Case Documents

SCHEDULE "AA" THE COMPETITION TRIBUNAL IN THE MATIER OF an Application by Southam Inc., et al. under section 106 of the OJmpetition Aa, R.S.C. 1985, c. C-34, as amended; AND IN 1HE MATTER of the direct and indirect acquisitions _ ~~~--~-by Southam Inc. , et al. of equity int.crests in the OMPETITION TRIBUNAL publishing The Vancouver Ccurier, the Nonh Shore eJWMAL DE LA CONCURRENCE

the &al Estate Weekly . BETWEEN: SOUTHAM INC. WWER. MAINLAND PUBLISHING L RIM PUBLISHING INC. YELLOW CEDAR PR.OPERTIF.S LID. NORm SHORE FREE PRFSS L'ID. SPECIALTY PUBLISHERS INC. ELTY PUBLICATIONS LTD.

- and -THE DIRECTOR OF INVESTIGATION AND RESEARCH

SECQND AMENDED STATEMENT OF GROUNDS AND MATERIAL FACTS

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F { I p L E tocr 21 1997 ta4 °s D ; E REGISTRAR • REGISTRAIRE OTIAWA, ONT. t>.-~:...::.:.:..:.:..;:_:~--~~~

Appli~ Respondent

- 2 -I. MATERIAL FACTS 1. The Applicants allege the following material facts as the basis of this Application under section 106 of the Compedtion Act (the "Act") for a variation of the divestiture order dated March 81 1993 (the •Divestiture Order") issued by the Competition Tribunal (the "Tribunal"}.

A. The Parties 2. Applicant Southam Inc. ("Southam") is a diversified Canadian oommunication oompany whose principal business is newspaper publishing. Through its Pacific: Press subsidiary, Southam currently owns two Vancouver-area daily newspapers: the Vancouvu Sun and the Provine£ (the "Pacific Press Dailies") which circulate in the Lower Mainla.nd 1 of British Columbia and throughout the rest of the Province. In a series of transactions carried out in 1989 and 1990, Southam and the other Applicants ac.quired a direct or indirect controlling interest in thirteen community newspapers in the Lower Mainland, including the North Shore News ("NS}r). As well, they acquired three distribution busin~ses, two printing bu~ and the Real Estm.e Weekly ("RITTV"), a zoned real estate advertising publication circulating throughout the Lower Mainland. Prior to the acquisitions, there were two independent competitors in the North Shore marlret for print real estate advertising: the "Homa" supplement of the NSN and the North Shore edition of the REW. After the acquisition, Applicant Lower Mainland Publishing Limited ("LMPL" ) owned and managed both of these publications.

3. The Director is the officer appointed under section 7 of the Act and is charged with the administration of the Act.

1 CapjCaliud terms ~ bereln such u Low~r Maicla.ud and tho Nortll Sb.ore are definod in die Tribunal'• Reasora of June 2 , 1992. ~ Dir~aor v. Southam, (1992) 43 C.P.R. C3d) 161).

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- 3 -B. History ol the Proceedings in Director l'. &utJuon Inc., et aJ.. 4. In its decision of June 2, 1992, (the "Tribunal Decision"), the Tribunal held that the common ownership by LMPL, one of the Respondents in that proceeding, of the NSN and REW, resulted in a likely substantial lessening of competition in the market for print real estate advertising services in the North Shore. The Tnl>unal found that the relevant geographic nwtet was the North Shore area of Vancouver. The Tribunal also concluded that the NSN and the REW were the only effective competitors in the namJwly-defined market of print rcaJ. estate advertising services in the North Shore. The Tribunal Decision was based on the competitive environment as it existed in the summer and fall of 1991.

5. In 1991, the REW was a tabloid publication devoted exclusively to real e.state advertisements placed by real estate brokers and agents. The REW was delivered free, door-to-<loor, on a weekly basis, in 14 separate zoned e.ditions. In total, the REW circulation area enoompassed all of Vancouver and most of the Lower Mainland. The North Shore edition of the REW rREW-NS") accounted for $1.164 million, and roughly 11 % of the REW's total revenue in 1991 . This edition was distnouted to approximately 50,000 households in the North Shore per week.

