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Appeal Court puts liability cat amongst merger pigeons

01 July 2008

The Court of Appeal has not had much to do with mergers and acquisitions. It has only heard a handful of cases. The reason for that is simple: in the time it takes to litigate an acquisition all the way to the Court of Appeal, the parties to the original deal have usually decided that life would be better and cheaper for the contested asset to be sold to someone else. That reality means we seldom hear the Court of Appeal's view on s47 of the Commerce Act (and we've never heard from the Privy Council or the Supreme Court). Section 47 bans asset and share acquisitions where the result substantially lessens competition in a market.

On 6 June though, the Court of Appeal gave judgment in New Zealand Bus Limited v Commerce Commission, a s47 case. The decision affects everyone thinking of buying or selling assets in concentrated industries and markets. Here's what happened and what it means for you.

The Commission sues NZ Bus and others

In 2005 the Commerce Commission sued to restrain NZ Bus from completing the acquisition of the 74% of Mana Coach Services Limited that NZ Bus did not already own. And for the first time ever, the Commission also sued the owners of the vendor and purchaser as accessories to the alleged s47 contravention.

At the time of the deal, NZ Bus and Mana were basically the only providers of bus services in the greater Wellington region.

NZ Bus had initially sought clearance from the Commission to proceed with the acquisition. The deal was conditional on clearance being granted. "Clearance" is a voluntary regime established by s66 of the Commerce Act: where the Commission is satisfied that the aggregation of corporate interests is not likely to substantial lessen competition in one or more markets, it will "clear" the transaction. Clearance immunises the parties from being sued on the deal under the Commerce Act by the Commission or third parties. In the NZ Bus case, following a wink-and-a-nod suggestion from Commission staff that the transaction was probably ok, NZ Bus withdrew its clearance application and the deal went unconditional. That proved to be a costly decision for all involved.

In the High Court, Justice Miller found NZ Bus liable for breaching s47 and held that members of the Waddell family (effectively the owners of the vendor, Mana) were accessory parties to that contravention. The Commission's accessory liability claim against NZ Bus' parent company failed because, on the facts, that company wasn't relevantly involved in the decision to pull the clearance application. Justice Miller penalised NZ Bus $500,000 and made NZ Bus and the Waddell interests pay the Commission a further $620,000 in costs and expenses.

Everyone involved appealed everything. The case went to the Court of Appeal in September last year.

The Court of Appeal makes s47 easier to offend

While the three judges could not agree amongst themselves on certain legal issues, the decision is significant for what it says about:

  • how easy it can be to substantially lessen competition when buying a business, and
  • how you become an "accessory" to a breach of the Commerce Act.

In a short judgment, Justice Wilson records his view that "the substantial lessening of competition test imposed by s47 is a low one –  any lessening of competition which is more than illusory or transitory is caught by s47." Justice Hammond adds to that observation by describing the s47 analysis as "an exercise of judgement and evaluation" where "a Court is always required to simplify to some extent". We are worried about these remarks. There should be a measure of sophistication and certainty to the regulation of business acquisitions. In short, the Court's comments have the potential to chill entrepreneurship: companies can be penalised up to $5 million for breaching s47; for the individuals involved, the fine tops out at $500,000. Would you risk proceeding without clearance?

It may be that, as Justice Wilson suggests, Commerce Commission "authorisation" of grey area acquisitions is the way to go. Authorisation is like a clearance application, only more formal and more expensive. However, unlike the clearance process, authorisation applications oblige the Commerce Commission to weigh an acquisition's competitive detriments against its benefits: where the deal is net-efficiency positive, the Commission will allow it to proceed. We may see more authorisation applications as a result of NZ Bus.

"Illegal" acquisitions and accessory liability

Everyone's heard of being an "accessory to murder". Thankfully few are. Being an "accessory to a breach of the Commerce Act" has a different ring to it. It's still pretty serious though.

Under the "orthodox" approach, an individual or a company involved in a deal that lessens competition will be an accessory where that person knew all of the "essential facts" that led the Court to conclude that the transaction breached s47. You can be liable as an accessory even where you have no idea that those facts constitute a contravention of the Commerce Act. The trouble with this approach is that it is always not clear even to judges whether or not a deal is on the wrong side of s47. The so-called orthodox approach, then, may promote excessive commercial caution which will poorly serve the economy.

In looking for another way forward, Justice Hammond fashioned what he called "dishonest participation". Under this theory of accessory liability, the Court asks whether a particular defendant is guilty of "commercially unacceptable conduct". That sounds a little more like it, but some may feel this approach is too uncertain and leaves too much discretion in the hands of judges who have never been involved in running, buying or selling a business. In the result, the Court of Appeal did not come to a final view on either approach because, on the facts, the judges were satisfied that the alleged accessories were innocent. There is more to come on this difficult point of law.

What do we think?

As we said at the outset, the Court of Appeal doesn't often look at mergers. That might be a good thing.

This judgment re-casts the competition test as a hair trigger without really saying why or exploring the commercial consequences of fiddling with the law in this way. The Court of Appeal also injects further uncertainty into the question of accessory liability, casting doubt on the standard approach but ultimately not settling on an alternative. The only point of real clarity is the observation that clearance applications, once made, should not be withdrawn –  something that seemed obvious until a "wink" from a Commission staffer kicked off this sorry story to begin with.

Bundling discounts

Some recent developments have brought greater certainty to the question of how bundle discounts should be treated in competition law. In particular, the Commerce Commission has set out the way it will analyse bundle discounts.

Also, there have been two significant US developments a report by the Anti-Trust Modernisation Commission and the PeaceHealth Decision of the Ninth Circuit Court of Appeal.

For more on bundling discounts, click here

0867: Remembering dial-up, and reinforcing the counterfactual test

Around the turn of the century, the Commission claimed that Telecom's decision to introduce a free internet access number range (0867 xxx xxx), while implementing a charge for residential local number dial-up access to the internet, was a breach of s36 of the Commerce Act.

Section 36 at the time (since amended) prohibited firms in a dominant market position from using that dominance for anti-competitive purpose. The High Court has held that Telecom neither used any dominance it may have had, nor had any anti-competitive purpose: instead, it was engaged in "normal profit-maximising behaviour, to be expected of any firm, dominant or otherwise".

Click here to examine the essence of the 0867 case, and the reaction/commentary that has followed, including ill-conceived calls for s36 of the Commerce Act to be reformed.

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