High Court finds a vendor liable as a party to a breach of the Commerce Act in a M&A transaction

This judgment has materially increased the risks for a vendor in adopting an "it's the buyer's problem, not mine" approach to the competition law aspects of merger and acquisitions.

When advising on the sale and purchase of a business the past rule of thumb, from a vendor's perspective, has been that any competition law issues arising from the sale are primarily the purchaser's problem.

The reason for this is that if the acquisition infringes section 47 of the Commerce Act (the Act), which prohibits acquisitions that substantially lessen competition in a market, it is generally the purchaser who will have to deal with the consequences. Consequences can include the imposition of a substantial financial penalty and/or a requirement that certain assets be divested.

However, the High Court 1 has now increased the risks for vendors of adopting an "it's not my problem approach" by imposing liability on the vendors of a business for being a party to a breach of the Act.

Background

The case centred on the provision of subsidised bus services in the Wellington region. The Greater Wellington Regional Council operates a tender for the operation of subsidised bus services, with those tenders subject to strict rules. New Zealand Bus Limited (NZ Bus) and Mana Coach Services Limited (Mana) were the only major operators of subsidised bus services in the Wellington region but with each operating in distinct geographic parts of it.

In July 2005, NZ Bus, which had an existing 26% shareholding in Mana, was approached by Mana's owners to determine its interest in acquiring the remaining 74% shareholding in the company. An agreement was reached between NZ Bus and the vendors in November 2005 and a sale and purchase agreement was executed in December. Completion of the acquisition of the Mana shares was subject to a condition requiring NZ Bus to obtain clearance or authorisation from the Commerce Commission.

NZ Bus submitted a clearance application to the Commission for its approval of the acquisition in January 2006 but later withdrew the application. The court noted that there was some controversy over the exact circumstances which led to NZ Bus withdrawing its application but it was clear that the Commission had indicated that it had concerns over giving its clearance to the proposal. NZ Bus was of the view that the acquisition was not in breach of the Act and that it had the option to proceed with the transaction without Commission clearance.

NZ Bus then approached the vendors for a waiver of the Commerce Commission condition. The vendors agreed to the waiver on condition that NZ Bus supplied them with an indemnity against costs, fines, expenses, losses and legal fees.

The counterfactual

The Commission commenced an action against NZ Bus based on section 47 of the Act to stop the acquisition. The Commission argued that competition was only likely to emerge in the geographic parts of the region that NZ Bus operated in if a major overseas or other New Zealand bus company acquired Mana and then used it as a springboard to compete with NZ Bus. In contrast, NZ Bus claimed that competition from Mana would be unlikely to emerge in its part of the region whether the acquisition proceeded or not.

Decision

After hearing evidence from industry players, including those identified as potential entrants into the market, Justice Miller accepted the Commission's characterisation of the counterfactual and found that the acquisition of Mana by NZ Bus would infringe section 47 of the Act.

Further, in a first in competition law in New Zealand, the court also found that two of the vendors' principals (the Principals) were party to that breach by aiding and abetting and being knowingly concerned with the contravention of the Act by NZ Bus.

In this case, NZ Bus agreed to keep Mana's vendors informed of the progress, status and details of the clearance application. But it was not only the Principals' involvement in the clearance process but also their existing knowledge of the market and the information they, therefore, had about the likely competition issues that led the court to conclude that by agreeing to waive the clearance condition the Principals had assisted NZ Bus to infringe the Act.

A separate two day High Court hearing to determine questions of relief and penalty for the breach was held on 14 and 15 August.

 

1 Commerce Commission v New Zealand Bus Limited & Others (Unreported, High Court, Wellington, 29 June 2006).

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