6. In 1991, the NSN was a community newspaper distributed free door-to-door on the North Shore three times per week. Its circulation was approximately 62,000, and the Friday edition of the paper included a real estate insert, the "Homes" supplement, which oontained only real ~te advertising, primarily for resale properties. The NSN' s total revenue from real estate advertising was $1.284 million and represented approximately 12 % of NSN's total revenue in 1991.

7. As stated earlier, the Tribunal held that LMPL's ownership of these two North Shore publications resulred in a likely substantial lessening of competition int.he marlret for print real estate advertising services in the North Shore. This conclusion was based on a number

. 4 ­of detemtinations regarding the relevant market and other statutory criteria. First, the Tribunal excluded cable, television, and radio from the relevant service market based on it.s finding that these electronic media were not close substitutes for print real estate advertising; it found that realtors spent very little on advertising in these media, and regarded them as having little effectiveness in attracting either pro~tive buyers or new listings.

8. Second, the Tn'bunal considered whether the two Pacific Press Dailies were competitors in this narrowly-defined service market. In making this evaluation, the Tribunal determined that the print real e&ate advertisements placed by Vancouver realtors served two pwposes: the sale of the property being advertised, and obtainio,g additional listings for the agent or firm.

9. The Tribunal determined that the REW and Home.s supplement were distinct from the Sun and Province in that: (a) their advertising rates were low enough that agents' pictures could be used, while such advertising was in general too costly in the two Dailies; (b) the REW-NS and Ho7t7a supplement efficiently reached the vast majority of prospective purchasers since the individuals and families who account for approximately two-thirds of total sales in the North Shore are already ~idents of the North Shore; and (c) the Pacific Press Dailies were used sparingly by realtor advertisers, primarily for the speciallied pwposes of announcing open homes or attracting out-of-town buyers.

10. In short, the Tribunal concluded that the Pacific Press Dailies did not provide close substitutes fur the advertising services provided to rea1tors by the REW and HO!MS supplement. Morrover, since the Tn"bunal had found that there wen: no acceptable substitutes for print advertising services, it concluded that there was no effective competition remaining in the North Shore once the NSN and REW came under the ownership of LMPL

11. Since the Tribunal found that it was only on the North Shore where the Dilector might be able to demonstrate a likely substantial lessening of competition in the relevant

- 5 • SCIVice market, it examined the relative difficulty of entry into the business of supplying print real estate advertising services in the North Shore. The primary barrier identified by the Tubunal was the need for credibility with real estate agents and firms. The Tribunal found that ~ attempts by major realtor finns to introduce competing real estate publications had failed because other unaffiliated agents (i.e., prospective advertisers) were not convinced that such a real estate newspaper would be operated in an unbiased manner. 1be Tribunal found that there was no convincing evidence that entry could be achieved in the North Shore maiket without both significant risk and investment and, therefore, held that there would likely be a substantial lessening of competition in the supply of print real estate adverti&ing services on the North Shore.

12. Two alternative remedies were proposed by the parties. The Director submitted that the complete divestiture of either the NSN or the REW was the only effective remedy, while the Respondents proposed the sale of the Home.J supplement of the NSN, including certain optional rights and proposed ancillacy agreements which would permit the purchaser of HQ1711!S to retain the efficiencies and goodwill generated by an ongoing relationship with the NSN.

13. The Tribunal evaluated the two proposed alternatives on the basis of whether they would likely restore the pre-merger competitive situation in the relevant market; this legal standard for divestiture remedies was subsequently rejected in the Supreme Court of Canada's decision in this proceeding. The Tribunal examined the proposal for divestiture of the NSN' s Homes supplement to determine whether it would "ensure the existence of a real estate publication with both financial viability and competitive vigour" (Tribunal Decision at p. 247). An important issue for the Tribunal was whether a potential buyer of Homes would be able to replace (by some means) the benefits which the real estate insert reali.z.ed as an integral part of the NSN. The Tribunal noted that the value of the Homa supplement was enhanced by its being inserted in the NSN, as evidenced by the fact that its advertising rates were somewhat higher than those of the REW-NS. As well, the Tribunal noted that the North

- 6 -Shore was a relatively costly area for door-to-door distribution and that distributional efficiencies Weie realized in the joint delivery of the Homes supplement with the NSN. Finally, with respect to the general cost structure of the Homes supplement, the Tribunal noted that it could not be assumed that its overall cost structure would remain the same post-dive.stiture, and that its post-divestiture cost structure would vary depending on the purchaser's resources and capabilities that might c.omplement the Homes business.

