New Zealand Bus Ltd v Commerce Commission
[2007] NZCA 502
•14 November 2007
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IN THE COURT OF APPEAL OF NEW ZEALAND
CA149/06
CA227/06
[2007] NZCA 502BETWEENNEW ZEALAND BUS LIMITED
First AppellantANDINFRATIL LIMITED
Second Appellant
ANDCOMMERCE COMMISSION
RespondentCA151/06
AND BETWEEN BLAIRGOWRIE INVESTMENTS LIMITED & ORS
Appellants
ANDCOMMERCE 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
AWe confirm the dismissal of the appeal by New Zealand Bus Limited against liability in respect of s 47 of the Commerce Act 1986.
BWe 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.
CWe dismiss the cross-appeal by the Commerce Commission against Infratil Limited, as to its liability as an accessory under s 83 of the Act.
DWe 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 narrativeThe 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 over-simplification, 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 supra-competitive 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]).
Oakley Moran, Wellington for Appellants in CA151/06
Commerce Commission, Wellington for Respondent
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