CA227/06
[2007] NZCA 502
BETWEEN NEW ZEALAND BUS LIMITED
First Appellant
AND INFRATIL LIMITED
Second Appellant
AND COMMERCE COMMISSION
Respondent
CA151/06
AND BETWEEN BLAIRGOWRIE INVESTMENTS
LIMITED & ORS
Appellants
AND COMMERCE COMMISSION
Respondent
Hearing: 19 September - 21 September 2007
Court: Hammond, Arnold and Wilson JJ
Counsel: L A O'Gorman and J White for Appellants in CA149/06 and
CA227/06
J W Tizard for Appellants in CA151/06
D J Goddard QC and L Theron for Respondent in all appeals
Interim
Judgment: 14 November 2007
Judgment: 6 June 2008 at 10 am
JUDGMENT OF THE COURT
A We confirm the dismissal of the appeal by New Zealand Bus Limited
against liability in respect of s 47 of the Commerce Act 1986.
B We allow the appeal by the Blairgowrie Investments Limited & Ors as to
the liability of the Waddell interests as accessories under s 83 of the Act.
C We dismiss the cross-appeal by the Commerce Commission against
Infratil Limited, as to its liability as an accessory under s 83 of the Act.
D We dismiss the cross-appeals by the Commerce Commission and New
Zealand Bus Limited as to the amount of the penalty ($500,000) ordered
by the High Court.
E We dismiss the costs appeal by New Zealand Bus Limited.
F In this Court, there will be no order for costs.
REASONS
Hammond J [1]
Arnold J [227]
Wilson J [269]
HAMMOND J
Table of Contents
Para No
Introduction [1]
The narrative
The Wellington bus companies [10]
Competition begins [13]
The Mana interests [16]
The Waddells’ wish to sell [23]
The Commission becomes concerned, and brings proceedings [27]
The legislation [31]
The respective positions of the parties [36]
The High Court decisions
Introduction [45]
The result in the High Court, as to liability [53]
The reasoning in the High Court, as to liability [54]
Penalties [62]
Costs [64]
The appeal against the finding of an anti-competitive transaction
Introduction [65]
The more specific grounds of appeal [68]
Areas of agreement [71]
The heart of it all [75]
A cosy arrangement? [77]
A substantial lessening of competition? [91]
Accessory liability
Introduction [106]
The legislation [110]
The construction of s 83 in the High Court [117]
The Waddells’ appeal [123]
The submissions for the Commission [126]
The law
(i) Some general observations [127]
(ii) The criminal law analogy [137]
(iii) Section 83 redux: dishonest (or unlawful) participation? [141]
Application to this case
(i) The Waddells [162]
(ii) Infratil [166]
Penalty
Introduction [186]
The jurisprudence of penalties [192]
Potential gains [202]
The Commission staff indicator [206]
Other factors [209]
Conclusion on penalty [210]
Costs
Background [213]
The High Court determination [216]
The relevant legal principles [217]
Conclusion on costs [220]
Conclusion [223]
Introduction
[1] The Commerce Commission brought proceedings in the High Court to
restrain New Zealand Bus Limited (NZ Bus) from completing the acquisition of the
74 per cent of Mana Coach Services Limited (Mana) that it did not already own.
The Commission was of the view that the acquisition would, contrary to s 47 of the
Commerce Act 1986 (the Act), substantially lessen competition in the Wellington
regional market for rights to operate scheduled public bus services subsidised by the
Greater Wellington Regional Council (GWRC), and school bus services subsidised
by GWRC or the Ministry of Education (the Ministry).
[2] In a judgment delivered on 29 June 2006 (the liability judgment), now
reported as Commerce Commission v New Zealand Bus Limited (2006) 8 NZBLC
101 774; (2006) 11 TCLR 679, Miller J agreed with the Commission that s 47 of the
Act had been infringed. The Judge further held that certain members of the Waddell
family, who are associated with Mana, were accessory parties to that contravention.
However, an accessory liability claim by the Commission against Infratil Limited
(Infratil), the parent company of NZ Bus, failed.
[3] By a second judgment delivered on 29 September 2006 (the penalties
judgment), the Judge assessed a pecuniary penalty of $500,000 against NZ Bus: HC
WN CIV-2006-485-585. He also awarded “usual” costs to the Commission, and its
actual fees paid to expert witnesses. This resulted in an award of total costs and
disbursements of $619,629.87.
[4] The various parties in this case have all appealed, and cross-appealed, in such
a way that effectively all the liability and penalty findings and part of the costs
holdings are in issue on this appeal.
[5] For reasons which I need not go into here, the appellants needed a decision
from this Court by mid-November 2007 as to whether, on the merits, this Court was
minded to uphold the Commission’s view as to a contravention of s 47 of the Act.
[6] To assist the parties, on 14 November 2007 this Court issued an interim
judgment in which it held that (at [2] – [3]):
[2] The appeal by NZ Bus Limited and Infratil Limited insofar as it is an
appeal against liability is dismissed. Reasons will follow in due
course.
[3] All other issues in the appeal by NZ Bus Limited and Infratil Limited,
and the associated appeal (CA151/06) by Blairgowrie Investments
Limited & Ors, remain reserved for consideration by the Court.
[7] Apparently, subsequent to that judgment, Mana has assigned the agreement
to a third party, who has completed the transaction. In that sense there has been a
commercial resolution of the ownership issues. Nevertheless, the question of
whether there was a breach of the Act is still a live issue, because it has implications
for the liability of the so-called accessory parties, and the penalty which was
assessed by the High Court. The case is therefore by no means moot.
[8] The proceedings in the High Court attracted a considerable volume of
evidence and submissions and two relatively lengthy judgments.
[9] Because there are to be separate judgments in this appeal I will first set out
the background and the issues which have arisen in an orthodox narrative fashion.
This will relieve my colleagues from having to repeat much of that material
themselves. I will then give my reasons in support of our determination on the
merits of the Commission’s case against NZ Bus; my views as to the liability of the
accessory parties; and finally, I will deal with the questions of penalties and costs.
The narrative
The Wellington bus companies
[10] NZ Bus is New Zealand’s largest bus company. It has public transport
networks in Wellington and Auckland and operations elsewhere. Until November
2005 it was owned by Stagecoach plc, an international bus company based in
Scotland. Since then, NZ Bus has been a wholly owned subsidiary of Infratil, which
is a listed investment company in New Zealand.
[11] NZ Bus trades through subsidiaries as Stagecoach, Cityline Hutt Valley, and
Runciman Motors. It has about 374 buses in Wellington and is by far the largest bus
company in the Wellington region. It services Wellington City, and a Hutt Valley
corridor running from the city to Upper Hutt, Eastbourne, and Wainuiomata.
[12] Mana is the second largest bus company in the Wellington region. It has
115 buses and operates in North Wellington, Porirua City, and Kapiti. The North
Wellington service operates through a subsidiary, Newlands Coach Service (1998)
Limited.
Competition begins
[13] Historically there was no competition between NZ Bus and Mana. Mana
serviced North Wellington and a western corridor running from Ngaraunga to
Waikanae. NZ Bus operated in the south, and to the east of the greater Wellington
area.
[14] That changed. As the Judge noted (at [67]) of the liability judgment:
Competition was not feasible until 1989, when the Transit New Zealand Act
required that all publicly funded passenger transport be tendered. Until then
the Wellington City Council owned and operated the public bus network in
the city. Following deregulation and the introduction of competition, the
Council sold its bus service to Stagecoach plc in 1991.
[15] By the time of the High Court proceedings, NZ Bus held 69 per cent by value
of contracts under which the GWRC and the Ministry subsidise scheduled public and
school bus services. Mana held 28 per cent. With rare exceptions, NZ Bus and
Mana did not compete for GWRC contracts. They did compete for certain Ministry
routes.
The Mana interests
[16] Mana has a convoluted corporate history. The Narain family owned
Newlands Coach Services until 1998, when they and the Waddells merged their two
businesses in Mana. Each family held 50 per cent of shares in Mana, with the
Waddells’ shareholding being held through Blairgowrie. At the risk of oversimplification,
Mana was thereafter owned 50 per cent by what I can term, broadly,
Narain family interests, and 50 per cent by Waddell family interests.
[17] It is convenient to interpolate here that Blairgowrie Investments Limited
(Blairgowrie), Copland Neyland Associates Limited, Rhoderick John Treadwell,
Kerry Leigh Waddell, Karyn Justine Cosgrove, and Ian Waddell are the present
owners in law, and the vendors, of the 26 per cent of shares in Mana. In one way or
another they are all associated with the Waddell family.
[18] Eventually, the Waddells sought to buy out the Narains. They looked to
Stagecoach (a subsidiary of NZ Bus, not Stagecoach plc) to serve as an equity
partner to help finance this bid.
[19] In March 2000, Mana and NZ Bus entered into an agreement whereby
NZ Bus or its nominee (together called “Stagecoach” in the Heads of Agreement)
would purchase 26 per cent of Mana’s shares. In return for its equity participation,
Stagecoach secured some important rights: as a result of securing 26 per cent of
shares, it gained a power of veto over any major transaction requiring the support of
holders of 75 per cent or more of Mana’s shares; it obtained pre-emptive rights over
the remainder of the Waddell interests’ shares in Mana; it acquired the right to
appoint one of Mana’s four directors and receive financial information; it secured an
agreed dividend policy; and it secured certain restraints of trade.
[20] These restraints of trade can be summarised as follows. The first restraint of
trade operated only if the Waddells’ bid was accepted by the Narain family. The
functional effect of it was to prevent either party, if they wanted to sell more than
20 per cent of their shares in Mana, from entering into competition with another
party for three years. A second restraint of trade clause, which took effect regardless
of whether or not the Waddells’ bid was accepted, provided that the Waddells agreed
not to compete with Stagecoach for three years if Blairgowrie (which held the
majority interest in Mana) sold more than 20 per cent of its shares.
[21] This agreement was substantially negotiated before the Waddells made their
bid. It was not however signed until after the transaction had been completed.
[22] The upshot was that upon completion of the transaction in 2000, NZ Bus held
26 per cent of Mana. Blairgowrie, which was controlled by John Waddell and his
wife, held 60.65 per cent, and the other second defendants in the High Court
proceedings held the balance.
The Waddells’ wish to sell
[23] In 2005, by reason of matters of ill health and other personal circumstances,
the Waddell family became keen to dispose of their shares. The selling shareholders
of Mana approached NZ Bus about the possibility of NZ Bus purchasing their
74 per cent shareholding. This was because of the pre-emptive rights held by
Stagecoach to which we have referred.
[24] By a letter of 9 November 2005, the Waddell interests agreed to sell the
remaining 74 per cent of shares in Mana to NZ Bus, subject to Commission
clearance. In consideration, the Waddell interests were to be paid a non-refundable
deposit of $3 million.
[25] Also in 2005, Stagecoach plc was negotiating to sell its shares in NZ Bus to
two Australian private equity investors. On 25 November 2005, Stagecoach plc
entered into an agreement to sell NZ Bus to Infratil, making NZ Bus a wholly owned
subsidiary of Infratil.
[26] On 23 December 2005, the Waddell interests executed an agreement to sell
their shareholding in Mana to NZ Bus, which as a result would own 100 per cent of
Mana. This agreement was conditional on the purchaser obtaining a clearance or
authorisation from the Commission.
The Commission becomes concerned, and brings proceedings
[27] NZ Bus applied for Commission clearance on 9 January 2006. On 9 March
2006 the Commission wrote to NZ Bus expressing concern about high barriers to
entry and the likelihood that not allowing the acquisition would result in greater
competition.
[28] There was a meeting between the representatives of NZ Bus and Commission
staff on 14 March 2006. Although there was some contest in the evidence as to what
precisely transpired at that meeting, as a consequence NZ Bus undoubtedly reviewed
its position. On 15 March the condition requiring Commission clearance or
authorisation was waived by agreement between NZ Bus and the Waddell interests.
NZ Bus thereupon withdrew its application for a clearance.
[29] It followed that, on the waiver, the agreement between NZ Bus and Mana
became unconditional and NZ Bus acquired an equitable interest in the shares in
Mana.
[30] As a result of an investigation, the Commission concluded that the
acquisition would be likely to have the effect of substantially lessening competition
in the relevant market. It determined to bring proceedings.
The legislation
[31] The relevant statutory provisions on which the Commission relied are
straightforward in this case. It is convenient to set them out in short form now.
[32] The starting point is s 47 of the Act which provides that a person must not
acquire assets of a business or shares if the acquisition would have, or would be
likely to have, the effect of substantially lessening competition in a market. A
market is defined under s 3(1A) of the Act as “a market in New Zealand for goods or
services as well as other goods or services that, as a matter of fact and commercial
common sense, are substitutable for them”. Relevantly, for the purposes of this case,
a share includes a beneficial interest in any such share (s 2). A person includes two
or more persons that are interconnected or associated (s 47(2)). Further, a person is
associated with another if that person is able, whether directly or indirectly, to exert a
substantial degree of influence over the activities of the other (s 47(3)).
[33] As to the authorisation and clearance provisions (see generally Part V of the
Act), s 66 provides for clearance of a business acquisition by notice to the
Commission. The Commission will grant a clearance if it is satisfied that the
acquisition does not, or is not likely to have, the effect of substantially lessening
competition in a market (s 66(3)(a)).
[34] Section 83 of the Act provides that the Court can award pecuniary penalties if
it is satisfied on the application of the Commission that a person has aided, abetted,
counselled or procured any other person to contravene s 47 (s 83(1)(c)) or has been
in any way, directly or indirectly, knowingly concerned in, or party to the
contravention by any other person of that section (s 83(1)(e)).
[35] Section 90 is an attribution of knowledge provision in relation to conduct by
servants and agents, both to a corporate defendant and to a person other than a body
corporate.
The respective positions of the parties
[36] In broad terms, the Commission maintained that it was at least implicit in the
March 2000 Heads of Agreement that Mana and NZ Bus would not compete with
one another while NZ Bus held its shares in Mana. Despite the fact that the litigation
prevented the transaction from settling, the Commission contended that NZ Bus
breached s 47 because it acquired an equitable interest in the shares when the
agreement became unconditional on the waiver.
