Godfrey Hirst NZ Limited HC Wellington CIV-2011-485-1257
[2011] NZHC 691
•8 July 2011
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
CIV-2011-485-1257
UNDER the Commerce Act 1986 (the "Act")
IN THE MATTER OF an appeal against the determination of the Commission to grant authorisation of a business acquisition pursuant to s 67(3)(b) of the Act
BETWEEN GODFREY HIRST N Z LIMITED Appellant
Hearing: 6 and 7 July 2011
Counsel: P R Jagose and J J Brown for Appellant
D J Goddard QC and N Caldwell for Wool Services International
Limited
B Latimour, I Gault and D Blacktop for Cavalier
M Dunning and M Morrisey for Commerce Commission
Judgment: 8 July 2011
JUDGMENT OF MILLER J
[1] This judgment responds to an application for stay, pending appeal, of an authorisation granted by the Commerce Commission. The authorisation involves the acquisition by Cavalier Wool Holdings Ltd of the wool scouring assets of New Zealand Wool Services International Ltd. They are the only two wool scourers still operating in New Zealand. Both have plants in the North and South Islands.
[2] The appellant, Godfrey Hirst NZ Ltd, manufactures carpets in New Zealand. It is a major purchaser of the New Zealand wool clip. It was formerly in the
scouring business but sold its plants to Cavalier some time ago.
GODFREY HIRST N Z LIMITED HC WN CIV-2011-485-1257 8 July 2011
[3] A clearance was not sought. Instead the Commission was asked for an authorisation under s 67 of the Commerce Act 1986. That course appears to have been followed because, as the Commission in due course found, the acquisition would remove Cavalier’s nearest competitor and wool exporters have limited ability to switch by exporting greasy wool to China for scouring there. The Commission was not satisfied that the acquisition would not substantially lessen competition in
North and South Island markets for wool scouring services.1
[4] However, the Commission accepted that there would be offsetting public benefits, in the form of productive efficiency gains from rationalising plants. These more than offset efficiency losses resulting from the acquisition, which was accordingly authorised under s 67(3)(b) of the Act.
[5] When the file first came before me as duty Judge on Wednesday 6 July it appeared that no special urgency attaches to the proposed transaction. Cavalier had initially sought an authorisation to acquire the assets and/or the shares in Wool Services International, but it varied the application so it was confined to the assets. The significance of that for present purposes is explained in an affidavit from the chairman of Wool Services, Derek Kirke, which was filed with the stay application. The company’s major shareholders, together holding 64.3 per cent of the shares, are in receivership. The shares are on the market. But Wool Services International is an active and successful business, and it has not offered its assets for sale. Rather, it has received an unsolicited offer from Cavalier. It has no reason to accept or reject the offer within any particular time period.
[6] When the stay application was called, however, Mr Latimour explained that the matter is indeed urgent. More than that, a stay would kill the acquisition. Affidavits were being sworn. I stood the matter down while they were filed.
[7] One of the receivers, Maurice Noone, swore an affidavit explaining that the receivers have been running a sales process the conclusion of which is imminent. He adds that he understands Wool Services International had received an undertaking
that on that day Cavalier would make an offer for its assets and liabilities, and the
1 Commerce Act 1986, s 67(3)(a).
offer would be conditional on the stay application being dismissed by close of business on Friday 8 July. The offer was to be otherwise unconditional, save for shareholder major transaction approval.
[8] Also filed was an affidavit of Martin Goldfinch, a director of Cavalier. He explains that the sale process has been pending since late 2010. Cavalier decided to seek authorisation for purchase of the assets, rather than the shares, because it understood some shareholders, totalling about 12%, were unlikely to accept the offer. It followed that the 90 per cent shareholding needed to achieve direct control of the assets would not be forthcoming. (Wool Services International is listed on the NZX.) Negotiations have been under way since the Commission granted the authorisation on 9 June. The receivers have acknowledged that Cavalier is a strong bidder but they say that Cavalier will cease to be treated as such if a stay is granted. The receivers’ reaction leads him to speculate that Cavalier’s offer is substantially higher than any others, and so benefits the creditors in whose interests the receivers are acting. Further, a stay would cause irreparable harm, in the form of loss of the net public benefits of $13.5m estimated by the Commission and foregone profits for Cavalier, which has also incurred considerable costs to date.
[9] I expressed myself unsatisfied with the evidence. Mr Noone’s cryptic affidavit posed more questions than it answered. It also seemed difficult to reconcile with Mr Kirke’s affidavit. I expressed a wish to hear from the receivers and offered to adjourn the application until next week, when I could hear it with the advantage of better evidence. Mr Latimour indicated that that would be too late. The application was adjourned until the following day.
