conversations with officials within that agency indicate
that the average time taken is similar.
Failure to complete the divestiture within this time frame will result in the
appointment of a trustee to effect the sale and/or the seeking of civil penalties
or other court relief for breach of an order. The FTC has been more aggressive
in seeking civil penalties than the Antitrust Division. Neither agency finds that
trustee sales are required very frequently, as the parties generally complete the
sale on their own.
The conditions surrounding trustee appointment, contract, and sale are laid
out in considerable detail in the order or decree. Where the government and
defendant cannot agree on the trustee to be appointed, each party nominates two
candidates to the court or Commission which appoints a final trustee. The Com-
mission or court approves the trustee contract, which must contain financial
incentives to quickly complete a sale. Trustees are authorized to complete the
divestiture at such price and on such terms as are then obtainable upon a rea-
sonable effort on their part, and do so at the defendant’s expense. Frequently, the
trustee is authorized to supplement the existing asset package with specified
“crown jewels” in order to ensure completion of the sale. This, in combination
with the obvious loss of control over the sale, acts as a powerful incentive for
the defendant to complete the divestiture within the originally specified time
period.
Conclusions
Earlier in this article we noted that the effectiveness of anti-competitive
merger relief should be measured in relation to its denial of market power. More
specifically, divestitures must be viable, competitive, and timely. Our review of
the Canadian experience illustrates that, not unlike the American experience, the
Bureau of Competition Policy’s initial use .of divestitures as a remedy to anti-
competitive mergers was characterized by a number of problems which resulted
in early relief likely being less effective in certain cases. However, changes have
been made in an effort to improve the effectiveness of the process. It is our opin-
ion that it is now time for the Bureau to further standardize its procedures in
respect of divestiture relief, thereby ensuring that viable asset packages are sold
to competitive entities in a timely fashion.
The Bureau should be sceptical of any divestiture package which does not
represent a profitable, stand-alone, operating entity with recognizable market
share, customers and managerial expertise. As in the United States, the burden
should clearly be upon the parties to demonstrate that the assets to be divested
comprise a viable ongoing concern. The definition of viable assets used in the
Arco Chemicals order of the FTC6 is a good example, which the Bureau may
wish to consider adopting.
To ensure viability, we believe the Director should argue that the busi-
nesses to be divested be defined to include “any additional assets or businesses
6 0Supra note 58.
REVUE DE DROIT DE McGILL
[Vol. 38
which may be necessary to ensure their viability and competitiveness.” In the
recent Southam/LMPL case, the Tribunal did not incorporate this type of phrase
within the final divestiture order, but instead chose not to limit the divestiture
to the listed assets, allowing for the inclusion of assets used in or necessary to
the business that a purchaser wishes to acquire. Notwithstanding use of this def-
inition, it is our belief that the Director should promote inclusion of the “viabil-
ity and competitiveness” phrase in all future orders in light of the Tribunal’s
strongly stated intention to ensure that the divested assets form a viable, com-
petitive business.
In order to ensure that the assets are maintained in the interim, the Bureau
should consider making greater use of interim injunctions. Where the parties
have closed the transaction, hold separate interim orders should be used as a
matter of course. More thought might be given to standardizing the language
used in these orders in a manner which will ensure their effectiveness. Hold sep-
arates should generally be expansive rather than restrictive, as this will improve
the parties’ incentives to quickly complete any required divestiture. The profits
and earnings of the held separate assets should remain with the assets them-
selves, rather than accrue to the parties. Affidavits attesting to the state of the
assets immediately prior to completion of the divestiture would give the Bureau
greater confidence that the parties have not neglected their obligations in any
way.
Monitoring of the parties’ efforts to effect the sale should continue. The
Bureau may wish to direct the process to a greater extent by developing a
generic profile, early in the divestiture process, of the type of purchaser who
would restore the pre-merger competitive structure of the market. This profile
would aid in later decisions concerning not only which potential purchasers are
directly approached, but also the kinds of publications in which advertisements
are placed and the geographic range within which potential purchasers are likely
to be located, as well as enabling the Bureau to make clear to the divestor early
in the process the kinds of purchasers who are likely to be acceptable and unac-
ceptable to the Director.
Parties involved in negotiating divestiture undertakings with the Bureau
must realize that divestitures are forced sales. They are the “cost” imposed upon
the firm for an anti-competitive merger or portion thereof. There should con-
tinue to be no minimum price at which divestiture will take place. Whereas the
parties are initially free to set their own price, they must bear the risk of asking
too high a price, that risk being the inevitable transfer of responsibility for the
sale to a trustee. The trustee must divest the assets for whatever price they will
bring. If the insistence on unrealistically high prices for divested assets is to be
discouraged, the parties must be convinced that deadlines will be enforced.
Trustee clauses should remain a fixture of all undertakings. Their effective-
ness has been improving and efforts to standardize the language used, in partic-
ular to ensure that the trustee is financially rewarded in a manner that encour-
ages timely completion of the divestiture, should continue. It is clear that, when
used effectively, this clause can provide incentives to both the parties and to the
trustee to complete the sale quickly.
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In the past, time deadlines have not always been met, and this may have
created a sense that the Bureau lacks resolve in this matter. A standarized struc-
ture which permits extensions only under extreme circumstances will alter the
parties’ incentives, in that failure to complete their obligations within the des-
ignated time period will impose increasingly high costs on the parties, as
responsibility for the sale goes to a trustee. It is our view that twelve months is
more than sufficient time to complete the vast majority of divestitures. The
average time taken to complete divestitures in recent merger cases involving the
Antitrust Division confirms the feasibility of this time frame. A limited time
period (for example, up to a maximum of six months) beyond this should be
granted to the trustee where parties have failed to complete the sale.
Enforceability of divestitures may be called ‘into question if the Bureau
continues to use undertakings rather than consent orders. In light of this, the
Bureau should revisit businesses’ willingness to proceed to the Tribunal by way
of consent, given the Tribunal’s decision with respect to intervenors in Canada
(Director of Investigation and Research) v. Air Canada.6 The business and
legal communities have, in the past, expressed concern over the length of time
involved in consent orders. However, in this recent decision, the Tribunal rec-
ognized the need to restrict intervenors’ participation to limited issues which
would clearly not be addressed by either the Director or respondents in order to
expedite the process. If this view reflects the Tribunal’s general willingness to
expedite proceedings, it should encourage greater use of consent orders. In addi-
tion, consent orders provide the opportunity to enforce breaches of undertakings
by seeking fines or other penalties under the criminal penalty provisions of the
Competition Act or through contempt proceedings.
By introducing a more structured approach to divestiture, the Bureau will
alter the incentives of those merging parties who choose to enter an agreement
where a substantial lessening or prevention of competition is likely to occur.
There has been an element of trial and error in the approach taken by antitrust
authorities as they move along the learning curve. In the case of Canada, this
may have left the impression that there is a low probability of firms being held
to all terms within undertakings, most notably timing. With the introduction of
a standardized process, from which deviation will be infrequent, parties who
choose to continue with an anti-competitive merger must be prepared to accept
the higher risk of facing significant costs. This is the direction in which the U.S.
enforcement agencies haie moved in order to address those inefficiencies which
had hindered their early divestiture efforts. It is also a direction which the Tri-
bunal, as stated in the recent Southam Remedy case,62 appears prepared to sup-
port. Divestiture relief will then be assured of achieving the desired goal of pre-
venting anti-competitive mergers, and in so doing, will restore competitive
markets.
61(23 December 1992), CT-88/1 (Comp. Trib.).
62Supra note 4.