[37] The Commission further maintained that if the transaction did not go ahead,
the likely result would be the sale of 74 per cent of shares, and perhaps NZ Bus’
existing 26 per cent shareholding, to another bus company which would then use
Mana as a springboard to establish itself in the greater Wellington area and actually
compete with NZ Bus.
[38] As to the position of the Waddell interests and their liability as accessories
under s 83 of the Act, the Commission’s position was that by agreeing to waive the
condition requiring clearance or authorisation, the Waddell interests aided and
abetted, or conspired with, NZ Bus to contravene s 47. In the alternative, the
Commission submitted that the Waddells were directly or indirectly concerned in, or
a party to, the breach of s 47 by NZ Bus.
[39] The same kind of allegation was made against Infratil, but with the further
allegation that Infratil had counselled or procured NZ Bus to contravene s 47. The
Commission maintained that it is sufficient for liability under s 83 to show that the
accessory knew the essential facts constituting the contravention without proof of an
intention to assist the principal.
[40] As to remedies, the Commission sought declarations, an injunction against all
defendants, an order cancelling the agreement, and pecuniary penalties.
[41] NZ Bus denied any tacit understanding in the March 2000 Heads of
Agreement that Mana and NZ Bus would not compete with one another while NZ
Bus held its share in Mana. It maintained that the transaction raised no competition
issues. It said that GWRC and the Ministry were monopsonists with substantial
countervailing market power. The term “monopsonist” is not used in everyday
language. It is an awkward technical term for the position of a single buyer or
consumer in a particular “market” with considerable influence over suppliers. In
particular, potential market entrants had identified the power of GWRC and the
Ministry to address contract lead times and maximum contract sizes as significant
constraints.
[42] In any event, NZ Bus argued that there would be no lessening of competition
because in practical terms NZ Bus and Mana operated in separate geographic
markets. Mana was in no better position to operate in NZ Bus’ territory (and vice
versa) than any other firm would be, including an overseas operator entering on a
de novo basis. Barriers to entry and expansion were low and potential entry imposed
a very real constraint on prices.
[43] In the alternative, NZ Bus and Mana made a rather technical argument that
they were associated parties for the purposes of s 47, so that any increase in NZ Bus’
shareholding in Mana should be treated as an internal transfer that would not
substantially lessen competition. The suggestion that Infratil was an accessory was
resisted on the footing that it lacked the necessary knowledge of the essential facts
which was required to establish the breach of s 47.
[44] The Waddell interests maintained that the transaction would not result in any
lessening of competition. They argued that competition from new entrants would
remain a significant constraint for both NZ Bus and Mana whether or not the
transaction went ahead. NZ Bus’ 26 per cent shareholding in Mana would restrain
significant expansion by Mana into NZ Bus’ area of operation. This was because
that shareholding carried the powers under the March 2000 Heads of Agreement to
veto any major transaction and to appoint a director. The Waddell interests also
denied that they were accessories to any breach of s 47 by NZ Bus.
The High Court decisions
Introduction
[45] There was a respectable degree of agreement on various matters in the High
Court proceedings, and clear findings by the Judge on other areas of concern in a
competition law case.
[46] The central issue was whether the acquisition by NZ Bus of the remaining
74 per cent of shares in Mana that it did not already own contravened s 47 of the Act.
[47] At [121] of the liability judgment, Miller J referred to the established
authorities which indicate that the question whether a substantial lessening of
competition is likely to arise is to be determined by comparing the likely state of
competition should the acquisition proceed with the likely state of competition if it
does not. No counsel took issue with that approach.
[48] The Judge considered that the relevant product dimension of the market was
for the rights to provide subsidised bus services (at [124]), and that the relevant
geographic dimension was the Wellington region as a single market (at [127]).
[49] The High Court also had before it evidence as to the history of the
transactions canvassed above, the market participants, market share data and the
correlation between rivalry and price, the profitability of NZ Bus and Mana, and the
position of potential entrants to the market.
[50] As to the latter factor, the Judge was satisfied that there was a genuine
interest in market entry among potential entrants. Importantly there was a strong
preference for entry by acquisition rather than de novo entry (at [143] - [144]).
[51] The Judge noted that barriers to entry and market definition, at least in a case
such as this, were primarily economic and factual questions, rather than legal ones
(at [154]). In his analysis of conditions of entry, the Judge applied the LET test
contained in the Commission’s Mergers and Acquisitions Guidelines (2004): that is,
whether entry is Likely, sufficient in Extent and Timely (at [151]).
[52] It was common ground amongst the economists who gave evidence that the
Court should utilise a three-year time line in analysing conditions of entry when
applying the LET test (at [155]). In relation to conditions of entry in the regional
market in this case, the Judge traversed evidence pertaining to lead times for requests
for tender, maximum size and duration of GWRC contracts, economies of scale,
commercial registrations, patronage information, local knowledge, acquisition of
staff and buses, depot location and establishment, tendering costs and incumbent
retaliation (at [162] - [182]).
The result in the High Court, as to liability
[53] The actual outcome of the liability issues was as follows:
? The High Court made a declaration “that the acquisition of the Waddell
interests’ shareholding on 15 March 2006 is likely to substantially lessen
competition in the Wellington regional market for rights to supply
subsidised scheduled public and school bus services, and so contravened
s 47” (at [256]).
? Kerry Waddell and Ian Waddell were held to have contravened s 83(1)(c)
and (e) “by participating in the waiver with knowledge of essential facts
sufficient to establish contravention of s 47” (at [257]).
? Infratil was held to be not liable as an accessory under s 83, as the
Commission could not show that Infratil deliberately assisted NZ Bus
with knowledge of the essential facts sufficient to establish contravention
of s 47 (at [252]).
The reasoning in the High Court. as to liability
[54] The High Court judgment under review was necessarily a very full one. The
essence of the Judge’s reasoning appears to have been as follows.
[55] The Judge considered there was a potential for competition between NZ Bus
and Mana, particularly in north Wellington. But the absence of competition was
explicable by deliberate restraint, on both sides (at [87]).
[56] The Judge held that there was something of a cosy understanding between
NZ Bus and Mana that they would not compete for anything other than the Ministry
technical routes. The Judge considered that Mana had initiated the acquisition to
protect itself from competition. This ambition explained the willingness of the
Waddell interests to grant NZ Bus pre-emptive rights, restraints of trade, negative
control over major transactions, some control over dividend policy, and a seat on the
board (at [84]).
[57] The acquisition of the Waddell interests’ shareholding which occurred on
15 March 2006 was likely to substantially lessen competition. If the transaction
went ahead, there would be a loss of existing competition between NZ Bus and
Mana on Ministry technical routes (at [204]). There would also be the residual risk
that Mana or NZ Bus might tender for GWRC contracts in the others area. The
various practical problems such as restructuring of GWRC contracts, the bundling of
routes and lead times meant that de novo entry would be possible, but would be
unlikely to occur in an effective and timely way. The “tacit understanding” the
Judge identified between NZ Bus and Mana, that neither would compete for GWRC
contracts in the other’s area, would be unlikely to survive the transfer of control to a
new entrant (at [201]). There was also the practical difficulty that Mana and NZ Bus
had possession of local assets and were the lowest cost providers. While potential
entry would only be a possibility if the transaction went ahead (thereby making it
only a relatively weak constraining force), entry would likely occur if the acquisition
did not go ahead. This would create a major and unusual opportunity for substantial
firms to enter the Wellington market, which all potential entrants had indicated that
they would prefer to do by acquisition rather than de novo entry. The capacity to
alter conditions of entry that facilitate competition did afford the GWRC a degree of
countervailing power. But that would be modest unless and until entry occurred on a
substantial scale. Many tenders would attract only one bid (at [196] - [197]).
[58] The Judge further held that NZ Bus and Mana were not associated parties for
the purposes of s 47. He was of the view that it would “turn the section on its head
to presume that it creates an exception where acquirer and target are already
associated” (at [211]), whether or not the acquisition substantially lessens
competition on the facts. Had the legislature intended to create an exception to s 47,
it could and should have done so explicitly. NZ Bus could not prevent Mana from
competing with it by reason of its 26 per cent shareholding and its seat on the board.
The right to appoint a director did not of itself establish that NZ Bus was able to
exercise a substantial degree of influence. The appointee was only one of four
directors. There was no control over board decisions and in any event the director
had to act in the best interests of Mana (at [213]).
[59] In relation to s 83, the Judge held that an accessory is liable only if its
participation was intentionally aimed at the commission of the acts that form the
principal’s contravention, namely the acquisition of assets or shares (at [230]). An
accessory must know the essential facts, being facts that sufficiently establish a
contravention of s 47 (at [236]); actual, not constructive, knowledge is required (at
[234]). In determining the essential facts that an accessory must know, the test must
be directed to the facts that have led the Court to conclude, as against the acquirer,
that the transaction is likely to substantially lessen competition (at [239]).
[60] Applying these principles, the Judge held that the Waddell interests had the
requisite knowledge to establish accessory liability under s 83 (at [250]).
[61] The accessory liability claim against Infratil failed. The Commission had to
show that Infratil deliberately assisted NZ Bus, knowing essential facts sufficient to
establish contravention (at [252]). Infratil was plainly aware of the waiver and hence
the acquisition itself (at [253]). However, knowledge that Mana could compete was
not enough to establish knowledge of facts establishing a substantial lessening of
competition under s 47 (at [254]).
Penalties
[62] Consistent with what he saw to be the deterrent purpose of the legislation,
the Judge considered that the “starting point” for penalties should be to estimate NZ
Bus’ potential unlawful gain. This he estimated at $2 million. He said that this sum
should be discounted to reflect the Commission’s contribution to the breach (relating
to the meeting between representatives of NZ Bus and the Commission on 14 March
2006), the absence of loss, the risk of error in the calculation of gains, and the stigma
associated with the Court’s findings. His Honour considered that some credit should
also be given for the absence of any previous breaches. Acknowledging that his
decision owed more to judgment than to calculation, he considered that a substantial
discount was warranted and ordered NZ Bus to pay to the Crown a pecuniary penalty
of $500,000 (at [66] - [67] of the penalties judgment).
[63] There was no room for an inference that the Waddells gained from the
transaction. And, knowing nothing of the Commission’s concerns, they reasonably
relied on advice that a clearance was not necessary. On any view the Waddells were
at the “low end of the culpability scale” and any penalty “would be reduced to a
token sum” (at [68]). In the circumstances, the Judge declined to impose a pecuniary
penalty on the Waddells.
Costs
[64] To complete the general narrative, I note that substantial costs and witness
expenses were awarded in favour of the Commission. There is an appeal point with
respect to the technical area of expert witness expenses which will be dealt with later
in this judgment.
The appeal against the finding of an anti-competitive transaction
Introduction
[65] The proceedings in the High Court were brought by the Commission as an
action for a declaration, an order cancelling the agreement, an injunction, and orders
for pecuniary penalties. All of those claims came within s 75 of the Act, which gives
the High Court jurisdiction in such matters, and it was never suggested that the High
Court did not have jurisdiction. It follows that any appeal to this Court is a general
appeal, from a series of determinations by the High Court. Accordingly, leave to
appeal was not required, as it is in some other circumstances, by s 97 of the Act.
[66] In relation to liability under s 47, the Notice of Appeal extends to 15 pages
under a variety of headings with particularised complaints under each head: no
substantial lessening of competition; market definition; existing competition; factual/
counterfactual; barriers to entry/expansion; and countervailing power.
[67] To my mind, this initial approach – essentially that the High Court Judge had
got just about everything wrong in relation to liability – has become a somewhat
unfortunate feature of appeals in commercial causes to this Court in recent years. It
has the unfortunate effect of endeavouring to inflict on the appellate court a complete
de novo reconsideration of the case, which is the very thing it is enjoined from
undertaking. It is true that a “rehearing” is required, but that relates to the evidence
which was adduced in the court below, and such further evidence as is permitted on
the appeal. It may also be a sign of considerable weakness in an appeal if counsel
are unable to identify with some real precision precisely where it is that the court
appealed from is said to have gone wrong.
The more specific grounds of appeal
[68] In fairness to counsel for the appellants, the grounds in the Notice of Appeal
were subsequently refined somewhat in the written submissions. They were
summarised by Ms O’Gorman as follows:
… the position of NZ Bus and Infratil is that the trial Judge erred in fact and
in law in concluding that the acquisition constituted a contravention of s 47:
(a) Relevant market: Given the unique factual characteristics of the
subsidised bus services industry in the greater Wellington Region,
particularly geographic considerations, the most useful tool for
analysis for the purposes of s 47 of the Commerce Act would have
been the five separate Area markets within greater Wellington.
(b) Existing competition: There was no basis for finding a tacit
understanding between NZ Bus and Mana about whether they would
compete in each other’s incumbent areas. The restraints of trade in
the 2000 Heads of Agreement were permitted under the Commerce
Act 1986, and in any event those restraints were never triggered and
have been extinguished. Furthermore, there was no proper factual
basis for any finding that NZ Bus and Mana were achieving excess
profits. To the contrary, they were operating on narrow margins and
achieving relatively low returns for the capital invested. This
explains the low numbers of bids on any given tender in the greater
Wellington Region and why new entry has been rare.
(c) Barriers to entry/conditions of entry: Using the LET test and
examining each condition of entry/expansion as against a 3 year time
period, the correct conclusion based on the evidence should have
been that potential entry imposes a sufficient constraint under the
factual such that no substantial lessening of competition would result
from the proposed acquisition by NZ Bus of the remaining 74%
shareholding in Mana.
(d) Significance of countervailing power: GWRC has significant
countervailing power so that it can set the terms of the market and
create the appropriate conditions for new entry should it be
dissatisfied with the competitive results that its tender process
achieves.
(e) Factual: Accordingly, under that “factual” scenario prices are
already at an appropriately competitive level, and new entry would
occur in an effective and timely way if prices were to rise to a supracompetitive
level. The threat of new entry and competition from
existing operators already provides an effective constraint in a tender
market.
(f) Counterfactual: Under the counterfactual, Mana under new
ownership would not be in any better position compared with other
potential entrants when considering entry into areas where NZ Bus is
already incumbent but Mana does not operate. Therefore it was
incorrect to find that Mana would inevitably use its existing
operations as a springboard to compete in other areas in the greater
Wellington regional market.