[10] On 7 July the receivers did not appear in person or by counsel. Mr Goddard QC appeared for Wool Services International, which filed an updating affidavit from Herbert Govan, one of the directors.2 Mr Kirke did not swear it because he is overseas. Mr Govan explains that an unsolicited offer has been received from Cavalier since Mr Kirke swore his affidavit. He expresses the Board’s concern
about destabilisation caused by the receivers’ sale process. He does not blame the
2 It has a Bell Gully cover page but I accept Mr Latimour’s assurance that it was not filed by his
firm.
receivers for that, but it is causing distraction to the business. Should this continue it will be detrimental to Wool Services International. To create stability the company must use every endeavour to conclude an agreement this week so it can refocus on its business and its core customers and staff. The Board wishes to finalise all negotiations, including the Cavalier offer, as a matter of urgency. That said, the receivers introduced the Cavalier offer and have asked that it be considered urgently but the Board has responded that it cannot properly address the offer until a number of conditions have been met. What those conditions are I do not know. He confirms that Wool Services International will be unable to conclude an agreement with Cavalier within a timetable set by the receivers unless the Court determines the stay application this week.
[11] I pause to note that it appears from Mr Noone’s affidavit that the urgency enveloping the stay application comes from Cavalier, while it appears from Mr Govan’s that it comes from the receivers. It may be that Cavalier is responding to a deadline set by the receivers for the conclusion of the share sale process.
[12] Mr Goddard supported Mr Latimour’s appeal for an urgent decision on the stay. I noted that the receivers have not expressly said that there are other bidders. His advice from counsel for the receivers is that there is other interest in the assets. Further, the receivers’ counsel has told him that there is a “not insignificant chance” that a stay would result in Cavalier losing the opportunity to purchase the assets.
[13] Mr Jagose confirmed that the appellant is not a bidder for the assets or shares. I infer that Godfrey Hirst does not rule out a possible acquisition. But it appeared before the Commission, and here, as a purchaser of scouring services, not a competitor for the assets. As I have said, it previously sold its own scouring plants.
[14] So much for the facts, or such of them as the protagonists have shared with the Court.
[15] The jurisdiction is found in s 95 of the Act, which simply provides that a clearance or authorisation remains “in full force” pending determination of the appeal, unless the Court orders otherwise. The leading authority, Telecom v Clear,
indicates that normal stay principles apply, including the principle that appeal rights should not be rendered nugatory. Other considerations are loss or damage should the acquirer not complete the transaction while the appeal is pending and the strength of the case.3 The following considerations appear to me to be of particular relevance:
a) The legislation presumes that a clearance or authorisation should normally remain in place pending appeal;
b)Nonetheless, the principle that an appeal should not be rendered nugatory is an important consideration;
c) The strength of the case is relevant, but it suffices if the appeal is arguable. The Court may be in a poor position to complete a more specific assessment of the appeal’s prospects of success;
d)When weighing the strength of this case the Court should recognise that it is dealing with an authorisation which followed a hearing before the Commission at which interested parties, including the appellant, were heard. I am told that most appeals concerned clearances granted on the papers following a Commission investigation;
e) Loss or damage should the stay be granted is an important consideration, particularly so if a stay may cause the authorised acquisition to fail before its merits have been examined on appeal;
f) However, the Court may be in a position, as it was in Telecom and as I am here, where it cannot with any confidence predict what will happen. Any or all of the protagonists may be exploiting – I use the term neutrally – the litigation process and its associated uncertainty for commercial advantage. In such a case the Court generally does well not to speculate, but to confine itself to (i) inquiring whether the protagonists have genuine questions to raise and proper commercial
interests to protect and (ii), allocating a swift fixture, so minimising as best it can opportunities to game the legal process;
g) Undertakings as to damages are imposed as a condition of a stay only in unusual circumstances;
h)Those who embark on a clearance or authorisation must know that it comes with appeal rights attached.
[16] A stay does not operate as an injunction prohibiting the proposed acquisition. It merely means that the successful applicant would consummate the acquisition at its own risk, in that the clearance or authorisation might subsequently be reversed. In some cases it might be argued, as it apparently was in Telecom, that that consideration reduces potential losses attributable to a stay, although I prefer the view that the applicant for a stay is not in a strong position to advance such argument. In any event, the Commission apparently having declined to authorise the transaction under s 67(3)(a), Cavalier would be at risk in this case of proceedings claiming that the acquisition substantially lessened competition in a market. (The Commission brought such proceedings in a not dissimilar situation in New Zealand
Bus.4) Mr Latimour’s instructions are that Cavalier will not complete the transaction
without the authorisation. I accept his submission that the application should be approached on the assumption that a stay will effectively prevent Cavalier from doing so.