14. After evaluating the optional production, printing and distn"bution agreements offered by the Respondents, the Tribunal rejected any divemiture remedy that depended for its likely effectiveness on long-term supply contracts between the only two competitors in the North Shore matk:et. Unl~ a prospective buyer of Homes could purchase competitively-priced production, printing and distribution services from supplien at arm 1 s length from the ~ts, or bad the capability to self-supply 1 the Tribunal did not believe that a stand-alone Hemes supplement would be a vigorous competitor for the long run.

15. In short, the Tribunal held that the Respondents' proposed divestiture remedy was not able to satisfy what it viewed as the minimum acceptable standard--that it restore the pre--merger competitive situation. As a result, the Tribunal ordered the Respondents to divest either the NSN or the REW in their entirety. The Tribunal also found that the ~ndents' proposed remedy did not meet the threshold applicable to divestitures in consent order proceedings (i.e., that it would not likely eliminate any substantial lessening of ooropetition in the market).

16. In August, 1995, the Federal Court of Appeal allowed the Director's appeal against the Tribunal's findings on the likely effects of the Respondents' newspaper acquisitions on competition in the market for print retail advertising services, and substituted its own finding that daily and community newspapers were in the same relevant service marlcet:. 2 With :? 63 C.P.lt (3d) 1. St 'd EctlcS6El98 01 ~ScP £98 9t l~ HlSc Sl3SSt;J 3~~18 ~~ 0t :Sl l 6 .lc l::xJ

. 7 ­respect to the Divestitu:re Order, the Court of Appeal clismissod the ~ndcnts' appeal completely, holding that it found no basis upon which to disturb the Tribunal's findings regarding the appropriate rem.eAiy. 3 17. In March, 1997, the Supreme Court of Canada held that the Tribunal's findings, while perhaps not correct, were certainly reasonable and, therefore, should stand;' as a result, the Supreme Court upheld the Tribunal's definition of the relevant service market and the Divestiture Order. It took issue with the Tribunal on only one signific.ant legal point. The Supreme Court held that the appropriate test for a merger remedy in a contested proceeding was the same test that had previously been applied in consent ~gs before the Tribunal (i.e., whether the proposed remedy is likely to eliminate any substantial lessening of competition that the merger may have caused). However, the Supreme Court noted that the Tribunal found the Respondents' proposed remedy did not meet this l~r threshold either and, therefore, it declined to order the Tribunal to reconsider the necessity for the Divestiture Order.

18. The Divestiture Order permits the Respondents 180 days to divest, at their option, either the NSN or the REW as a going concern to an arm's length purchaser. The Tribunal stayed the Divestiture Order pending the Federal Court of Appeal's ~sition of the parties' appeals. The Respondents then obtained an order from the Supreme Court of canada staying the Divestitnre Order until the final disposition of appeals by that Court. The de.cision of the Supreme Court of Canada was released on March 20, 1997, and that triggered the 180 day period for finding a suitable buyer pursuant to the Divestiture Order.

3 63 C.P .R. (34) 67. ' Seo Canada (DtrectQT ofln~galtcft and Rtst(D'ch) .... Soz.uh4ml~. ~ 20, 1997), <·s.c.c. Deci8ion") unreported decision of the Supreine Court of Ca».tida, file No. 24915.

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- 8 -II. STATEMENT OF GROUNDS A. Section 100 19. Sectlon 106 provides: Where, on application by the Director or a person against whom an order has been made under this Part, the Tribunal finds that

(a) the circumstances that led to the making of the onier have changed and, in the circumstances that exist at the time the application is made under this section, the order would not have been made or would have been ineffective to achieve its intended puipose, . ..

the Tribunal may rescind or vary the order accordingly.

