PUBLIC VERSION in the HIGH COURT of NEW ZEALAND WELLINGTON REGISTRY CIV 2006-485-585 UNDER the Commerce Act 1986 in the MATTER O
Total Page：16
File Type：pdf, Size：1020Kb
PUBLIC VERSION IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY CIV 2006-485-585 UNDER the Commerce Act 1986 IN THE MATTER OF of an acquisition of shares in Mana Coach Services Limited BETWEEN COMMERCE COMMISSION Plaintiff AND NEW ZEALAND BUS LIMITED First Defendant AND BLAIRGOWRIE INVESTMENTS LIMITED, COPLAND NEYLAND ASSOCIATES LIMITED, RHODERICK JOHN TREADWELL, KERRY LEIGH WADDELL, KARYN JUSTINE COSGRAVE AND IAN WADDELL Second Defendants AND INFRATIL LIMITED Third Defendant Hearing: 22 May - 30 May 2006 1 June - 2 June 2006 Appearances: D Goddard QC and Ms L Theron for Plaintiff C Carruthers QC and Ms L O'Gorman and Ms J White for First and Third Defendants J Tizard for Second Defendants Judgment: 29 June 2006 at 2.15pm JUDGMENT OF MILLER J COMMERCE COMMISSION V NEW ZEALAND BUS LIMITED HC WN CIV 2006-485-585 29 June 2006 Table of Contents Paragraph Introduction [ 1] The witnesses [ 14] NZ Bus and Mana [ 19] Buyers and regulators of subsidised public transport [ 22] services Public transport services in the greater Wellington [ 29] region (excluding Wairarapa) The Council’s transport strategy [ 29] Route design [ 32] Tendering Rules [ 34] Relationship between Council procurement [ 48] procedures and commercial registrations LTNZ and Ministry of Transport reviews of tendering [ 57] rules The LTNZ review [ 58] Impetus for LTNZ reform of tendering rules [ 59] The Ministry of Transport review [ 64] Timing and likely shape of future changes [ 66] The relationship between NZ Bus and Mana [ 67] No historic competition [ 67] The Heads of Agreement [ 68] Understanding that Mana and NZ Bus would not [ 76] compete The transaction [ 90] Proposed sale of Waddell interests’ 74% to [ 90] Stagecoach: the 9 November letter agreement Sale of NZ Bus by Stagecoach plc to Infratil [ 91] The Waddell-NZ Bus agreement for sale and purchase [ 94] NZ Bus’ application for clearance [ 98] Withdrawal of the clearance application [103] Staff report of 30 March [114] Section 47 [120] The relevant market [123] Market definition principles [123] Product market [124] Geographic market [125] The market participants [129] Market share data and correlation between rivalry [133] and price NZ Bus and Mana profitability [137] Potential entrants [139] Barriers to entry and conditions of entry [145] Conditions of entry in the regional market [161] Lead times [162] Contract term [164] Maximum contract size [165] Scale [166] Commercial registrations [169] Information [170] Local knowledge [173] Depot location and establishment [174] Staff [179] Buses [180] Tendering costs [181] Retaliatory action [182] The factual [183] The counterfactual [187] Significance of countervailing power [192] The likely effect of the acquisition on competition [199] The associated parties issue [208] Accessory liability [215] Whether a vendor’s agreement to sell unconditionally, [217] or to waive a condition requiring clearance or authorisation, may contravene s83 The mental element of accessory liability [224] What must an accessory know? [236] Attribution of an agent’s state of mind to a principal [240] Standard of proof [241] Liability of the vendors [242] Liability of Infratil [251] Decision [256] Costs [259] Introduction [1] The Commerce Commission sues to restrain New Zealand Bus Ltd (NZ Bus) from completing the acquisition of the 74% of Mana Coach Services Ltd (Mana) that it does not already own, saying the acquisition will substantially lessen competition in a Wellington regional market for rights to operate scheduled public bus services subsidised by the Greater Wellington Regional Council (GWRC or the Council) and school bus services subsidised by the Council or the Ministry of Education. [2] NZ Bus trades through subsidiaries as Stagecoach, Cityline Hutt Valley, and Runciman Motors. It is the largest bus company in the Wellington region, where it maintains about 374 buses. [3] Mana is the second largest bus company in the region, with 115 buses. It operates in Porirua City, Kapiti and North Wellington, the latter through its subsidiary Newlands Coach Service (1998) Limited. The second defendants are the present owners in law and vendors of the shares. They are all associated with the Waddell family, and I will call them the Waddell interests unless it is necessary to distinguish among them. [4] New Zealand Bus holds 69% by value of contracts under which the GWRC and the Ministry of Education subsidise scheduled public and school bus services. Mana holds 28%, so the transaction would result in NZ Bus holding 97% of the subsidised contracts by value. The rest are held by half a dozen firms, none of which has a substantial market presence. [5] NZ Bus and Mana operate in discrete parts of the greater Wellington region. NZ Bus services Wellington City, a Hutt Valley corridor running from the city to Upper Hutt, Eastbourne, and Wainuiomata. Mana services North Wellington and a Western corridor running