(g) Likely effect on competition: Accordingly, the acquisition is
unlikely to result in a substantial lessening of competition when
comparing the factual with the counterfactual.
[69] In oral argument, Ms O’Gorman further refined matters by suggesting that
the Judge’s decision as to liability under s 47 had really been driven by two factors: a
finding that there was a “cosy arrangement” between NZ Bus and Mana; and a
finding that NZ Bus and Mana were achieving supra-competitive profits.
Understandably therefore, her oral submissions were directed in large part to
persuading us that neither of these propositions could be sustained.
[70] In the result, some of the arguments set out at [68] above simply fell away
before us and the views of the High Court Judge were essentially accepted on them.
For instance, the concern about the relevant market received little, if any, emphasis
before us.
Areas of agreement
[71] Given the difficulties in precisely defining the issues, it is useful to recall
what was not in dispute on the merits in this appeal.
[72] There was no dispute before the High Court, nor is there now on appeal, as to
the principles to be applied under s 47. The question is simply whether there is
likely to be a real – that is, a “non-trivial” – lessening of competition for a significant
number of routes in Wellington within the relevant timeframe, when one compares
the situation where the acquisition proceeds, with the position if it does not.
[73] Nor does there seem to have been any dispute as to the economic principles
which are relevant as to the liability of NZ Bus in this case. The dispute was and is
as to the application of those principles to the facts of this case.
[74] A number of important matters were common ground:
? All the economic witnesses thought market definition to be not
particularly important in this case, and definitely not decisive here.
? The likely effect of the acquisition should be examined over a period of
three years from the date of acquisition.
? In considering the likely effects of the acquisition, and the prospect of
entry by other providers on conditions of trade, other factors that affect
the likelihood, extent or timeliness of entry have to be looked at, not just
long-run barriers to entry.
? On most routes an incumbent provider will have the lowest costs.
? As to bid markets – which existed in this case – a merger will materially
reduce competitive constraints or lessen competition if it combines the
lowest and second lowest cost bidders and other bidders have materially
higher costs.
The heart of it all
[75] It is important not to lose sight of the forest for the trees in a case like this.
The central legal issue was simply whether the acquisition of 74 per cent of the
shares in Mana by NZ Bus would substantially lessen competition to a degree that
could be described as “real” under s 47 of the Act. Essentially, under this head this
case is one of degree: some lessening of competition was always likely to result from
this transaction, but was it enough to infringe the Act?
[76] The Judge took the view that what had come about in the Wellington bus
market was the result of what he termed a “tacit understanding” which led to the
development of anti-competitive pricing. Competitive conditions would not be
better under one operator; indeed they would likely be worse. The Judge considered
that in the result, the line of anti-competitive behaviour had been crossed by a
sufficient margin for the purposes of liability.
A cosy arrangement?
[77] Given the attention to this point by Ms O’Gorman – and the concern it has
given rise to on the part of the appellants, who plainly think the lower Court was
simply wrong on this point – I will deal first with the Judge’s finding that there was
an operative tacit understanding.
[78] It is important to observe at the outset that s 47 of the Act is concerned with
effects and not motives. It asks whether, if a certain state of affairs exists, this will
have the effect of substantially lessening competition in the market. Why something
was brought about or came about is not directly relevant to liability as such, though
it helps to understand how things came about, and the existence of a discernible
malignant scheme would always be highly relevant to relief.
[79] A second general point is that the Act proscribes articulated contracts and
arrangements (for instance see Part 2 of the Act on restrictive trade practices). The
analysis is much more difficult as to what occurs in the absence of an explicit
agreement. Competition lawyers and economists have had a good deal of difficulty
with tacit or unstated collusive arrangements. (In the Australian context, see Wylie
“Understanding “understandings” under the Trade Practices Act – an enforcement
abyss?” (2008) 16(1) TPLJ 20).
[80] The standard model of competition describes every firm as a price-taker,
which means that each firm takes the market prices as given and then expands
production until marginal cost is just equal to price. In essence, the only information
the competitive firm needs is the location of customers, the firm’s own costs, and the
market price. The firm does not need and is not troubled by the actions of competing
firms. However, firms in oligopolistic industries take a keen interest in the actions
of their rivals, and take actions in response to those rivals. “Parallelism” occurs
where there are few sellers in a market who take the reactions of competitors into
account when deciding how much they are going to produce, and what price to set.
[81] While it is difficult to set out an all-encompassing formula, what is thought to
be undesirable is a form of tacit collusion in which each firm in a particular market
knows that it is in the interests of them all to maintain a high price or to avoid
vigorous price competition, and the firms act in accordance with that realisation.
This does not amount to a conspiracy, at least in the traditional criminal law sense.
At its worst, the behaviour may have an impact equivalent to price fixing; at its least
malignant, firms do not compete as vigorously as they might have done otherwise.
[82] The High Court Judge explained why he thought there was a tacit
understanding in this case thus (at [83] - [89]):
[83] In this case, NZ Bus witnesses observed that NZ Bus would suffer
loss should it compete with Mana, in that Mana’s earnings (and hence
dividends and presumably the value of its shares) would be affected.
Ms Waddell agreed that if Mana were to enter the Wellington area in any
serious way then NZ Bus would likely retaliate, but that NZ Bus is unlikely
to think it is in its interests to compete so long as Mana does not initiate
competition. NZ Bus witnesses confirmed that good cause to enter Mana’s
territory would exist, were Mana to compete in Wellington or the
Hutt Valley. Mr Martin also made that point in an interview with the
Commission, saying that if Mana did that “we’ll just tender in their area next
time.” Indeed, NZ Bus made a good deal of the risk of retaliation should
Mana enter its area, arguing that a new owner of Mana would opt to behave
just as Mana does now. Explaining why NZ Bus as a minority shareholder
would discourage Mana from competing with it, Mr Ridley-Smith said that
the threat of retaliation was something that Mana would have to take into
account should it try to compete with NZ Bus. In short, the defendants
maintained that self-interest leads the two firms not to compete despite low
barriers to entry, while firmly denying a consensus or meeting of minds
about competition.
[84] I find that there does exist between NZ Bus and Mana an
understanding that they will not compete for anything other than Ministry
technical routes. The evidence begins with the fact that the Waddell
interests approached Stagecoach. They did not do so because of its expertise
in running a bus company. Ms Waddell’s evidence led me to conclude that
their purpose in seeking out Stagecoach as a shareholder was to secure a
quiet life. This is not a case of the larger firm buying a stake in its rival
uninvited. I am satisfied that Mana initiated the acquisition to protect itself
from competition. This ambition explains the willingness of the Waddell
interests to grant NZ Bus pre-emptive rights, restraints of trade, negative
control over major transactions, some control over dividend policy, and a
seat on the board. These things collectively have considerable value.
[85] The restraints of trade in the Heads of Agreement tend to confirm
the understanding, particularly clause 6, which operated whether or not the
bid was accepted. I do not think it matters that negotiations were concluded,
and the agreement signed, after the bid was accepted: clause 6 was part of a
closely negotiated agreement and must be taken to record the parties’
bargain. In reaching this conclusion, I do not find it necessary to draw an
inference against NZ Bus because of Mr Martin’s absence, as Mr Goddard
invited me to do. The agreement speaks for itself. I accept the
Commission’s contention that it is scarcely plausible in the circumstances
that the parties would devote so much attention to restraints upon
competition following a future sale of shares by the Waddell interests
without also reaching an understanding about competition in the meantime.
[86] There is competition at the margin and a degree of overlap in
services, but it is not inconsistent with such an understanding. As already
noted, the two firms compete for Ministry of Education technical routes,
some of which Mana has operated in Wellington City for a number of years.
They also competed for a single GWRC route between Porirua and the
Hutt Valley. Ms Waddell explained that by saying Mana thought the route
was in “our” area.
[87] For reasons elaborated on later in this judgment I am also satisfied
that there is potential for competition between NZ Bus and Mana,
particularly in north Wellington. The absence of competition is explained by
deliberate restraint on both sides. Of course that is not conclusive, since the
firms might have reached their decisions independently, but it does lend
support to my finding.
[88] The witnesses denied an understanding, but while I found their
evidence credible in other respects I do not accept what they had to say on
this point. To some extent they were also debating the question whether the
understanding amounts to an agreement. The evidence that an understanding
exists is compelling. I do accept that it falls short of a contract or agreement
that the parties consider enforceable. The appointment of Mr Waddell as
NZ Bus’ representative on the Mana Board and the practice of keeping very
commercially sensitive information from Mr Turner tend to support that
conclusion. The scope of the understanding is also uncertain at the margin,
as evidenced by competition over the Hutt Valley-Porirua route. Rather, the
stake in Mana creates an incentive for NZ Bus not to compete in Mana’s
territory without good cause and the parties have reached an understanding
that good cause would exist were Mana to provoke NZ Bus by initiating
competition.
[89] Whether or not I am correct in this conclusion, the evidence
establishes that the parties have chosen to refrain from competing in
circumstances where competition is possible. It is the effect of their
behaviour that must be taken into account when evaluating the likelihood of
competition in the counterfactual. Put another way, analysis of the effect of
the transaction on competition does not depend on the conclusion that their
behaviour is attributable to a meeting of minds rather than decisions
independently reached. It rests rather on the question whether a new owner
would behave differently.
[83] The Judge noted that this “tacit understanding” is “not likely to survive
transfer of control of Mana to a new entrant [and that] the importance of this
conclusion cannot be underestimated” (at [201]).
[84] I intend no disrespect to Mr Goddard QC’s submissions under this head in
saying that they reduce to the proposition that the appellant is endeavouring
inappropriately to displace factual findings on this point, to the extent that they were
necessary and appropriate to the High Court judgment. And with all respect to
counsel for the appellants, Mr Goddard was correct: they really are trying to
displace the inference the Judge drew on this general point.
[85] It seems inescapable that there has been a very real degree of competitive
restraint in the relationship between NZ Bus and Mana. The question is why this is.
A real degree of risk aversion? A tacit understanding? Or what?
[86] In fairness to Mana, there was some evidence that it was generally a risk
averse company. On the other hand, the Judge was entitled to and did point to
Ms Waddell’s evidence in which she openly referred to “our” area, and to each
company’s “patch”. Even more tellingly she said that Mana approached NZ Bus in
the way it initially did to secure a “quiet life”.
[87] A judge is also perfectly entitled to have regard to the probabilities, and
“comfort”, or a relatively easy fit, is not implausible but indeed distinctly likely in a
context in which Mana had not had a trouble-free internal history. Why, when it was
having its own internal problems, would it want to generate an external commercial
contest?
[88] The restraint of trade provisions in the 2000 Heads of Agreement must also
be relevant in the current context. The Judge was entitled to attach significant
weight to that feature. Why should there be a concern about the future if there was
nothing of concern about the present?
[89] The whole of the business context was also highly relevant. The thrust of the
economic evidence indicated that NZ Bus and Mana were sound companies turning
respectable, though not supra-competitive profits.
[90] I am not satisfied, after looking at all the evidence to which counsel drew our
attention on the appeal, and after my own consideration of the matter, that the Judge
was wrong in his finding that a “tacit understanding” existed between NZ Bus and
Mana. Where that finding takes one is another matter.
A substantial lessening of competition?
[91] I appreciate the authority in this Court that there should be a comparison of
the factual and the counterfactual in determining whether a substantial lessening of
competition is likely: see Tru Tone Ltd v Festival Records [1998] 2 NZLR 352 (CA).
That said, the heart of this case was always going to be where things would likely
come to rest if the transaction went ahead. I consider the essential points are quite
apparent, even in the usual smog of a competition law case.
[92] The relevant market is the greater Wellington regional market.
[93] The particular concern is the provision of subsidised bus services in that
market.
[94] There are presently two major suppliers of subsidised bus services in that
market. I have indicated the extent of their holdings and operations. They do not
presently compete vigorously, but there is still competition, at least at the margins.
Competition exists for Ministry routes, rather than GWRC contracts.
[95] If the proposed transaction went ahead the new “combined” company would
hold 97 per cent by value of the contracts in the market.
[96] Such a new purchaser would have effective control of Mana; it could
determine its competitive strategy without interference by NZ Bus.
[97] If the particular transaction were to go ahead, the practical outcome would be
only one very large supplier in the market, with an almost monopolistic market share
and few competitive restraints.
[98] Although it is true that some constraints would remain, as Ms O’Gorman
contends, two major suppliers are always going to give rise to a more competitive
situation than one. With one supplier, tender prices could be expected to rise, which
is a concern for the GWRC and the Ministry; if those bodies were not prepared to
pay raised prices, then the quality of service would typically fall.
[99] It also seems to me that Mr Goddard was right to suggest that it is highly
relevant to ask whether NZ Bus and Mana are the lowest cost suppliers of services
for a material number of routes in the Wellington region. The High Court Judge
found, as a question of fact which has not been challenged before us, that the two
companies are the lowest cost competitors (at [203]). If the lowest cost supplier and
the next lowest cost supplier merge, the removal of competitive restraints is very
significant, and prices are likely to rise.
[100] Perhaps the strongest feature of the appeal was the proposition advanced by
Ms O’Gorman that the price correlation evidence was wrong in some respects. With
reference to the evidence, she maintained that prices are at competitive levels, that
the return on capital is not supra-competitive, and that barriers to entry are relatively
low.
[101] All of this was directed, as I apprehend it, towards an overall submission that
potential entry by other companies, coupled with existing competition and GWRC’s
countervailing powers, would ensure that prices remain properly competitive in the
factual.
[102] In straightforward terms, what the Court held was that potential entry and
these other factors would not be a sufficient constraint to ensure that the acquisition
does not substantially lessen competition within the relevant three year timeframe.
[103] In consequence, the appellant’s argument was somewhat misplaced: the High
Court was less concerned about supra-competitive prices as such than with the more
practical question of what the constraints were going to be, as best the Court could
determine them, if the transaction went ahead.