[17] I advised counsel at the hearing that the appeal can be heard in the week of
22 August, subject only to confirming that a lay member can be found who is available to sit.
[18] In this case I must balance the possible loss of the authorised transaction, should the stay be granted, against loss of the appeal right, should it be denied. Mr Latimour accepted that the appeal would be rendered nugatory were the transaction to be completed. Mr Goddard qualified that by pointing out that it could not be completed pending major transaction approval, but that seems to me not to
assist much, since such approval presumably could be obtained before a judgment was delivered (and if not, the uncertainty which troubles the receivers and the company would remain). He did not dispute that the appeal would be rendered nugatory should the transaction be completed before the authorisation was set aside.
[19] Against that is the prospect that a stay will kill the transaction, as Mr Latimour put it. I accept that the possibility exists. The receivers’ present deadline for a sale will have passed by 22 August. However, I observe both that the sale process has been pending for a long time, the vendors apparently willing to await the authorisation process, and that the hearing is but weeks away. There is no reason to suppose that any genuine competing bidder would lose interest in the assets if the sale, which has been pending for many months, were deferred a little longer. A stay would not preclude negotiations, nor the completion of an agreement provided that it was conditional on an authorisation being in place at settlement. I accept, however, that a stay must tend to make such agreement less attractive from a vendor’s perspective, so putting Cavalier at something of a disadvantage. Beyond that it seems unwise to speculate. I know nothing of competing bidders or the condition of their bids. For present purposes I adopt Mr Goddard’s advice that there is a not insignificant prospect that the transaction will be lost.
[20] Mr Latimour did not deny that the appeal is arguable, but he sought to rebalance the scales by persuading me that it is barely so. I have reviewed the thorough and forceful arguments he advanced to that end in his written submissions. I accept that the Commission both quantified the benefits and detriments, finding the former significantly outweighed the latter, and undertook a qualititative assessment. Its decision was fully reasoned and its approach apparently disciplined. It heard from the appellant and its expert witnesses. Its approach was apparently orthodox.
[21] But in the appellant’s favour, the Commission appears to have concluded that the acquisition would lessen competition in markets for wool scouring services. It identified losses of allocative and dynamic efficiency. What outweighed them was the saving in production costs that would result from rationalisation. I am not presently able to say that the Court would adopt the same approach or attach the same weights to benefits and detriments. An appeal is not simply a matter of
checking the Commission’s arithmetic. Contrary to Mr Latimour’s submission, it seems the appeal may contain something new, in that the appellant asks the Court to discount some of the efficiency gains as “functionless monopoly rents”, rather than genuine costs savings which can be characterised as public benefits. I accept that the appeal is at least arguable, and I do not find it necessary or appropriate to go further.
[22] The final question is whether I ought to make a stay conditional upon an undertaking as to damages. Mr Latimour acknowledged that an undertaking is exceptional in this context, but he argued that one is warranted here given what he characterised as specific evidence of the nature and extent of likely losses.
[23] I decline to require an undertaking as to damages. Although it pursues a private interest, an appellant in this setting is normally taken to be serving the public interest in competition. And in this case the appellant is not, so far as I know, a competing bidder for the assets. It presents as a major buyer of wool scouring services, a member of a class who will have to confront any increase in the merged firm’s market power. Further, Mr Goldfinch’s affidavit shows that the losses to which Mr Latimour pointed comprise in major part increased profits resulting from productive efficiency gains which Cavalier evidently believes it will able to retain, at
least for a time.5 Recognising that the Court might not be instantly disposed to view
increased profits as an unequivocally good thing in this setting, he told me that his instructions are that Cavalier has projected no price increases. Whatever Cavalier’s intentions, the evidence illustrates that the appellant has a proper commercial interest in the appeal, in its capacity as a buyer of the affected services.
[24] The application for a stay of the determination pending resolution of the appeal is granted, with costs reserved.
[25] The appeal is provisionally set down in the week of 22 August before
Mallon J and a lay member. I direct that counsel are to liaise about any necessary
pre-trial directions. The registrar is to convene a teleconference before me next week for that purpose.6
[26] I have ordered that the confidential version of the authorisation may not be searched or copied without leave. Pending the teleconference I extend that order to the entire file, recognising that some of the material filed in haste may be confidential. If that is so, counsel should now file both public and confidential versions.
Miller J
Solicitors:
Chapman Tripp, Wellington for Appellant
Bell Gully, Auckland for Cavalier
0
0
0