High Court awards penalties for NZ Bus merger

In September, the High Court issued its first penalty decision for a breach of the business acquisition provisions (section 47) of the Commerce Act. For this reason alone the decision is important, however, it also provides some practical guidance because it is one of the rare occasions under the Commerce Act where the parties have not agreed on a penalty and then simply sought to have that endorsed by the court.

In June the High Court 1 found New Zealand Bus Limited (NZ Bus) guilty of breaching the Commerce Act in acquiring the 75% of Mana Coach Services Limited it did not already own from two private shareholders. The court also found that the vendors were guilty of breaching the Commerce Act. In a further judgment 2 released in October the High Court issued its decision on penalty.

The court:

• fined NZ Bus $500,000; and
  
  
• ordered NZ Bus to pay approximately $600,000 in costs to the Commission;
  
  
• but did not impose a financial penalty on the vendors.

Starting point for penalty: commercial gain

The court affirmed that the purpose of a pecuniary penalty is to deter a rational party from engaging in the conduct ex-ante. That is the commercial gain of the action should be cancelled out by the penalty.

The court concluded that NZ Bus's commercial gain from the acquisition would have been about $2 million. However, the court was not satisfied that the vendors would receive any commercial gain from the sale of their assets over and above a commercial selling price. For that reason, it did not impose a pecuniary penalty on the vendors.

Counsel for the Commission argued because the probability of detection and enforcement action was less than 100%, the starting commercial gain should be inflated. This was because a rational business would weigh up the potential that the acquisition would "fly under the radar". While the court did not rule out this possibility entirely, it did not consider the NZ Bus case warranted such an increase.

Other relevant factors

From the $2 million starting point, the court cited other factors relevant in assessing an appropriate pecuniary penalty under the Commerce Act:

• New Zealand's voluntary merger clearance regime means it is not a mitigating factor if an acquirer proceeded believing reasonably but wrongly that the acquisition would not breach the Act. It follows that favourable legal advice does not amount to a mitigating factor; the court describing it rather as " absence of an aggravating factor".
  
  
• There is potential for over-deterrence particularly because an active business acquisition market is desirable.
  
  
• Because detection and enforcement is difficult and costly, where an acquirer takes a gamble its acquisition would remain undetected or the Commission would lack resources to enforce the law, there might be reason to increase the penalty.

NZ Bus' penalty

While the court concluded NZ Bus's expected commercial gain would be about $2 million, it ordered NZ Bus to pay a fine of only 25% of that amount ($500,000) because:

• no third party had suffered loss;
  
  
• NZ Bus had a previous good record;
  
  
• there was some public stigma associated with a finding of breach; and
  
  
• the Commission had contributed to NZ Bus' decision to withdraw its clearance application and proceed without clearance, therefore, contributing to the breach.

Relationship of pecuniary penalty and costs

The court held the issues of pecuniary penalty and costs should be treated (and calculated) separately. It noted that a penalty represents the harm done to consumers and is designed to deter a contravention; while an award of costs is designed to compensate for the social costs of enforcing the Act. The court ordered NZ Bus to pay approximately $600,000 to the Commission in costs this included full recovery by the Commission of its experts' costs.

 

 

Need more information?

For more information on this case, please contact one of our competition law team:

Phil Taylor
Partner

Jenny Stevens
Senior Associate

Torrin Crowther
Senior Associate

David Blacktop
Senior Associate

 

1 Commerce Commission v New Zealand Bus Limited and Ors (Unreported, High Court, Wellington, 29 June 2006)

2 Commerce Commission v New Zealand Bus Limited and Ors (Unreported, High Court, Wellington, 29 September 2006)

Enquiries and information

For more information on any of the cases, articles and features in Commercial Quarterly, please email Diane Graham or call her on 64 9 916 8849.