[104] With respect, the Judge was correct that to a real extent there was an exercise
of judgment and evaluation involved here. A court is always required to simplify to
some extent. As it is sometimes said, a competition law court cannot explore the
world economy in order to decide a single monopoly case. What a court is doing
when it draws a line around the relevant market and how various behaviours will be
construed within it is making a critical judgment. It is true that some data will be
weighed or considered in deciding whether the law is violated and some will not.
Yet all the suggestions about more systematic ways to inform that judgment are
merely techniques, or hand tools. In short, this Court should not allow a kind of
false scientism to overtake what is in the end a fundamental judgment which is
required by the Act itself.
[105] In this case, the evidence was quite diffuse. But it seems to me that the Judge
had regard to all the relevant factors. He then came to an ultimate determination that
the constraints which would exist if the transaction proceeded were not sufficient to
deflect a finding that the acquisition would substantially lessen competition in the
relevant market. I have not been persuaded that he was wrong in that conclusion. I
therefore join in the dismissal of the liability appeal point.
Accessory liability
Introduction
[106] In the High Court, the Commission sought pecuniary penalties under s 83
against the Waddell interests and Infratil.
[107] In relation to the Waddells, its contention was that by agreeing to waive the
condition requiring Commission clearance or authorisation, they had aided and
abetted or conspired with NZ Bus to contravene s 47, or were directly or indirectly
concerned in, or party to, the contravention by NZ Bus.
[108] The same allegations were made against Infratil with the added gloss that
Infratil counselled or procured NZ Bus to contravene s 47.
[109] The accessory liability claim against the Waddells was successful while the
claim against Infratil failed.
The legislation
[110] Section 83 of the Act provides as follows:
83 Pecuniary penalties
(1) If the Court is satisfied on the application of the Commission that a
person—
(a) has contravened section 47:
(b) has attempted to contravene that section:
(c) has aided, abetted, counselled, or procured any other person
to contravene that section:
(d) has induced, or attempted to induce, any other person,
whether by threats or promises or otherwise, to contravene
that section:
(e) has been in any way, directly or indirectly, knowingly
concerned in, or party to, the contravention by any other
person of that section:
(f) has conspired with any other person to contravene that
section,—
the Court may order the person to pay to the Crown such pecuniary
penalty as the Court determines to be appropriate, not exceeding
$500,000 in the case of a person not being a body corporate, or
$5,000,000 in the case of a body corporate, in respect of each such
act or omission.
(2) In determining an appropriate penalty under this section, the Court
shall have regard to all relevant matters, including—
(a) the nature and extent of the act or omission:
(b) the nature and extent of any loss or damage suffered by any
person as a result of the act or omission:
(c) the circumstances in which the act or omission took place:
(d) whether or not the person has previously been found by the
Court in proceedings under this Part to have engaged in any
similar conduct.
(3) The standard of proof in proceedings under this section shall be the
standard of proof applying in civil proceedings.
(4) In any proceedings under this section, the Commission, upon the
order of the Court, may obtain discovery and administer
interrogatories.
(5) Proceedings under this section may be commenced within 3 years
after the matter giving rise to the contravention arose.
(6) A person is not liable to a pecuniary penalty under both section 80
and this section in respect of the same conduct.
[111] This is the first case in which the Commission has invoked the accessory
liability provisions of s 83, which was enacted pursuant to the Commerce
Amendment Act 1990.
[112] There is little in the parliamentary material which is of assistance, as to the
provenance and scope of this section. However two years after the enactment of
s 83, a review team said the following in relation to pecuniary penalties and their
application to professional advisors:
7.27 The High Court may impose pecuniary penalties under section 83 of
the Act if an anticompetitive merger is implemented without being
authorised by the Commission. Section 83 was enacted in conjunction with
the introduction of the voluntary premerger notification regime in 1990. The
Court is able to impose penalties on, among others, a person who aids, abets,
counsels or procures any other person to contravene the merger prohibition.
One submission has expressed concern about the manner in which this
provision may apply to professional advisors to merger participants.
7.28 The review team does not share these concerns. We consider it to be
appropriate that a professional advisor who is aware or should be aware of
the facts that gave rise to a contravention of the merger law be subject to
penalties under the Act. A similar provision applies to contraventions of the
prohibitions on anticompetitive behaviour and has done so since the Act
came into force in 1986.
[113] That review team, comprising representatives from the Ministry of
Commerce, The Treasury, the Department of Justice and the Department of the
Prime Minister and Cabinet, consulted very extensively in New Zealand before
reporting as it did.
[114] Plainly, an over-broad formulation of s 83 would have significant
implications for commerce and professional practice: it could impact on mere
vendors of assets or shares and advisors who may be involved in a transaction but
who do not necessarily share in the resulting gains; there is the stigma of a breach
and penalty; and there may be difficult insurance and indemnity issues. There has
been some discussion about the proper approach to, and reach of, this provision in
the aftermath of the High Court judgments in this case. See, for example, Horner
and Quigg “Business vendors beware: Accessory liability in New Zealand” Lawyers
Wkly (29 August 2006).
[115] On the other hand, an unduly narrow view could “neuter” the section.
[116] The issue of accessory liability is in turn closely intertwined with the
clearance procedures in Part 2 of the Act. As the Act stood in 1986, all merger or
take-over proposals above certain floor figures had to receive a clearance from the
Commission. This resulted in many mergers being notified to the Commission that
did not raise genuine competition concerns. The compliance costs for business were
thought to be inappropriate. In 1990 the compulsory notification regime was
amended to one of voluntary notification. See Berry and Riley “Beware the new
business acquisitions provisions in the Commerce Amendment Act 1990” (1991) 21
VUWLR 91.
The construction of s 83 in the High Court
[117] Conscious of the history of the legislation, and the implications of catching
innocent or “mere” vendors, Mr Goddard endeavoured to formulate a test for
liability under s 83 in a way that would not ordinarily capture vendors. He focused
on the actions required for accessory liability which, as a matter of convenient
shorthand, counsel characterised as the actus reus aspect of liability. As the Judge
said, this proposed test sought, for example, to distinguish between a vendor who
sells shares or assets of a business without insisting upon a condition requiring
clearance or authorisation from a vendor who waives such a condition (at [218]).
[118] The Judge appreciated what was driving these kinds of concerns. But he took
the view that what Mr Goddard was suggesting “asks too much of the language of
the statute”, indicating that “the statutory language is plainly apt to capture a
vendor”. Rather, the protection of the innocent “must lie in the mental element” (at
[223]).
[119] After considering the mental element of accessory liability, the Judge
concluded (at [230]):
… an accessory is liable under s 83 only if its participation was intentionally
aimed at the commission of the acts that form the principal’s contravention,
namely the acquisition of assets or shares … it will be a rare case in which
participation is not deliberate. That may be true of the major participants,
but it need not be so of those at the margins of the transaction.
[120] This passage has since been cited with approval by Williams J in Commerce
Commission v Koppers Arch Wood Protection (NZ) Ltd [2007] 2 NZLR 805 at [79]
(HC).
[121] It was accepted by all counsel in the High Court that an accessory must at
least know the essential facts that sufficiently establish a contravention of s 47. The
more contentious issue – as is so often the case with legislation of this character – is
whether the accessory must also be conscious that the facts known to it established a
contravention of the section.
[122] The Judge held that the test must be directed to knowledge of the “essential”
facts that have led the Court to conclude, as against the acquirer, that the acquisition
is likely to substantially lessen competition. This must begin with knowledge of the
number, and size of the market participants; an appreciation of the extent to which
substitution occurs; and an appreciation of the things that create market power (such
as barriers to entry, product differentiation and vertical integration). The Judge said
that was “an imposing list”, but businessmen could be expected to know these things
“because success in business depends on them” (at [239]). In transactional terms,
the essential facts would include facts that led to the Court’s conclusions about the
likely market position of a merged firm and what is likely to happen to the assets or
shares if the transaction does not proceed, and facts that establish a significant
competitive advantage is likely to result from the transaction.
The Waddells’ appeal
[123] Before us, counsel for the Waddells accepted that accessory liability must
contain a mental element requiring actual knowledge of the circumstances and an
intention to, for instance, aid and abet. In other words, constructive knowledge will
not suffice.
[124] The principal submission is that the Judge erred in requiring knowledge of
those “facts” which have led the Court to conclude, as against the acquirer, that the
acquisition is likely to substantially lessen competition. It was said that the “facts”
in the current context are not simple facts or, in some cases, even facts at all. It was
said, they are conclusions, predictions, and judgements that must be deduced from
facts and that reasonable people may disagree on. Mr Tizard argued that it is
unlikely that Parliament intended to impose accessory liability for the purposes of
pecuniary penalties where there is room for differences over the determination of the
ultimate effect of a transaction.
[125] He further said that the Waddells granted the waiver of Commission
clearance in good faith on the belief that clearance was not required. Mr Tizard
concluded by arguing that there was insufficient evidence to establish that either of
the Waddells had the requisite knowledge of the matters upon which the Judge relied
to conclude that the sale of the shares was likely to substantially lessen competition.
The submissions for the Commission
[126] Mr Goddard argued that accessory liability would not be workable in the
context of the Act if accessories needed to know that the facts are capable of
characterisation in the language of the statute. In terms of the knowledge
requirement in s 83, the vendor must know, or be reckless as to, the essential facts
which make the acquisition a breach of s 47. He said that the essential facts in the
s 47 context were the nature of the business of the two parties; the general market
environment in which they operate; and the fact that the two parties are actual or
potential competitors, and that the transaction will lessen this competition. He
suggested that the degree of culpability of the vendor can be addressed through the
level of penalty imposed.
The law
(i) Some general observations
[127] It will be apparent from the way this case was approached by counsel and the
Judge in the High Court that there was an acceptance that this subject area of the law
is closely analogous to the criminal law relating to accessory liability, requiring both
an actus reus and a degree of intention based on knowledge. Accordingly, the
argument was as to the extent of the required knowledge which the alleged accessory
must be shown to have possessed.
[128] It is true that much of the language of s 83 mirrors the language in s 66 of the
Crimes Act 1961, relating to parties to offences. Similarly, the Australian courts
have adopted a criminal law construction of ss 75B and 76 of the Trade Practices Act
1974. See the authorities canvassed in Pearce “Accessorial Liability for Misleading
or Deceptive Conduct” (2006) 80 ALJ 104 and, in particular, Yorke v Lucas (1985)
158 CLR 661.
[129] In relation to overtly collusive activity such as cartels and price fixing, the
actus reus can appropriately be regarded as inherently wrong, and something like the
North American per se approach to antitrust liability can make sense. In Broadcast
Music, Inc. v Columbia Broadcasting System, Inc., 441 US 1 at 8 (1979), the United
States Supreme Court held that certain agreements or practices are so “plainly anticompetitive”
and so “lack redeeming virtue” that they are conclusively presumed
illegal without further examination. What is to be regarded as a per se wrong is
contentious; the area is not static, and may be reviewed from time to time as to what
is to be regarded as bad per se behaviour. See generally, Black Conceptual
Foundations of Antitrust (2005) at 62-93. However, that is not the context of this
case, where the central difficulty is prospectively knowing whether an acquisition of
shares is going to have the effect of substantially lessening competition in the
relevant market. See Castle and Writer “More than a little wary: Applying the
criminal law to competition regulation in Australia” (2002) 10 CCLJ 5 at 13:
“[w]hen one introduces the inherent ambiguity of economic criminality, the
traditional view of criminal responsibility based on a view that all criminal acts are
wrong at some fundamental level … begins to fall down”.
[130] A number of problems need to be addressed.
[131] First, is the strict criminal law analogy the correct approach? Generally, the
law should only resort to criminal law principles where the particular acts
complained of are always harmful to society. But the harm caused by “illegal” acts
in competition law terms can be much more ambiguous; and parties can
“accidentally” breach the statute. See King “Commentary: The Economics of
Penalties and the Penalty of Being an Economist” in Berry and Evans (eds)
Competition Law at the Turn of the Century: A New Zealand Perspective (2003) 213
at 216.
[132] Indeed, although it did not give any reasons for this, this Court has already
shown real caution about being drawn into a rigid “classification” of the pecuniary
penalties provisions in the Act. As Cooke P put it in Port Nelson Ltd v Commerce
Commission [1994] 3 NZLR 435 at 437:
The proceeding … is indeed as the Act says a penalty proceeding. It has
some analogy to a criminal proceeding; it has some analogy to a civil
proceeding; it has been called a hybrid; but we are content to take the Act’s
own term, a proceeding for the recovery of pecuniary penalty, and it is true
that heavy maximum penalties are provided.
[133] Secondly, lawyers and judges develop bad habits in relation to uncritical
doctrinal transposition. As Harpum rightly pointed out in “The Basis of Equitable
Liability” in Birks (ed) The Frontiers of Liability (1994) 9 at 9, there is the danger of
courts being over-willing to apply authorities on one ground of liability to another
that is conceptually discrete; of preferences for applying, as if they were statutory
provisions, judicial dicta that were conditioned by the factual context in which they
were made; and what the author thought to be an obsessive concern with what might
be described as the mens rea necessary for liability without sufficient consideration
of the actus reus in this sort of area.
[134] Thirdly, the practical results of an “over-reach” in accessory liability are
significant. There are real consequences not just for the company which is caught,
but also for corporations who may feel compelled to compete less aggressively as a
result, with significant ramifications for consumers as well. There is also a serious
question as to whether the traditional competition law doctrine of the twentieth
century is, in this sort of area at least, adequately in line with contemporary
organisational structures and economics. See generally, Sautet “The shaky
foundations of competition law” (2007) New Zealand L.J. 186.
[135] This Court is not bound by prior authority in the construction of s 83,
although real respect is to be accorded to the Australian authorities, and there is
much to be said for trans-Tasman uniformity in this area. See Union Shipping NZ
Ltd v Port Nelson Ltd [1990] 2 NZLR 662 at 700 (HC):
… the 1986 Act clearly follows in a general way a number of approaches
adopted in Australia under the Trade Practices Act 1974 … Developments
and approaches in those jurisdictions can be kept in mind accordingly.
But in a case of first impression in this country, I think it is appropriate to ask: what
is the correct approach to accessory liability under the Act to be?
[136] For convenience of analysis, I will group my observations under two heads.