20. In inteipreting section 106 of the Act, the Federal Court of Appeal held in Director v. Air Canada that the woros •the circumstances that led to the maldng of the order" involve:

a detemrina.ti.on by the TnOunal of the existence of a simple causal relationship between the circumstances and the order, but no more. It is not necessazy that such relationship be "direct" or "demonstrable• other than in the very limited sense that the Tribunal must be satisfied that it exists. Nor is it necessary to relate the citrumstances to the purposes sought to be achieved by the order although it is of course always legitimate to look to such purposes as a guide

to identifying some of the circumstances leading to it. 5 21. We submit that the Tribunal's power to vary an order is constrained only by the same conditions which must be satisfied under section 92 to make the order in the first instance. 6 Without the consent of all parties, the Tribunal is limited to ordering the disrolution of the

S C4nada (Director ofI nvestigation and &uarch) v. Air Canada (1993), 49 C.P.R. ('3d) 417 at 426, fed. 0:. of Appeal, por Hngessen.

6 Id.

- 9 ­merger (subparagraph 92(l)(e)(i)) or the divestiture of assets or shares (subparagraph 92(1)(e)(ii)). 7 On an application to vary an order under section 106, therefore, the Tribunal may rescind the order or direct the dissolution of the merger or the divestiture of shares or assets. g

22. As indicated earlier, the Supreme Court has held in this proceeding that the appropriate test to apply to a proposed remedy in a section 92 case is whether the remedy is likely to be effective in eliminating the substantial lessening of com.petition causally attn"butable to the merger. 9 23. The puq>ose of a section 92 order is reme.dial, not punitive. Af page 245 of the Tn'bunal Decision, the Tribunal stated: There can be no dispute that orders under Part vm of the Act should be designed solely as remedies and not as a punishment. The tribunal is of the opinion that a remedy is Dot pqnitive unless it WS further than n~sary tQ J>e effectiye. In the tribunal's previous reasons, it commented (p. 266, at pp. 306-7 C.P.R.):

The tribunal is aware that the North Shore edition of the Real Estate Weekly and the real estate section of the North Shore News each account for only 10-15 % of their respective revenues. The Challen" will be to devise an effective remedy that does not harm the interests of the respondents in a disproportionate way.

These remarks were meant to oonvey the tribunal's willingness to consider remedies that effectively restore competition in the relevant marlcet without affectin' mote Qf the res,pectiye businesses tb'!n n~sa.i:y to accomRlitl the~· (underlining added)

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- 10 -24. In canada (Director of Investigation and &search) v. .Air Canada, (1993) 51 C.P.R. (3d) 143, the Tribunal held that it is reasonable in making a section 92 order to do it on tenns that are the least harmful to all parties consistent with protecting the public interest in competition.

B. Grounds for Section 106 Application 25. The circumst:ance3 that led to the making of the March, 199.3, Divestiture Order have materially changed since 1991 and, in the existing circumstances, the Divestiture Order would not likely have been made.

26. These material changes in circumstances since 1991 relate to .... ~ aspects of the case which were pivotal to the Tribunal's decisions with respect to .... the alternative remedies: (1) the .... alterations to the competitive environment which permit cost-effective production. printing and distribution of the REW-NS aoart from the remainder of the REW group and ?(hich permit the emergence of an acceptable buver of the REW-NS; and (2) the existence of an actual purchaser for the REW-NS on terms that would make the REW-NS a vigorous competitor to the Homes supplement. If these circumstances had existed at the time the Tribunal was considering the approprlate remedy, we submit that the Divestitnre Order would not likely have been made .

.... 1. Badq!round "' 27: Ibete has beoo a significant increase in the volume of print real estate advertising in the North Shore since 1991. AdditiOMlly. both the diversity of print ooblications and alternative media offering .... real estate .... advertising A on the North Shore .... has increased. Howeyer. dptjng this period We page count of the .MW-NS hu remained effectively constant while the page oount of the NSN has decreased. The reasons for these changes relate to

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- 11 ­changes in the teal e.state industr:y and, in particular, to the move from •traditional houses• to "100% houses".

