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When the largest bus operator in Wellington, NZ Bus, looked to acquire 100% of the second largest bus operator (in which it already held 26%) the High Court, in a landmark decision, not only found NZ Bus to be in breach of the Commerce Act, but also found the Vendors liable as accessories. The Commerce Commission had also claimed accessory liability against NZ Bus' parent company Infratil, but no liability was found by the High Court. Following appeal to the Court of Appeal, the parameters of accessory liability have become even more murky. Given the critical importance of this issue to the business community the Commerce Commission has sought leave to put the matter before the Supreme Court. We outline the issues below.
The Acquisition
NZ Bus, 100% owned by Infratil, was the largest bus company operating in the Wellington region. NZ Bus owned 26% of Mana Bus, the second largest bus company operating in the region.
In 2005 the remaining shareholders in Mana Bus (Vendors) agreed to sell their shares to NZ Bus subject to Commerce Commission clearance. NZ Bus applied for clearance in January 2006. Representatives of NZ Bus met with the Commerce Commission. The exact nature of the discussions at this meeting are in dispute, but there was some evidence that Commerce Commission representatives hinted that NZ Bus might consider withdrawing its clearance application. This suggestion arose in circumstances where delay was already beginning to cause concern for NZ Bus. The option of withdrawing the clearance application was available to NZ Bus if they were unhappy with the process for considering the application proposed by the Commission.
Following the meeting, NZ Bus sought the Vendors' consent to waive the condition requiring Commerce Commission clearance for the sale. The Vendors agreed to the waiver on the basis they would have an indemnity from NZ Bus for any legal costs or fines that might result. The clearance was withdrawn and the agreement for sale and purchase went unconditional. The Commerce Commission then commenced proceedings to prevent settlement, claiming a breach of section 47 of the Act by NZ Bus and accessory liability on the part of the Vendors and Infratil.
The High Court Decision
In the High Court, NZ Bus was found to have breached section 47 of the Commerce Act on the basis that the acquisition was likely to substantially lessen competition in a market.
While this was relatively uncontroversial, the Court's next finding was less so. This was that the Vendors were liable as accessories to the breach by NZ Bus. The High Court held that, by agreeing to waive the condition requiring Commerce Commission clearance or authorisation, the Vendors had aided and abetted or conspired with NZ Bus to breach section 47, or were directly or indirectly concerned in, or party to the contravention by NZ Bus. Infratil was found not liable as an accessory as the Commerce Commission could not show it had deliberately assisted NZ Bus with knowledge of the essential facts.
The test used by Justice Miller in determining accessory liability was as follows:
- An accessory is liable only if its participation was intentionally aimed at the commission of the act that formed the contravention of section 47, namely the acquisition of assets or shares.
- An accessory must know the essential facts, being facts that sufficiently establish a contravention of section 47.
- Actual not constructive knowledge is required in determining the essential facts that an accessory must know. The test must be directed to the facts that have led the Court to conclude, as against the acquirer, that the transaction is likely to substantially lessen competition.
The Court of Appeal Decision
The decision was appealed. The Court of Appeal agreed with the High Court that the acquisition was likely to substantially lessen competition. The focus of the Court then turned to accessory liability for the Vendors and Infratil.
Different Approaches Within the Court of Appeal - Separate written judgments were provided by two of the judges and a different approach taken by each on the question of accessory liability, one adopting the High Court's approach, the other preferring a more strict approach. The third Judge simply agreed with both his fellow Judges and did not decide the issue for certain one way or another.
Justice Hammond - a stricter approach to accessory liability - Justice Hammond in the Court of Appeal considered that the broad approach to accessory liability adopted by the High Court could have significant implications for commerce and professional practice. It would impact on vendors of assets or shares and advisers involved in a transaction, and it would raise insurance and indemnity issues.
Taking this into account he adopted a stricter standard for accessory liability. He found that it would be necessary to establish that there was "dishonest participation" in the substantial lessening of competition. As to what this would mean, the Judge found that dishonesty did not mean unconscionable conduct. Rather the question viewed objectively was whether the defendant was guilty of commercially unacceptable conduct in the context of the case.
Applying this approach to the facts, Justice Hammond found that accessory liability should not have been imposed on the Vendors. Their involvement was limited, their knowledge was restricted and their conduct could not be described as objectively dishonest.
Interestingly, on this approach, Justice Hammond considered the position of Infratil to be more finely balanced. In failing to see the Commerce Commission clearance process through, Infratil had taken a very real chance which was, in Justice Hammond's view, commercially unacceptable behaviour of the character required for accessorial liability. Infratil was saved from liability by the finding of the High Court that Commerce Commission staff did hint that NZ Bus might consider withdrawing the clearance application. In those unusual circumstances it was difficult to say that going ahead with the transaction without a clearance was objectively dishonest. But for that factual evidence, Justice Hammond would have decided this issue the other way.
Justice Arnold - knowledge and intention required - Justice Arnold, who delivered a separate judgment, considered that the "dishonest participation" approach did not provide any greater certainty than the approach adopted by the High Court. This was on the basis that the issue of what was commercially unacceptable conduct would depend on the Court's view on the facts of each case. Instead Justice Arnold adopted the same approach to accessory liability as the High Court, but still reached the same outcome as Justice Hammond - neither the Vendors nor Infratil were liable.
Where to Now?
As a result of the division between the Court of Appeal Judges on the issues of accessory liability, there is uncertainty as to the exact test that will be applied going forward. Will it be the "knowledge of the essential facts and intentional participation" test of the High Court, or the "dishonest participation" test of Justice Hammond?
It is not surprising therefore that the Commerce Commission announced on 4 July 2008 that it was seeking leave to appeal to the Supreme Court against the Court of Appeal's decision dismissing a claim for liability against Infratil. An express reason given by the Commission Chair for the appeal is to seek to "clarify the law as to accessory liability under the Commerce Act, which is now unclear following the Court of Appeal's decision".
As a result the saga will continue. Hopefully the Supreme Court will give firm guidance on the requirements for accessory liability so businesses involved in acquisitions have greater certainty as to when liability may arise. We will keep you updated.
This newsletter is produced by Simpson Grierson. It is intended to provide general information in summary form. The contents do not constitute legal advice and should not be relied on as such. Specialist legal advice should be sought in particular matters.
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