Firstly, I will address more closely what I will call the criminal law analogy.
Secondly, I will suggest that a “dishonest participation” model may be a more
appropriate approach. I emphasise that in this judgment I am concerned only with
cases where there has been a contravention of s 47 of the Act, in the area of business
acquisitions.
(ii) The criminal law analogy
[137] The criminal law analogy is the current orthodoxy in the interpretation of the
accessory liability provisions in the Act pertaining to restrictive trade practices
(s 80). It holds that accessories must know of the essential facts which make up the
contravention, and intentionally participate in it. (In the criminal law context, see
generally Duff “‘Can I help you?’ Accessorial liability and the intention to assist”
(1990) LS 165).
[138] The standard Australian authority is Yorke v Lucas (see above at [128]),
which involved a statutory provision (s 76 of the Trade Practices Act) that is almost
identical to s 83 of the New Zealand Act. As to the equivalent of our s 83(1)(c), the
majority of the High Court of Australia held that in the criminal law, one cannot aid
or abet without intentionally participating in the offence having knowledge of the
essential matters which go to make up the offence (whether one knows, or not, that
those matters amount to an offence). Liability under the equivalent of our party
provision in s 83(1)(e) requires “a party to a contravention to be an intentional
participant, the necessary intent being based upon knowledge of the essential
elements of the contravention” (at 670).
[139] This approach conforms with orthodox criminal law reasoning pertaining to
derivative liability. See for instance Giorgianni v R (1985) 156 CLR 473. That was
a dangerous driving case in which the appellant, who was the employer of the driver,
was charged as an accessory. The High Court of Australia held that both knowledge
of the circumstances and an intention to aid, abet, counsel or procure were necessary
to render a person liable as a secondary party. This reflects a general concern that
inadvertent or accidental assistance is not, or should not be, culpable. Giorgianni
reflects the insight that intention may be necessitated for secondary participation
even where the principal’s liability is strict.
[140] Giorgianni was followed in New Zealand in Specialised Livestock Imports
Ltd v Borrie CA72/01 20 September 2002 where this Court held, as to the accessory
liability provisions of the Fair Trading Act 1986, that as those provisions import the
requirements of the criminal law, accessories must know of the contraventions and,
in the appropriate sense, intentionally participate in them (at [156]). See also
Megavitamin Laboratories (NZ) Ltd v Commerce Commission (1995) 5 NZBLC 103
834 at 103, 850 (HC) (per Tipping J): “I can see no injustice or conflict with the
policy of the [Fair Trading] Act for the law to require that the secondary party must
be shown to have mens rea – in the present case knowledge of the falsity of the
representation”. For discussion, see Weston “Primary or Accessory Liability of
Directors: Metaphysical Bifurcation?” in Rowe and Hawes (eds) Commercial Law
Essays: A New Zealand Collection (2003) 79 at 94.
(iii) Section 83 redux: dishonest (or unlawful) participation?
[141] The principal difficulty with the criminal law analogy is well exemplified by
this case. It is that of having to articulate, in the context of a suggested lessening of
competition, just what are the “essential facts” that go to make up that “lessening”,
and what it is that the “guilty” party must be shown to have known about them.
Given that there can be “grey” areas of facts, the parties and the Commission are
faced with real problems of trying to anticipate the likely ultimate outcome of a case,
and in a context where there is the possibility of a $5 million pecuniary penalty for
body corporates (s 83(1)), determined only at the civil law standard of proof
(s 83(3))!
[142] This then prompts the inquiry: is it possible to state the requirements of s 83
liability in a lessening of competition case in a more appropriate and comprehensible
way?
[143] Certain things must be incontrovertible. First, the provisions of s 83(1)(c),
(d), (e) and (f) all require that there has first been a contravention of s 47 of the Act:
there cannot be accessory liability without there being an underlying infraction. But
it is worth noting that under the Australian authorities, it is not a pre-condition that
proceedings be brought against the primary violator; it is possible to sue (only) the
secondary party, although the underlying infraction would still have to be proved:
Matheson Engineers Pty Ltd v El Raghy (1992) 37 FCR 6 (FCA).
[144] Secondly, liability under s 47 is strict liability; the pecuniary penalty
provision in s 83 is discretionary. Under s 83 the Commission makes an application
to the Court. If the Court is satisfied (to the civil standard) that there has been an
infraction, in one of the ways set out in s 83(1), then the Court “may” order that a
penalty be paid having regard to the matters set out in s 83(2) which are not
exclusive.
[145] Thirdly, the various subsections in s 83 require little, if any, exegesis. Terms
such as “aided”, “induced” and “conspired” are all commonplace in the law. As
Brennan J sagely noted in Yorke v Lucas, in relation to the Australian party
provision, “the term adds little to the more specific terms to be found in s 5 of the
Crimes Act, but it ensures that none is omitted from the net of criminal liability
whom the common law would include” (at 677). It must be shown that the
defendant acted in one or more of those ways.
[146] Fourthly, it follows that a context specific evaluation is required in the
particular case. It does not at all follow that how a Court should approach (say) a
price fixing case is necessarily the same as how it should approach a lessening of
competition case. To put this another way, although the section provides an overall
framework, it does not necessarily provide a “one-size-fits-all” solution.
[147] A much more difficult question is this. Is there a golden thread of principle
which runs through the accessorial liability categories that should be recognised by
the law in respect of the enumerated acts, if they are shown to have been committed?
[148] The answer to this question seems to date to be based on attempts to define,
conceptually, the sort of knowledge that is required, much in the same way as we
struggle to define mens rea in the criminal law. This, I think, is a blind alley.
[149] Firstly, the Act should be approached purposively and we should pay distinct
regard to what it is that the Act is trying to achieve. There are sound policy reasons
for saying that accessories to violations of the Act should be penalised, but only
when the circumstances justify such a course.
[150] Secondly, a “degrees of knowledge” approach is unworkable. Trying to
come up with water-tight classifications of knowledge was, with respect, rightly
called “unhelpful and …unrememberable” by Blanchard J in Nimmo v Westpac
Banking Corporation [1993] 3 NZLR 218 at 228 (HC). And as Lord Nicholls of
Birkenhead said in Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378 at 392
(PC): “‘Knowingly’ is better avoided as a defining ingredient of the [accessory
liability] principle and … scale[s] of knowledge [are] best forgotten.” This is
precisely where, for some period of time, the civil law on accessory liability went
wrong, and ultimately the blind alley had to be avoided there, too.
[151] Thirdly, a knowledge based test can be very unfair in a close-run case,
because there is room for very real and not unreasonable divergences of view.
[152] Fourthly, what people actually “know” is one thing, but is hardly a
satisfactory determinant for a penalty by itself. It is surely when that knowledge is
dishonestly put to use for an improper purpose that the line is crossed. This was
Lord Nicholls’ insight, admittedly in the civil arena, in Royal Brunei Airlines:
“… dishonesty is a necessary ingredient of accessory liability. It is also a sufficient
ingredient” (at 392) (emphasis added).
[153] It strikes me that the same thing is true of s 83. There is a grave danger of
over-analysing the section. It is sui generis. In other words, it stands alone. The
section is aimed at deterring and punishing seriously unacceptable commercial
behaviour, in relation to business acquisitions that substantially lessen competition
under the Act. One form of seriously unacceptable behaviour is to dishonestly
participate in a lessening of competition, which then has deleterious consequences
for consumers, and society at large.
[154] Some caveats should be entered here. By “dishonest”, I do not mean
“unconscionable”. The latter term is far too open-textured in an area of the law
where there can be real room for debate about where the broad merits of the case
fall. What I do mean is that the “dishonesty” is to be assessed objectively: was the
particular defendant guilty of “commercially unacceptable conduct” in the particular
context of the case, to borrow a phrase from Knox J in Cowan de Groot Properties
Ltd v Eagle Trust plc [1992] 4 All ER 700 at 761 (Ch D). It may be thought that the
term “dishonest” is too strong for behaviour of this kind. “Unlawful” is another
possible term, though it rather begs the question – “unlawful” in what respect?
[155] This conception would put accessory liability under this statutory provision
on the jurisprudential footing of fault-based liability, founded on participatory
dishonesty of the kind I have indicated, in contradistinction to the strict liability of
s 47.
[156] To take stock of all of this, the approach to the accessory liability provisions
of s 83 would then be, first, to establish whether there was a contravention of s 47 of
the Act; then secondly, to inquire whether an alleged accessory party dishonestly
participated in that contravention in one of the ways noted in s 83. The state of
knowledge of a defendant would be directly relevant to that enquiry, but not
dispositive. A defendant may be shown to have had conscious knowledge of
impropriety, which is the easy case. But he or she could not impose their own
standard of honesty. The standard is objective: that view which would be taken by
an honest person placed in the particular circumstances.
[157] A number of concerns would doubtless be raised by way of objection to such
an approach. In particular it may be said that it is difficult to know when the line of
“dishonesty” in the sense I have used that term is crossed. It is true this may not be
the easiest of tasks. But it is at least an analytical task, and moreover one which has
to be (and is) performed in many settings by Judges, and sometimes juries.
[158] There is, I acknowledge, a possible difficulty that the test for a lessening of
competition would not then (on the existing authorities) be the same as for trade
practices cases. However there is room for argument that the latter subject-area is
becoming somewhat redundant after the important recent decision of the High Court
of Australia in Houghton v Arms (2006) 225 CLR 553 (discussed in Dietrich, “The
(almost) redundant civil accessorial liability provisions of the Trade Practices Act”
(2008) 16 TPLJ 37), which held inter alia that persons acting on behalf of a
corporation can be liable as principals for misleading conduct, even where such
conduct also constitutes the corporation’s liability. Whether that be so or not, s 47
and s 83 are two distinct provisions – on of strict liability and one of discretionary
liability. There is no logical reason why the tests should be conflated.
[159] A dishonest participation approach would have the virtue of circumscribing
somewhat the potential areas of liability for financial and other advisors, a gloss that
Mr Goddard tried to achieve in his submissions (see [117] above). And it would
have what in this day and age is a relatively rare and priceless virtue – that of
rendering the law more certain and knowable.
[160] The approach I have outlined is that which I would prefer to take to this case.
Admittedly counsel confined themselves to the attempted application of the existing
Australian authorities, by analogy, to s 83, although Mr Goddard responsibly
recognised that the present “fit” between accessory liability and s 83 is very
awkward in lessening of competition cases. He sought himself to achieve some
gloss on the wording of the section.
[161] As it transpires for reasons I will shortly come to, whatever test is adopted, in
my view the Judge was wrong: the Waddells should not be subjected to accessory
liability. Neither should Infratil be, as Mr Goddard contended.
Application to this case
(a) The Waddells
[162] Whether the position of the Waddells is approached in terms of the Yorke v
Lucas formula, or on the participatory dishonesty footing I have suggested, in my
view the Judge was wrong: accessory liability should not have been imposed on
these defendants.
[163] In general terms, their involvement was limited; their knowledge was
somewhat circumscribed; and their conduct could not be described as objectively
“dishonest”.
[164] It is correct that the letter of 9 November 2005, whereby the Waddell
interests agreed to sell the remaining 74 per cent of shares in Mana, required NZ Bus
to involve the Waddells in the clearance application and update them regularly as to
progress. Clause 7.2 of the 23 December 2005 agreement for sale and purchase of
the Mana shareholding to NZ Bus was to similar effect. It is clear that Infratil and
NZ Bus did involve the Waddell interests in the clearance application to some extent.
Some of the correspondence from the Commission went to the Waddells, but
significantly Ms Waddell did not see the letter of 9 March 2006, detailing the
Commission’s concern about the proposed acquisition. Ms Waddell was present at
discussions with Mr Tizard in which the Waddell interests agreed to waive the
clearance condition which was, as the Judge said, a form of participation in the
breach. But significantly, as Mr Tizard emphasised, Ms Waddell was not involved
in the discussions between the Commission and NZ Bus. She did not know that the
Commission was being told by other operators that they would only enter
Wellington by acquiring Mana. She was not told that there was a real risk that the
Commission would decline the clearance application. To the contrary, she was told
that the Commission had “hinted” that the application should be withdrawn. Indeed
she was told that NZ Bus’ legal advice was that the application need not have been
made at all.
[165] In these circumstances I would allow the Waddells’ appeal in relation to
accessory liability.
(ii) Infratil
[166] It will be recalled that the Commission cross-appealed the High Court
Judge’s dismissal of the accessory liability claim against Infratil. The Commission
seeks a penalty against Infratil on the basis that Infratil:
? was actively involved in the acquisition;
? was aware of the essential facts giving rise to a Commerce Act concern;
? was aware of the Commission’s concerns in relation to the acquisition,
and that there was a Commerce Act risk; and
? actively encouraged and procured NZ Bus to take that risk by pursuing
the acquisition, waiving the condition and settling without a clearance or
authorisation.
[167] It is clear on the High Court Judge’s findings that Infratil’s actual
involvement in the transaction was well established to the standard required by
s 83(1)(c) and (e). Infratil therefore had the necessary actus reus; the High Court
seems to have been concerned as to whether Infratil had the necessary mental
element.
[168] Mr Goddard submitted that whatever threshold of knowledge is required for
s 83 purposes, Infratil “had met it”. And further, “the accessory provisions must be
intended to capture a parent company that effectively runs a transaction, makes all
the relevant decisions, and is aware of but elects to run a Commerce Act risk” (at
[252]).
[169] It is relevant to recall at this point that s 90 of the Act provides for the state of
mind or conduct of a director, servant or agent of a body corporate to be attributed to
the body corporate.
[170] The individuals whose conduct or state of mind needs to be scrutinised in this
case, for the purposes of attribution to Infratil, were Mr Ridley-Smith and certain
other employees and agents of Infratil who were involved in the due diligence.
[171] Mr Ridley-Smith was an executive employed by H R L Morrison and Co Ltd,
which managed Infratil. He was responsible for the purchase of NZ Bus from
Stagecoach plc and oversaw the due diligence of both NZ Bus and Mana. In the
latter role, he familiarised himself with the business of each of the companies,
admittedly in a relatively short period. By the time of the Commission’s interim
injunction application to prevent settlement of the share purchase, Mr Ridley-Smith
thought that he had sufficient knowledge of the market and transactions to express a
view on whether the acquisition would have, or be likely to have, the effect of
substantially lessening competition. He said that he originally considered that the
geographic proximity of Mana’s and Stagecoach’s operations might raise
competition issues. But after learning “a considerable amount more about the bus
business”, he considered that the geographic proximity was not of distinct relevance.
