Court of Appeal finds vendors in NZ Bus not liable

In this article, senior associate Jenny Cooper comments on the recent Court of Appeal decision which overturned the High Court's landmark finding of accessory liability for breach of the Commerce Act against the vendors of Mana Coach Services to New Zealand Bus Limited. The High Court decision was the first time that vendors had been found liable under the Act in relation to an anti-competitive business acquisition.

The Court of Appeal confirmed that vendor liability could arise but considered that the vendors should not be liable in this case because they were not involved in the clearance process and were not aware of the Commission's concerns about the acquisition. Justice Hammond set out a new test for accessory liability under the Act based on "dishonest participation". He held that it was unacceptable to "take a punt" by proceeding with a business acquisition without a clearance or authorisation where the participant has knowledge that it is a borderline case. Such behaviour may give rise to penalties under the Act for any parties, including vendors, who "dishonestly" aid and abet the transaction or are knowingly concerned in it.

The facts

In 2005, NZ Bus, the largest bus company in the Wellington region and in NZ, entered into an agreement with Blairgowrie Investments Limited and others (the Vendors) to acquire Mana, the second largest bus company in the Wellington region. The agreement was conditional on NZ Bus obtaining Commerce Commission clearance or authorisation.

During the clearance process the Commission expressed concerns to NZ Bus and its parent company, Infratil, that the acquisition would reduce competition. A meeting was held at which NZ Bus claimed Commission staff encouraged them to proceed without a clearance. This was denied by the Commission. NZ Bus then took legal advice and concluded that the least-risk highest-benefit strategy was to withdraw the clearance and complete the acquisition. It approached the Vendors to seek a waiver of the clearance condition, telling them that its advice was that clearance was not needed.

The Vendors waived the condition and NZ Bus withdrew its application for clearance. Before the transaction was settled, the Commission began proceedings against NZ Bus, Infratil, and the Vendors, alleging that the acquisition breached s47 of the Act as likely to have the effect of substantially lessening competition in a market.

High Court decision – vendors found liable

In the High Court Justice Miller found that the acquisition did breach the Act and that NZ Bus was accordingly liable. He also held that the Vendors were liable as accessories to the breach. Whereas the acquirer in a business acquisition in breach of the Act is automatically liable without any requirement to prove knowledge or intention, Justice Miller applied the same test for accessory liability found in the criminal law. He held that an accessory is liable under the Act only if:

• it has knowledge of the essential facts that establish a contravention of the Act (i.e. the facts which led the court to conclude that the transaction was likely to substantially lessen competition); and

• its participation was intentionally aimed at the acts that form the contravention (i.e. the acquisition).

The Vendors were liable "by participating in the waiver with knowledge of essential facts sufficient to establish contravention of s47". This finding was based on their market knowledge, rather than any understanding on their part as to whether a competition law analysis would reveal a breach of the Act. In fact, Justice Miller held that the Vendors were unaware of the Commission's concerns and had reasonably relied on advice that a clearance was not necessary.

In contrast, despite knowing of the Commission's concerns, Infratil was not liable as it did not know all the facts about the market that led the court to conclude that the acquisition was likely to substantially lessen competition.

Court of Appeal decision – new test proposed

The Court of Appeal upheld Justice Miller's finding that the acquisition breached s47 but overturned the liability finding against the Vendors. The court expressed misgivings about applying the criminal law test for accessory liability in the competition law context. Their main concern was that determining whether an acquisition is likely to have the effect of substantially lessening competition relies on an evaluative assessment of a wide range of facts and circumstances and is often very difficult to know in advance.

In view of this, Justice Hammond concluded that the criminal law approach was not suitable and, instead, adopted a test of "dishonest participation" under which liability depends on an objective assessment of whether the alleged accessory was guilty of "commercially unacceptable conduct".

Applying this test Justice Hammond found that the Vendors were not liable – their involvement was limited and they had not been told there was a real risk the Commission would decline clearance. In contrast, he would have held Infratil liable on the grounds that its decision to take a "punt" in a borderline case was "commercially unacceptable conduct". However, a finding by the High Court that the Commission had hinted to Infratil that NZ Bus might consider withdrawing the application meant it was difficult to say that there had been "objective dishonesty" by Infratil. Infratil therefore escaped liability.

In his separate judgment, Justice Arnold agreed with Justice Hammond that there were difficulties in applying the criminal law approach to accessory liability. However, he considered that Justice Hammond's "dishonest participation" approach did not provide any greater certainty as it relied on the court's intuitive judgment as to what was commercially appropriate on the facts of each case. Applying the traditional approach, Justice Arnold came to the same result as Justice Hammond, with neither the Vendors nor Infratil found liable.

Left with the deciding vote between the traditional approach and Justice Hammond's alternative, Justice Wilson opted not to cast it, stating that he agreed with both his fellow judges.

Liability lessons

The Court of Appeal clearly felt that the High Court's findings on liability were at odds with where culpability lay in this case. Their decision suggests that a vendor will not be held liable for a business acquisition unless they are on notice that the Commission has concerns or they have some other reason to be concerned that the transaction may breach the Act (unlike an acquirer who is automatically liable if an acquisition is found to have breached the Act). Where there are such concerns, vendors (and other parties) should obtain independent expert competition law advice and should not agree to the transaction proceeding without a clearance or authorisation only after a careful analysis of all the facts and circumstances indicates that it is safe to do so.

This article was first published in Competition Matters, NZLawyer magazine, 27 June 2008.

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