Jurock Affidavit - pa~. 10-23 (Sch. 1). A 2. Material Changes in the Comoetitive Environment "'(i) Changes in the Market for Flnr Disfn)ution 28. Canada Post. a dominant distributor of economy mail delivery "<flyers) in 1991. exited this business. Consequently. Canada Post no longer maintains a specialized flyer deliverv force. nor does it competitively price its delivery services fgr economy mail. This exit has created an opoortqnity in the market. most notably for the community newspapers.

"{ii) Changes in Technology A~· Since 1991, "'deyelopments in digital and eledronic ooblication and printing techn91ogies mve 1imifisant1y reducedJbe degree of mapua} labour WYN to prosiuce and print newsorint ooblication.s. These changes allow a zoned edition like the REW-NS to operate independently of the other editions of the REW without suffering a significant cost penahv.

(iii) New Community Newspaper Competition 30. In 1991. the NSN was the only home--delivered" community newspaper in the North Shore. Since that tlme. the Voia has emerged as a ~tive community paper. The

Voiq is a pewsprint magazine published twice monthly and A distributed " yia its own distribution netw9rls to hOOO throughout the North Shore. Squamish and Whistler. The existence of the Voice gives the new owner of the REW-NS a distn"lxrtion option other than

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- 12 ­the NSN. If that new gwner owns the Vqjce, the combina.£i2n producs significant distnbation economies.

(iv) Cumulative Effect of the Material Environmental Changes 31. The changes outlined in ooraVJQhS 2§ tS? 3Q f9g@er make it possible for a purchaser to emerge who is able to purchase the REW-NS only and operate it as a viable. vigorous

COOJDetitor in the North Shore,

""" 3. The Emergence or an Astual Buyer of REW-NS """32. The effect of thm material ch3nge~ need n~ @ml shou]d not be considered in the abstracts An entrepreueur has emewd who recognized the opportunities which the change§ i!f~ and wb52 1cte4 to take advantage of them. Thu~. the final material change since the

TnDuna.l•s mnedy decision has been the identification of "' an actual buyer for the REW-NS who fully meets the concerns originally expressed by the Tribunal when it considered a sale of the Homes supplement to an independent, unidentified buyer.

"' ll· The Applicants submit that the principal buyer "' gt the REW-NS. Mr. Michael DelesaDe. has the financial resources and has assembled the publishing ... ;,xpertisx to make the REW-NS into a vigorous, arm's length competitor to the Homes supplement, " Mr. Delesalle"' bas no affiliation with the Applicants" ug bas reamtly acquired a substantial interest in the Voic.e, the twice monthly home-delivered North Shore community newspaper d~ above. He is also the former owner of Lumberland, a retail company which, among other things, published flyers for itself and other retailers in the Lower Mainland. In addition, through his acquisition of the Voice and his business plan to acquire other components of the niche publishing business, he bas shown bis commitment to community newspaper publishing. Mr. Dele.salle intends to make the Voice a weekly community paper by combining the business of the REW-NS with that of the Voice.

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- 13 -J;i.. In contrast to the "' factual enyironment in which the Tribunal considered the Homes Divestiture, Mr. Delesalle' s acquisition of the REW-NS would permit significant synergies relating to the " cost advantages of association with the Voice. Further, the integration of the REW-NS with the Voice MJ1 create further synergistic revenue opportunities as the a4yertising value of each publication is enhanced by it§ association with the other. This new North Shore publishing basin~ would not have to rely upon a competitor for the supply of services such as production and distribution. Finally, the proposed variation means that the real estate publication (the REW-NS) with the higher clrrulat:ion (as compared to the Homes supplement) would be divested.

Letter to Applicants' Counsel from Co~ for Mr. Delesalle dated July 23, 1997, attached as Schedule 2.

"'4. Conclusion A 35. If the changed ciroum§tans;es identifies! above had existed in 1991 , the Applicants submit that the Divestiture Order would not have been made "'. for a number ofre.asons. First, the changes in the competitive environment A hjlVS( mage possib}e effective. ind~rart com0'.f:ition in the releyant market by a cliyested REW-NS· Second· Mr. Delesalle has assembled the properties and developed a business plan that will allow him to be an effective competitor on the North Shore. "'Consequently. the Divestiture Order is no