In short, Mr Ridley-Smith seems to have come to the view that there would not be a
substantial lessening of competition, on the facts as he understood them to be.
[172] The High Court Judge held that (at [254]):
… in this case, knowledge that Mana could compete is not enough to
establish knowledge of facts establishing a substantial lessening of
competition. NZ Bus’ position in the clearance application, in which
Mr Ridley-Smith was involved, was that Mana could compete but that it was
in no better position to do so than any new entrant, in that it too would have
to acquire a new depot, fleet, and staff. There is no evidence that Mr Ridley-
Smith knew that Mana could use its existing assets to compete on northern
routes; the Waddell interests disclosed that in the earlier negotiations with
Stagecoach plc. Nor does the evidence show that he knew of the tacit
understanding, or at least that Mana and NZ Bus had chosen not to compete
in circumstances where competition was viable. He did not attend the
14 February meeting with the Commission, at which Mr Martin made it clear
that NZ Bus would retaliate if Mana initiated competition.
[173] Again, it appears to me that whether one follows the Yorke v Lucas approach,
or has regard to a requirement for objective “dishonesty”, a claim of accessory
liability against Infratil necessarily fail. The Commission’s cross-appeal should be
dismissed.
[174] Firstly, the claim fails “on the facts”. The concerns which the Judge had on
that score have not been displaced and he has not been shown to be wrong. That
alone is sufficient to dispose of the cross-appeal.
[175] Secondly, even if Infratil knew all the material facts – and assuming solely
for the purpose of this point that it did so – it is difficult to say that it was objectively
dishonest. What Infratil did was to take a rather unwise “punt” in a borderline case.
In failing to see the Commission clearance process through, Infratil was taking a
very real chance. I would have been inclined to the view that this amounts to
commercially unacceptable conduct of the requisite character for s 83 liability. A
gamble on the Commission not taking action may be acceptable in commercial
terms, but it is not in legal terms. However, the complication in this case is the
vexed issue of whether there was a “nod” or a “wink”, by Commission staff. The
factual issues here are relevant to both liability and penalty in my view and I now
turn to deal with that discrete issue.
[176] NZ Bus applied for a clearance from the Commission in order to obtain the
immunity set out in the Act. There were then undoubtedly vexing delays with the
clearance progress. Requests for extensions of time were sought by the Commission
on several occasions. It seemed as if a further extension might have been required,
just at the critical time in the transaction.
[177] NZ Bus’ decision to withdraw the clearance application came about as a
result of discussions in a meeting with Commission staff on 14 March 2006.
[178] Certain things seem clear enough:
? the Commission took the view that it needed to be affirmatively satisfied
that the acquisition would not breach s 47; and
? the industry was in a state of flux and industry participants had given
differing views. There were difficulties for the Commission in reaching
that level of satisfaction.
[179] What was hotly contested was whether Commission staff indicated that it was
open to NZ Bus to proceed without a clearance or somehow encouraged it to do so.
That the issue was at least “aired” is quite apparent from the recorded transcript of
the 14 March meeting where Mr Finchham, one of the Commission’s staff, is
recorded as saying, “You know, deciding on, you know, assessing your view of
whether there’s going to be lessening in competition and going ahead without
clearance” (emphasis added).
[180] A fuller record of the transcript is set out at [6] of the High Court’s penalties
judgment. The transcript records an exasperated NZ Bus representative, Mr Martin,
saying, “What, so we would just go ahead and sit there on our hands waiting for you
to decide to challenge it?” Mr Finchham replied, “I don’t know, that’s your call to
make.”
[181] The High Court Judge dealt fully with the withdrawal of the clearance
application and the meetings between NZ Bus and the Commission at [103] - [113]
of the liability judgment. He returned to the issue in the penalties judgment (at [9]
and [10]):
[9] It was common ground that NZ Bus assumed the risk that the
Commission would sue if it withdrew the clearance application. Its
representatives knew the staff they were dealing with were not the
Commission’s decision-makers, and Mr Ridley-Smith accepted in evidence
at trial that NZ Bus was not given any comfort about whether the
Commission would intervene. Its representatives understood quite clearly
that the Commission might sue, and might win; that was the point of
Mr Ridley-Smith’s paper for the Infratil directors.
[10] However, I am also satisfied that the Commission staff did hint that
NZ Bus might consider withdrawing. That is apparent from the transcript
and confirmed by the tenor of the sound file. They pointed out that the
Commission would decline the application unless satisfied that it did not
have the effect of substantially lessening competition, and that NZ Bus
would then have the option of proceeding without the clearance and waiting
to see whether the Commission or anyone else took action. They raised that
possibility because they were having difficulty reaching a conclusion about
the effect of the transaction. Their observations led NZ Bus to fear that the
clearance application was likely to fail. It also believed that the Commission
would be likely to sue should NZ Bus settle the transaction after a clearance
was declined; I infer that NZ Bus believed the Commission would feel
compelled to act in that case, not because it necessarily believed the
transaction was anti-competitive but to protect what it saw as the integrity of
the clearance regime. The less confrontational approach was to withdraw
the clearance application and settle, in the hope that the Commission, with
limited resources and more pressing issues to deal with, would not sue.
Hence the decision to withdraw just two days before the Commission was to
issue its decision. The application had been filed on 9 January and the
Commission and NZ Bus had agreed to extensions of time, but the
Commission’s decision was due on 17 March and no further extension had
been sought. The transaction was not due to settle until 3 April at the
earliest and there was provision to delay settlement until 30 June.
[182] Those were findings of fact which the Judge was entitled to come to. He
heard from the witnesses first hand and listened to the sound file of the 14 March
meeting. The Judge’s impression of the witnesses and what happened overall is
critical.
[183] The most significant thing is the Judge’s finding that the Commission staff
did “hint” that NZ Bus might consider withdrawing the clearance application. That
was a most unusual occurrence. It plainly had at least some bearing on the decision
that NZ Bus actually took.
[184] In those circumstances, it is difficult to say – although it is not an easy case –
that this was “objective dishonesty”. If there had not been the particular finding of
fact, I would have decided this issue the other way.
[185] I would therefore dismiss the Commission’s cross-appeal in relation to the
accessory liability of Infratil.
Penalty
Introduction
[186] In the High Court, the Commission sought a penalty against NZ Bus of
between $1.5 million and $2.5 million on the basis that:
? this amount is necessary for realistic deterrence of people choosing to go
ahead with borderline acquisitions of substantial businesses, without
seeking a clearance or authorisation from the Commission;
? if the same broad approach to penalties under ss 47 and 83 is adopted as
in the ss 27 and 80 context, pertaining to restrictive trade practices, this
amount is consistent with previous penalty decisions in New Zealand; and
? and this amount was consistent with Australian authority.
[187] In his submissions on penalty to this Court, Mr Goddard maintained that:
The Commission’s principal concern [is] that a substantial penalty be
awarded in order to deter people from proceeding with acquisitions that they
consider to be marginal from a Commerce Act perspective, especially where
they might consciously take the view that there is a prospect that the
Commission will not take action because of resource constraints.
[188] Given this viewpoint, the Commission has cross-appealed against the penalty
actually awarded in the High Court. Unsurprisingly, NZ Bus claims that the penalty
of $500,000, even if substantive liability under s 47 is maintained, is excessive in the
circumstances. NZ Bus maintains that no penalty should have been imposed.
[189] NZ Bus and Infratil, in case it should incur accessory liability on appeal,
jointly submitted that the Judge’s starting point of $2 million was flawed and without
a proper evidential basis. It is said that it was based on an incorrect assumption that
NZ Bus and Mana were achieving supra-competitive profits and failed to take into
account the costs of business.
[190] It was further submitted that the $500,000 penalty imposed was inconsistent
with the principles of a voluntary and optional clearance regime, particularly in
circumstances where the shares were never transferred and the acquirer had a
genuine belief that no substantial lessening of competition would result.
[191] NZ Bus and Infratil also argued that the Judge did not take adequate account
of various mitigating factors.
The jurisprudence of penalties
[192] Any system of competition law must have both sound doctrine and
enforcement mechanisms that ensure, at reasonable cost, a respectable degree of
compliance with the law.
[193] A basic objective of any remedial system is to deter people from violating the
law. One way to deter unlawful activity is by making it costly to engage in.
However, a difficult but crucial question is: just how costly should it be made? See
Becker “Crime and Punishment: an Economic Approach” (1968) 76(2) J.Pol.Econ.
169 and Posner Economic Analysis of Law (5 ed 1998) at Ch 7.
[194] There are some relatively easy cases. A potential violator may reckon that
the punishment cost to him is a figure lower than the social cost. Such a deliberate
violator, taking advantage of low penalties, is the easy case. This doubtless explains
why there is a $5 million maximum penalty to deter body corporates under s 83(1).
[195] At the other end of the scale, there may be some uncertainty in the definition
of the prohibited conduct or the application of that definition to particular cases.
Heavy penalties may have the effect of deterring lawful conduct at the margin,
requiring potential defendants to steer too far clear of the intended zone.
[196] These sorts of issues have given rise to a vast law and economics literature,
and some of the more complex techniques of analysis ever employed in a legal
context. Some commentators want to limit the application of penalties to practises
that cause a net social loss; others want to move away from a quasi-criminal
approach; still others suggest something more in the nature of a compensatory
approach.
[197] At least as the law stands in Australia and New Zealand, deterrence is seen to
be the most significant factor to be considered in the imposition of penalties for anticompetitive
conduct. Deterrence is thought to be what would be referred to as
“general deterrence” in criminal law parlance: that is the sending of a message to all
persons in the commercial community who might contemplate engaging in such
activity. See, for instance, Commerce Commission v Koppers Arch Wood Protection
(NZ) Ltd (2006) 11 TCLR 581 (HC) (the latest penalties and costs judgment is HC
AK CIV 2005-404-2080 8 February 2008); ACCC v Leahy Petroleum Pty Ltd
(No. 3) (2005) 215 ALR 301 (FCA); and Commerce Commission v Herberts Bakery
Ltd [1991] 2 NZLR 726 (HC).
[198] There is some rather indirect parliamentary support for a deterrent approach
to pecuniary penalties. The Commerce Select Committee recorded that “the purpose
of penalty and remedy provisions in competition law is to penalise today’s offender
with sufficient severity to discourage others from committing similar acts”: Select
Committee Commerce Amendment Bill (Report 1999) at 23. A similar notion was
expressed in the 1992 governmental review of the Act (see above at [112]), which
suggested that the main “incentive” to comply is the threat of the heavy penalties
which are proscribed.
[199] As I have indicated, there is room for a great deal of debate about the purpose
and effectiveness of remedies in the competition law area. However, the
overwhelming weight of authority in Australasia presently is that deterrence must be
the prime objective. Indeed, counsel did not suggest that we should proceed on any
other basis.
[200] That said, as with any lawsuit, at the end of the day the particular facts and
circumstances are all important. The Act does not require a “blind” deterrence
approach. Section 83(2) requires that all relevant matters be considered in
determining an appropriate penalty. Those factors will include:
? the nature and extent of the contravening conduct (s 83(2)(a));
? the amount and extent of loss or damage caused (s 83(2)(b));
? the circumstances in which the conduct took place (s 83(2)(c));
? whether the defendant has a generally compliant record (s 83(2)(d));
? how deliberate and persistent the conduct was; and
? and the financial position of the defendant.
[201] I now turn to the factors which were in distinct dispute in this case.
Potential gains
[202] The Judge considered that NZ Bus’ potential unlawful gains from the
transaction were unlikely to be less than $2 million and may have been more (at [52]
of penalties judgment). This was based on the following considerations:
? Under the SSNIP test (which inquires whether a supplier would be able to
impose a small yet significant and non-transitory increase in price, which
the Commission generally defines as a 5 to 10 per cent increase that is
sustained for a period of one year), NZ Bus stood to earn 5 to 10 per cent
more revenue each year on approximately half the $20 million greater
Wellington market for the next five years (at [48]).
? A penalty of $2 million was about 10 per cent of the annual turnover of
the greater Wellington market.
? Based on alleged differences between EBIT levels, a post-merger NZ Bus
would have been able to sustain market prices that were 10 per cent above
competitive levels.
[203] The High Court then “discounted” that amount to $500,000 in order to reflect
the Commission’s “contribution” to the breach, the absence of loss, the risk of error
in the calculation of gains, and the stigma associated with the Court’s finding (at
[66]).
[204] Ms O’Gorman suggested that despite the fact that the persuasive onus was on
the Commission – which it was – the Court accepted mere speculation that NZ Bus
would have achieved supra-competitive profits post-acquisition. She said that there
was no valid evidence that supra-competitive profits had been achieved by the
parties, or could be achieved following the proposed acquisition. In any event, the
amounts referred to by the High Court were gross amounts which did not reflect the
gains that could be anticipated because they did not take into account the costs of
business.
[205] There is real force in the points advanced by Ms O’Gorman, in particular that
it is extremely difficult to determine, as an artificial exercise, whether supracompetitive
profits would in fact have been made. However, there is no question
that the Judge allowed a very significant discount for that very uncertainty, along
with other factors.
The Commission staff indicator
[206] I have detailed the factual context to this issue at [176] to [183] above.
[207] Mr Goddard strenuously sought to persuade us that the behaviour of
Commission staff did not contribute to the breach of the Act and should not be taken
into account. I understand the technical force of the argument but I do not think it
should bear on the separate question of what penalty is appropriate in the particular
circumstances. A particular difficulty I have is that I do not know what precise
percentage the trial Judge allowed for the Commission’s so-called contribution to the
breach.
