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 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.
From the $2 million starting point, the court cited other factors relevant in assessing an appropriate pecuniary penalty under the Commerce Act:
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:
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.
While legal advice is not seen by the courts as a mitigating factor when setting a penalty, the approach of the court in using commercial gain as a starting point does highlight the need for acquirers to be fully aware of the competition law issues inherent in any business acquisition proposal. The NZ$2 million would have represented 10% of the annual turnover of the combined company in the affected market a substantial number by any standards. In a larger market, the appropriate starting point could be much higher and accordingly, any penalty award much greater.
For more information on this case, please contact one of our competition law team:
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)
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.
This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.