from Ngauranga to Waikanae. The area between the Western and Hutt corridors north of Ngauranga lacks significant population and is connected by only one significant road, SH58. I have used the term ‘corridor’ because the GWRC categorises public transport routes in that way, but it is apt to mislead insofar as it suggest that bus services between the city and points north of Ngauranga are plentiful. There are few such services, because the Council seldom subsidises them. Its transport strategy relies on commuter trains for longer distance passenger service within the region. Many bus services in the Western and Hutt Corridors converge on major train stations at Porirua and Paraparaumu in the west and Petone, Lower Hutt and Upper Hutt in the Hutt Valley. [6] The attached map depicts the areas serviced by Mana and NZ Bus, bus service linkages to train stations, and bus depots and yards. Mana has depots at Porirua, Paraparaumu, and Newlands: the latter, which lies in close proximity to State Highway 1 at the Ngauranga Gorge, is said to be strategically placed as a base for competition in northern parts of Wellington City. New Zealand Bus has depots at Kilbirnie, Waterloo Exchange (Lower Hutt) and Upper Hutt. Apart from depots, which are secure facilities where buses are stored, serviced, cleaned and fuelled, both firms have yards or ‘minimal depots’ where buses may be parked securely overnight, and layover areas where they may be parked between journeys. New Zealand Bus has yards at Eastbourne, Wainuiomata, Stokes Valley, Karori and Upper Hutt. Mana has a yard at Paraparaumu. [7] With rare exceptions NZ Bus and Mana do not compete for GWRC contracts, although they do compete for certain Ministry routes. Because of the Council’s transport strategy, the region’s geography, and the absence of competition between NZ Bus and Mana, some 87% of GWRC contracts attract only one bid. [8] The Commission nonetheless complains that the transaction will substantially lessen competition in a market for rights to operate subsidised regular and/or school bus services in the greater Wellington region (excluding Wairarapa), and so contravenes s47 of the Commerce Act. That is so because the Waddell interests will offer Mana to other bidders should the Court restrain the NZ Bus transaction. The Commission’s case is that the counterfactual – what will happen if the transaction does not proceed – is sale of the 74%, and perhaps NZ Bus’ existing 26% shareholding, to another bus company that would use Mana as a springboard to establish itself in the greater Wellington area and compete with NZ Bus. Several substantial foreign or New Zealand firms say they would like to enter the Wellington market but claim there are substantial barriers to doing so except by acquisition. [9] The transaction has not settled because the litigation intervened. The Commission pleads that NZ Bus nonetheless breached s47 because it has acquired an equitable interest in the shares, the agreement having become unconditional through an agreement of 15 March 2006 between vendors and purchaser to waive a condition requiring the Commission’s clearance or authorisation. The Commission also asks the Court to punish the Waddell interests and Infratil Limited, NZ Bus’ parent, saying they aided and abetted or conspired with NZ Bus in this contravention. The Commission seeks declarations, an injunction against all defendants, an order cancelling the agreement, and pecuniary penalties. [10] NZ Bus says the transaction raises no competition issues. The Council and the Ministry are monopsonists that by definition have substantial countervailing market power. They set fare levels and fix the terms and structure of the contracts, and they have a wide range of discretionary powers that may ensure prices paid to bus companies (in the form of subsidies) for the services they provide are at the competitive level. In particular, the Council has the power to address contract lead times and maximum contract sizes, which are the leading constraints identified by potential entrants. In any case, there can be no lessening of competition because NZ Bus and Mana operate in separate geographic markets. Whether that is so or not, Mana is no better placed to compete in NZ Bus’ territory, and vice versa, than any other firm, including an overseas operator entering on a “de novo” basis. Barriers to entry and expansion are low, so potential entry imposes a real constraint on prices. The transaction cannot result in a breach of s47 in any event, because Mana and NZ Bus are already associated persons for purposes of the Act. They also deny that Infratil is an accessory, saying it lacked the necessary knowledge of the essential facts that are said to establish breach of s47. [11] The Waddell interests agree with NZ Bus that there are separate geographic markets, so that the transaction results in no lessening of competition. Whether or not that is so, there would be no change in competition in the counterfactual, although that does involve sale of the Waddell interests’ shares in Mana to another entrant.