[208] I do not wish to leave this point without saying something more about the
importance of the clearance procedure in Part 5 of the Act. It must be sound legal
advice that, at the outset of a business acquisition, a party to that transaction should
make up their mind as to whether a clearance application is to be lodged with the
Commission. If it is deemed appropriate to approach the Commission, then it is
distinctly unwise not to complete the clearance process. It really should be an all-ornothing
situation: go to the Commission and complete the clearance procedure, or do
not go at all because anything in between is fraught with risk. Practitioners will be
well enough aware that there can be delays with Commission clearances.
Technically, there is no time limit in the Act and commercial transactions can be at
the mercy of prompt decisions by the Commission. The Commission has a heavy
obligation to see that commercial transactions are not thwarted for lack of timely
delivery of clearances. But the clearance provisions have been mandated by
Parliament for what it considers to be good and sufficient reason, and it is to take an
unusually large and potentially very expensive risk not to go through with the
process, once initiated.
Other factors
[209] Other factors going to penalty included the stigma of a finding of breach, the
absence of previous breaches, and the absence of actual loss. All of these things
were adequately taken into account by the Judge.
Conclusion on penalty
[210] It is arguable that the High Court Judge may have adopted an overly high
starting point as to penalty. But he did give a very large discount – around
75 per cent – from the head figure for the various mitigating factors discussed above.
[211] In terms of fundamental principle, $500,000 was an appropriately deterrent
pecuniary penalty in a marginal case. NZ Bus was to an extent precipitate and risktaking
in what it did. But a penalty ordered by a lower court should not be altered
unless there is a sound reason for doing so. In the end, I think the Judge’s “situation
sense” has not been shown to have been wrong. I would dismiss the cross-appeals
on penalties.
[212] It should be noted that even if Infratil were held to be an accessory, I would
not have thought an “additional” penalty against it to be appropriate. NZ Bus was a
wholly owned subsidiary of Infratil, and there is consequently a “flow-through”
effect for Infratil itself. It is hard to see why a “double penalty” should be imposed
in this case, particularly where no application for a penalty has been made against
particular individuals.
Costs
Background
[213] In the High Court penalties judgment, the Commission was awarded full
reimbursements for its expert fees, being a total sum of $466,058.34. NZ Bus and
(to the extent that it may be responsible for them) Infratil appeal against the decision
of the Judge to grant that full reimbursement.
[214] The essential submission is that the expenses sought by the Commission were
not reasonable in amount, and were much higher than those incurred by the
appellants. This appears to be because the Commission had engaged two off-shore
economists, one English and one American.
[215] The Commission’s position is that the High Court was in the best position to
evaluate the helpfulness of the Commission’s expert evidence and the reasonableness
of those costs. Mr Goddard submitted that in circumstances where it has done so
carefully, taking all relevant factors into account, and there is no error of principle in
its approach, the threshold for this Court to intervene is simply not met.
The High Court determination
[216] The High Court Judge said (at [100]) of the penalties judgment:
I accept that it would not be reasonable to order a losing party to pay
experts’ costs to the extent that they exceed those of an equally satisfactory
local expert. But in this case the Commission went to some effort to obtain
New Zealand or Australian experts. Indeed, it approached [an expert for NZ
Bus] but found he was already engaged … In the circumstances, I am
satisfied that the Commission acted reasonably by engaging overseas
experts.
The relevant legal principles
[217] Disbursements are subject to r 48H of the High Court Rules. Witness
expenses are a matter for the discretion of the Court in accordance with r 48H(2).
[218] Since the enactment of r 48H, a successful party is generally entitled to
recover the actual expenses of its expert witnesses, provided they satisfy the criteria
in r 48H(2) that they are both necessary for the conduct of the proceeding and
reasonable in amount.
[219] There is no “two-thirds” rule so far as expert fees recovery is concerned. In
supporting that proposition, this Court in Air New Zealand Ltd v Commerce
Commission [2007] 2 NZLR 494 at [47] found the High Court Judge’s “careful
exegesis” in the penalties judgment to be particularly helpful: “we have no doubt
that, since the enactment of r 48H the winning party is generally entitled to recover
the actual expenses of its expert witnesses, provided they satisfy the criteria in
r 48H(2)”.
Conclusion on costs
[220] The point being advanced on appeal comes down to the proposition that the
fees of the overseas experts were unreasonable by comparison to that of local
experts.
[221] In this case, the Judge was particularly well placed to evaluate whether the
work was appropriate and necessary and he clearly thought it was. There is simply
no basis for the inference that the expert fees of each party should in effect “equate”.
[222] I would dismiss this distinctly makeweight appeal point.
Conclusion
[223] I would therefore:
(a) Confirm the dismissal of the appeal by NZ Bus against liability in
respect of s 47 of the Act.
(b) Allow the appeal by the Waddells, as to their liability as accessories
under s 83 of the Act.
(c) Dismiss the cross-appeal by the Commission against Infratil, as to its
liability as an accessory under s 83 of the Act.
(d) Dismiss the cross-appeals as to the penalty amount ordered by the
High Court.
(e) Dismiss the costs appeal by NZ Bus.
[224] As to costs, the precise order in the High Court was that NZ Bus pay to the
Commission the following sums:
(a) the sum of $117.190.00 (being costs of the application calculated on
a 3C basis at pre-2006 amendment levels ($110,080.00) and costs of
the application calculated on a 3C basis at 2006 amendment levels
($7,110.00));
(b) the sum of $16,590.00 (being costs of the penalty hearing calculated
on a 3B basis at 2006 amendment levels); and
(c) disbursements of $485,849.87.
That order will stand.
[225] In this Court, all the parties enjoyed some measure of success, and the case
has been very much a test one, in an area of public importance. Costs will therefore
lie where they fall in this Court.
[226] Finally, I would not wish to leave the case without expressing my gratitude to
counsel. In particular, Ms O’Gorman picked up a difficult burden at short notice
when senior counsel fell ill. That allowed the appeal to proceed. She said all that
could have been said, and said it well.
ARNOLD J
[227] I concur in the conclusions set out in Hammond J’s judgment at [223] –
[224]. I also agree with his reasons in relation to penalty and costs and have nothing
to add. I do wish to provide a brief summary of my reasons on two aspects of the
case, however – the liability of NZ Bus and accessory liability.
Liability of NZ Bus
[228] Like Hammond and Wilson JJ, I consider that the acquisition by NZ Bus of
the Waddell interests’ 74 per cent shareholding in Mana breached s 47 of the
Commerce Act. My reasons are essentially the same as those of Miller J. I make the
following brief comments, adopting the structure adopted by Ms O’Gorman in her
issues sheet, albeit that I will address the issues in a different order:
(a) Market definition;
(b) Existing competition;
(c) Significance of countervailing power;
(d) Conditions of entry; and
(e) Factual/counterfactual.
Market definition
[229] Miller J found that the relevant market was the market for subsidised bus
services in the greater Wellington region (excluding the Wairarapa). On appeal
NZ Bus maintained its stance at trial that the geographic dimension comprised not a
single regional market but five distinct geographic markets or sub-markets within
that region. However, Ms O’Gorman did not press the point strongly. Given the
instrumental nature of market analysis, she seemed prepared to accept that the
broader definition permitted satisfactory consideration of the competition issues
raised by the proposed acquisition despite her preference for the narrower
market/sub-market analysis. I agree with that approach and treat the relevant market
as that found by Miller J.
[230] The purchasers of services in this market are GWRC and the Ministry. The
GWRC subsidises scheduled bus services and dedicated school bus services on
scheduled public transport service routes, and also licenses commercial (ie,
unsubsidised) bus services. The Ministry subsidises school bus services in areas not
served by public transport and for pupils to attend technical classes (technical
routes).
[231] Land Transport New Zealand (LTNZ) disburses subsidies to regional
councils on behalf of central government. It provides about 45 per cent of GWRC’s
annual bus subsidy payments, the remainder coming from ratepayers. Under
statutory authority LTNZ publishes the Competitive Pricing Procedures Manual (the
CPP Manual), which contains approved procurement procedures with which GWRC
must comply if it wishes to obtain government funding.
[232] The two principal suppliers in the market are NZ Bus and Mana, which
between them have 97 per cent of the market by contract value (NZ Bus 69 per cent
and Mana 28 per cent). They operate largely in discrete geographic areas of the
market. The remaining contracts are held by various firms, none of which has a
substantial market presence.
Existing competition
[233] The evidence showed that there had been limited competition between
NZ Bus and Mana in tenders for bus routes within the greater Wellington regional
market. While there had been some competition between the two operators for
technical routes tendered by the Ministry, in relation to slightly under 90 per cent of
the routes tendered by GWRC only one or other company had bid.
[234] The parties disagreed as to the reasons for this, both at trial and before us.
The Commerce Commission said that the two companies enjoyed a “cosy
relationship” in terms of which they chose not to compete with each other.
Mr Goddard noted the restraints in the Heads of Agreement (see [19] above). He
submitted that there was no point in these unless (a) there was the potential for
competition between NZ Bus and Mana and (b) the potential competitive threat that
each posed to the other was greater than the threat posed to either by a de novo
entrant. Mr Goddard also noted the references to the potential for “retaliation” and
the use of language such as “our” patch by the NZ Bus and Mana witnesses.
[235] For its part, NZ Bus denied that there was any understanding between the
parties that they would not compete. Reference was made to the evidence of
Mr Turner (an executive director of NZ Bus) and Ms Waddell (the Managing
Director of Mana) to the effect that there was no such understanding. Ms O’Gorman
said that the limited competition came about because NZ Bus and Mana were
operating on low margins and achieving low returns on capital invested within their
particular areas of operation. The evidence did not show, she said, that they were
earning supra-competitive profits, as the Judge suggested. Ms O’Gorman submitted
that the parties had not competed for the same reasons that there had been no de novo
entrants in the market, namely the need to make considerable capital investments in
order to operate in the other’s area of operation.
[236] The Judge accepted the Commission’s arguments and concluded that the
absence of past competition between NZ Bus and Mana was “in substantial part” the
result of a tacit understanding that they would not compete with each other
(at [127]). Further, while recognising that the information before him was not
perfect, the Judge concluded that NZ Bus and Mana were very profitable by
international standards despite the fact that NZ Bus faced some operational
inefficiencies (at [138]). The Judge also noted that other operators had expressed
interest in entering the Wellington regional market, with acquisition of an existing
operator being the preferred means of entry (at [143]).
[237] I make two points about these arguments. First, care needs to be taken in
relation to evidence of past market behaviour in this context. As the Australian
Trade Practices Tribunal said in Re Queensland Co-operative Milling Association
Ltd (1976) 8 ALR 481 at 516, “whether firms compete is very much a matter of the
structure of the markets in which they operate”. In a merger or acquisition case
factors going to market structure will generally be critical (market structure includes,
most importantly, conditions of entry, but also factors such as the degree of market
concentration and any long term contractual or other arrangements that restrict the
ability of market participants to compete). The analysis is a forward-looking one,
comparing the likely state of competition if the merger or acquisition proceeds with
the likely state of competition if it does not. Evidence of past conduct may be
relevant – it may, for example, cast light on market structure, indicate the likely
response of an incumbent to new entry or provide pointers to likely future
developments within the market. But to the extent that behaviour within a market is
discretionary, it can change, and so may not be a reliable indicator for the future. In
principle, market structures which drive market participants to act competitively are
the best assurance of competitive outcomes.
[238] As I have said, past behaviour was raised in two ways in the present context.
First, the parties agreed that there had been limited competition between NZ Bus and
Mana in the past but disagreed as whether that was the result of the structure of the
market (in particular, its geographic characteristics), or whether it simply reflected
decisions made by the two companies. The Judge found that it was principally the
latter. Second, NZ Bus and Mana relied on past behaviour when they argued that
neither was earning supra-competitive profits, so that prices must have been
competitive. As I will shortly indicate, that conclusion does not follow. But even if
it did, it would be of little significance if those prices resulted from voluntary
restraint on the part of the companies rather than the effect of competitive forces.
[239] The second point is that disputes about whether companies are or are not
earning supra-competitive profits are, in my view, often unhelpful. (In fairness to
the Commission, the Judge said that it did not set out to prove that NZ Bus and Mana
were earning monopoly profits (at [137]).) The important question is whether prices
are competitive (although price does not always tell the full story as market power
can be exercised other than through pricing, eg, by lowering the quality of services
or goods without lowering price). Prices may be above competitive levels because
they recover inefficiently incurred costs whether or not they also capture supracompetitive
returns. So, demonstrating that profits or rates of return are not above
competitive levels does not mean that prices are at competitive levels.
[240] As Hammond J says (at [103] above), an important theme of NZ Bus’
submissions was that the Judge wrongly found that NZ Bus and Mana were earning
supra-competitive profits and this error permeated his entire analysis. NZ Bus said
that neither company was earning supra-competitive profits, so that “current prices
are at competitive levels”. But that conclusion does not follow. It overlooks the
possibility that existing prices are recovering inefficiently incurred costs.
[241] I accept that evidence of rates of return in excess of industry norms may
provide some evidence that prices are above competitive levels. But the earning of
“normal” rates of return does not preclude the possibility of supra-competitive
pricing.
[242] Further, in this context, it must be remembered that the material necessary to
make economic (as opposed to accounting) assessments on these issues is rarely
available. It was not available in this case, as the Judge recognised.
[243] That said, I agree that the evidence demonstrates that NZ Bus and Mana have
each pulled their competitive punches so as not to provoke a competitive response
from the other. I accept that there was no explicit agreement or arrangement to this
effect. But there was, as the Judge found, a tacit understanding (perhaps better
expressed as conscious mutual restraint). The restrictive terms in the Heads of
Agreement are confirmatory of this. So also is the fact that NZ Bus was prepared to
pay the Waddell interests a non-refundable deposit of $3m in consideration for the
letter agreement of November 2005. As the Judge said, this payment was an
acknowledgement that Mana would pose a competitive threat to NZ Bus in
Wellington should the parties not reach agreement about the sale of the Waddell
interests’ shares in Mana (at [93]).
[244] In my view, the Judge’s conclusion that there was a tacit understanding was
not only open on the evidence – it was inevitable. Against this background, a
finding that prices in the market were not “competitive” (in the sense that they were
not set solely or principally in response to competitive pressures) must inevitably
follow.
Significance of countervailing power
[245] NZ Bus argued that both the GWRC and the Ministry had a wide range of
powers available to them under the current CPP Manual framework and could use
these to eliminate any barriers to entry and to ensure competitive outcomes.
[246] While acknowledging the difficulties with the concept, the Judge accepted
that countervailing power has a part to play in competition analysis generally, and
was relevant in this case in particular (at [192] – [194]). However, he held that any
countervailing power possessed by GWRC (or the Ministry) would be limited until
there was new entry on a substantial scale because most tenders attract only one bid
(at [197]). Given the necessity to provide a bus service, this meant that GWRC was
in a weak position in relation to NZ Bus and Mana. In addition, GWRC was at an
informational disadvantage as compared to the two operators.
[247] I accept that there are mechanisms available to GWRC (and the Ministry) to
place pressure on the operators, as NZ Bus submitted. But some would take time to
implement as changes to the CPP Manual would be required. In any event, I agree
with the Judge that the extent of any countervailing power is modest. Given the need
to provide bus services and the lack of detailed information, GWRC is not in a
strong position when seeking to place pressure on a single tenderer. It lacks credible
alternatives, whether in the form of alternative suppliers or the capacity to provide
the service itself rather than contracting for its provision (ie, to “make” rather than
“buy”).
[248] In short, then, where it receives only one tender (as it does for 90 per cent of
its tenders), GWRC cannot credibly threaten to by-pass the tenderer, and so has little
countervailing power.
Conditions of entry
[249] In its submissions NZ Bus placed considerable emphasis on the constraining
effect of potential entry on the merged entity should it attempt to raise prices to
supra-competitive levels. It noted the presence in the Wellington area of at least one
other substantial bus operator (Tranzit) which could potentially play a greater role in
the market, and pointed to the potential for small operators to obtain contracts. (This
latter point presumably recognises that competition at the margins can influence
competition in the broader market.) Further, NZ Bus emphasised the Judge’s finding
(at [185]) that some of the conditions that made entry difficult (short lead times for
tenders and maximum contract sizes) would be ameliorated over time by GWRC.
[250] Overall, NZ Bus challenged the Judge’s conclusion, based on his analysis of
the conditions of entry, that if the acquisition was allowed to proceed new entry was
possible, but unlikely to occur in an effective and timely way (at [188]). By contrast,
under the counterfactual the 74 per cent interest in Mana would be acquired by a new
entrant, which would use the shareholding as a springboard to compete in the
Wellington regional market (at [190]). The mutual restraint, which had characterised
the NZ Bus/Mana relationship, was unlikely to survive.
[251] For my part, I found it difficult to reconcile this aspect of NZ Bus’
submissions with its explanation for the fact that historically there has been little
competition between NZ Bus and Mana. The principal reason for that was said to be
the geographic features of the market, which meant that both NZ Bus and Mana
would have been required to make significant capital investments (for example, to
acquire additional depots and additional buses) in order to compete against each
other. There were substantial risks in doing this. NZ Bus said that this also
explained why there had been no de novo entry into the Wellington regional market.
[252] While costs of this type may not qualify as a barrier to entry in economic
terms, being costs that must be borne by an incumbent as well as a new entrant, they
are relevant to the assessment of whether new entry is likely, sufficient in extent and
timely if the acquisition is allowed to proceed. In other words, they are factors that
will weigh heavily with potential new entrants and will operate as substantial
obstacles to timely and significant new entry. As the High Court said in Air New
Zealand v Commerce Commission (No 6) (2004) 11 TCLR 347 at [102]:
[T]he question of whether conditions in a market which have the potential to
prevent, impede or slow entry and expansion, are or are not barriers to entry
or expansion, may be less important than whether or how they will affect the
likelihood, extent and timeliness of entry – the LET test – in the factual as
compared to the counterfactual.
[253] In short, NZ Bus’ explanation for the lack of competition between it and
Mana, and for the lack of de novo entry, seems to involve some acknowledgement of
the substantial difficulties facing new entrants. In my view, this undermines, to
some extent at least, the significance of the threat to the merged entity from potential
competition, upon which NZ Bus placed so much reliance.
[254] In any event, the Judge’s analysis of conditions of entry was, in my view,
correct. It may be that, over time, some of the impediments to entry will be removed
or minimised (for example, lead times could change). But the Judge found that such
changes are unlikely within the relevant time frame (at [186]). In any event, they
would not address all entry conditions. The Judge’s conclusion that de novo entrants
are currently at a substantial disadvantage, and would remain so over the relevant
time frame, was well justified on the material before him. So also was his
assessment that under the counterfactual the 74 per cent shareholding in Mana would
be acquired by a substantial entrant which would use it as a springboard to compete
in the Wellington regional market. The evidence established that there are others
who are interested in entering this market, and that realistically they can enter on a
sufficient scale only by way of acquisition of an existing operator and then by
incremental growth. Entry in any other way would be much more risky, costly and
difficult.
Factual/counterfactual
[255] As Hammond J notes (at [74]), the economists in this case agreed that the
merger of two rivals with the lowest costs of service would lessen competition in a
bid or auction market and would do so substantially if other bidders or potential
bidders had substantially higher costs. The economists also agreed that, in
circumstances where bids from firms without local assets are rare, it could properly
be inferred that bidders with local assets will be the lowest cost bidders.
[256] The Judge found (at [203]) that NZ Bus and Mana were the lowest cost
competitors in the Wellington regional market and that Mana was significantly more
efficient than NZ Bus. He concluded that the acquisition of Mana by NZ Bus would
lessen competition relative to the counterfactual because, in the counterfactual,
rivalry between NZ Bus and Mana (under its new ownership) would cause prices to
fall towards competitive levels. In addition, in the factual the relatively minor
existing competition between NZ Bus and Mana on the Ministry’s technical routes
would go. The Judge did not agree that another acquirer of the 74 per cent
shareholding would operate Mana as the Waddell interests had. Rather, he
considered that it would use the shareholding in Mana as a springboard to compete
with NZ Bus (at [189] – [190]).
[257] NZ Bus argued that, under the counterfactual, Mana would have no particular
advantage over other new entrants competing for contracts. In my view, it is clear
that it would. It has local knowledge and local assets, which it could use as a base
for incremental incursions into NZ Bus’ area of operation. The economic evidence
showed that it would have a substantial cost advantage over a new entrant from
outside the market. The evidence of potential entrants also supports this view.
[258] In the result, then, I consider that the Judge was right to find that the
acquisition breached s 47.
Accessory liability
[259] Section 83 of the Commerce Act and s 43 of its companion Act, the
Fair Trading Act, deal with accessory liability. They are in identical terms and are
based on the equivalent provision in the Australian Trade Practices Act (s 75B).
[260] The orthodox view is that the approach to be taken to the application of these
sections is the same as that taken in respect of accessory liability in the criminal law.
Accordingly, an accessory will be liable only if he or she intentionally participates in
the contravention, which means simply that the person must have knowledge of the
essential matters which go to make up the contravention (see Yorke v Lucas). In the
Commerce Act context, an alleged accessory need not know how the facts might be
characterised in terms of the language of the Act. So, for example, to be liable as an
accessory to a contravention of s 27 a person need not understand that the
arrangement at issue had the likely effect of substantially lessening competition in
the relevant market (see Rural Press Ltd v Australian Competition and Consumer
Commission (2003) 216 CLR 53 per Gummow, Hayne and Heydon JJ at [48]).
[261] As Hammond J says, there are difficulties in applying the same approach to
the accessory provisions in s 83 as is applied in relation to accessory liability in the
criminal law. While that approach seems to be workable in relation to accessory
liability under the Fair Trading Act, it is more problematic under the Commerce Act,
at least in relation to contraventions of s 47. There are two reasons for this:
(a) First, the requirement that accessories have knowledge of the essential
facts that comprise the contravention is difficult to apply.
(b) Second, a finding that s 47 has been contravened requires an
evaluative assessment on the part of the court.
I deal with each point in turn.
[262] To conclude that a merger or acquisition will, or is likely to, have the effect
of substantially lessening competition in a market a court will have to make an
evaluative assessment that takes account of a wide range of facts and circumstances.
The court will have to:
(a) Identify the relevant market;
(b) Assess the state of competition within that market, including
identifying and assessing relevant conditions of entry;
(c) Consider the likely state of competition in the factual and in the
counterfactual;
(d) Contrast the two; and, having done all this,
(e) Undertake an evaluative assessment as to likely competitive effect of
the merger or acquisition.
[263] In reaching a view on these points, a court will draw on evidence from
present and potential market participants, experts and others with knowledge of the
particular industry. Accordingly, where a court concludes that there has been a
contravention of s 47, that conclusion will almost inevitably be based on a wide
range of “essential facts”. On the orthodox approach, then, to establish liability as an
accessory to a contravention of s 47 it would be necessary to show that the alleged
accessory knew all the “essential facts” that led the court to conclude that the merger
or acquisition breached s 47.
[264] Confronted with this difficulty, a court might be tempted to say that where
the alleged accessory is an industry participant he or she must be familiar with the
details of the industry and that this will suffice for accessory liability. This seems
essentially to have been the approach adopted by Miller J in respect of the Waddells
(at [246] – [250]). Such an approach has its own difficulties, but might be justifiable
in this context were it not for the second difficulty, namely the evaluative nature of a
decision that s 47 has been contravened.
[265] As I have said, a court’s decision about whether or not s 47 has been
breached involves what is ultimately an evaluative assessment. This results from the
nature of the issues the court is required to address. In some cases, the conclusion
that s 47 has been breached will be obvious, but in many it will not. An approach to
accessory liability which does not recognise the difficulty of predicting with
assurance whether a particular merger or acquisition will be held to contravene s 47
may result in the scope of accessory liability being widened to the point that it has a
“chilling” effect. Such an approach may promote excessive caution by encouraging
unnecessary applications for clearance. In a voluntary clearance regime it is difficult
to see what purpose is being served by drawing in as accessories individuals who do
not seem, in any real sense, to be blameworthy in terms of the policy of the Act.
While this outcome can be mitigated by imposing no penalty, that does not seem a
particularly attractive solution.
[266] Hammond J has suggested that the Courts should adopt a standard which he
describes as “dishonest participation”. While I agree that the application of the
criminal law approach in this context is difficult, if not impossible, I am not attracted
to Hammond J’s solution. To me his approach seems to swap one set of difficulties
for another, principally because it provides no effective standard that can be
discerned in advance. Rather, it seems to rely on the court’s intuitive judgment as to
what is commercially appropriate on the facts of the individual case. In my view,
greater certainty is required.
[267] That said, I doubt that I am able to offer a better solution. Assuming that the
requirement for knowledge of essential facts unduly limits the scope of accessory
liability in this context, an alternative would be to require knowledge of a real risk of
contravention. That may better serve the policy of the Act. If a person understands
that there is a real risk that a merger or acquisition will be found to breach s 47 but,
with that knowledge, facilitates the merger or acquisition, the imposition of
accessory liability seems an appropriate response. It may provide an incentive for
such persons to refuse to facilitate a merger or acquisition in the absence of a
clearance or authorisation.
[268] Be that as it may, adopting the orthodox approach to s 83, I agree with
Hammond J (at [161] above) that neither the Waddells nor Infratil had the
knowledge necessary for accessory liability.
WILSON J
[269] I have read in draft the judgment of Hammond J, and am in agreement as to
both reasoning and result. I have also read in draft the judgment of Arnold J, and am
in general agreement with his observations. I wish to add my own brief observations
on two matters, first the possibility of authorisation and secondly the relationship
between Infratil Ltd (Infratil) and New Zealand Bus Ltd (NZ Bus) for the purpose of
fixing penalty.
[270] The substantial lessening of competition test imposed by s 47 of the
Commerce Act 1986 is a low one. “Substantial” is defined in s 2(1A) as “real or of
substance”, with the consequence that any lessening of competition which is more
than illusory or transitory is caught by s 47. Accordingly, the minor competitive
impact of the acquisition by NZ Bus of the shareholding of Mana Coach Services
Ltd (Mana) which it did not already own was sufficient to bring the acquisition
within s 47. More particularly, pre-acquisition competition between NZ Bus and
Mana in tendering for a small number of routes is of itself sufficient to establish that
substantial (in the sense of real) lessening of competition would result. As a matter
of commercial reality, there is no way that, following acquisition, NZ Bus and Mana
would each tender for the same route in the knowledge that the lower of their tenders
would in all probability be accepted.
[271] But that does not mean that the acquisition could not proceed. As a
counterpoint to the adoption of the low “substantial lessening of competition” test,
the Act in s 67 permits the Commerce Commission to authorise an acquisition which
is likely to have the effect of substantially lessening competition if the public
benefits resulting from the acquisition outweigh the detriments caused by the
substantial lessening of competition. As the Commission correctly held in Goodman
Fielder Ltd/Wattie Industries Ltd (1987) 1 NZBLC (Com) 104,108 at 104,147 and in
Air New Zealand Ltd/Qantas Airways Ltd (23 October 2003 Decision 511) at para
[897], all benefits must be taken into account whereas only detriments in a market
where competition is lessened will be relevant.
[272] On the present facts, only very minor lessening of competition would result
and the consequent detriment would be modest. NZ Bus would therefore not face a
difficult task in establishing sufficient public benefit to outweigh that detriment.
Greater efficiencies of scale in all the services of Mana and NZ Bus could well in
themselves be sufficient to do so, as could rationalisation of their operations in the
limited areas where they overlap.
[273] As I have said, I agree with the conclusion of Hammond J that the
Commission’s cross-appeal against the dismissal of the claim against Infratil should
itself be dismissed. Moreover, even if Infratil were technically liable as an
accessory, I have difficulty in understanding the purpose of the Commission in
proceeding against the parent of a wholly-owned subsidiary which is the participant
and which plainly has the capacity to pay any penalty which might realistically be
imposed. While NZ Bus would obviously not have entered such a major transaction
without the support of its parent, I cannot see why that support should result in a
penalty being imposed on Infratil in addition to that properly payable by NZ Bus.
Solicitors:
Buddle Findlay, Auckland for Appellants in CA149/06 and CA227/06
Oakley Moran, Wellington for Appellants in CA151/06
Commerce Commission, Wellington for Respondent
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