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. Potential competition from new entrants is a significant constraint for both Mana and NZ Bus and will remain so following the acquisition or in the counterfactual. Significant expansion by Mana into NZ Bus’ area of operation is constrained by NZ Bus’ 26% shareholding, which carries with it the power to prevent any major transaction and the right to appoint a director. The Waddell interests also maintain that Mana and NZ Bus are associated persons for the purposes of s47, and deny that they are accessories to any breach by NZ Bus.

[12] The general issue is whether competition following the acquisition is likely to be substantially less than it would be if a firm other than NZ Bus controlled Mana. Subsidiary issues are whether there is one regional market or discrete ‘corridor’ markets corresponding to each firm’s present territory, why the firms presently compete only at the margin, the extent and relevance of countervailing buyer market power, conditions of entry and their effect on potential entrants, whether Mana under new ownership is better placed to compete with NZ Bus in the latter’s territory than a ‘de novo’ entrant, whether NZ Bus and Mana are associated persons, and accessory liability.

[13] The Commission launched the proceeding on 30 March with an application for an interim injunction intended to prevent settlement on 3 April. The parties elected an early trial instead. In the circumstances, they agreed that this judgment would be confined to liability and declarations. A further hearing may be necessary to determine whether an injunction should lie and whether penalties should be imposed. I record that the quality of the evidence and argument was very high despite pressure of time, and I acknowledge the considerable efforts of counsel on all sides.

The witnesses

[14] The Commission called Simon Whiteley, the General Manager, Policy and Planning, at LTNZ, Anthony Cross, the Manager, Transport Service Design, at the GWRC, Kenneth Lawn, the Director-Operations of the Canterbury Regional Council (also known as ECan), and Mark Lambert, the Manager, Passenger Transport Development at the Auckland Regional Transport Authority (also known as ARTA).

[15] The Commission then called industry participants who gave evidence on subpoena: Andrew Ritchie, a Director of Ritchies Transport Holdings Limited and National Vice-President of the Bus and Coach Association (NZ), Peter Lodge, a Director, General Counsel and Company Secretary of Veolia Transport Australia Pty Limited, which is a subsidiary of the major French passenger transport company Veolia Transport, Neil Smith, Director of Swan Transit, a major Australian bus company, Ross Mackiggan, Executive General Manager of Transdev-TSL, a major public transport company that operates buses, trams and ferries in Australia, and Paul Snelgrove, Managing Director of Tranzit Group Limited, a bus company based in the Wairarapa which operates school runs and charter and tour services in the Wellington area and urban bus runs in Wairarapa, Palmerston North and Wanganui.

[16] The Commission called expert witnesses: Alistair Aburn, a resource management specialist whose evidence focused on the availability of depot sites in Wellington, the Hutt Valley and Porirua, Murray Horlor, an accountant who has advised GWRC and ECan on cost structures and tenders for bus operations, Gustavo Bamberger, a senior economist with Lexecon, a consulting firm that specialises in the application of economics to legal and regulatory issues, and John Dodgson, an economist with NERA Economic Consulting and head of NERA’s European transport team, with substantial experience in UK bus transport markets.

[17] NZ Bus called Paul Ridley-Smith, an executive employed by HRL Morrison and Co Ltd, which manages Infratil, and the executive responsible for the purchase of NZ Bus from Stagecoach plc, Ian Turner, an executive director of NZ Bus, Garth Stewart, an operations analyst for NZ Bus who modelled dead running costs, and Gregory Campbell, the Managing Director-NZ of Transpacific Industries Group, a supplier of buses to NZ Bus and former chief executive of Red Bus Limited, a Christchurch bus company. It also called David Watson, a consultant presently employed by the GWRC whose experience includes establishment in 1991 of the current tendering system and the conduct of tenders since then, David Overington, an industry expert based in Australia who was a member of a group that developed the original competitive pricing procedures, and James Mellsop, an economist with CRA International and leader of CRA’s New Zealand competition practice.

[18] The only witness for the second defendants was Kerry Waddell, the Managing Director of Mana.

NZ Bus and Mana

[19] NZ Bus is New Zealand’s largest bus company, with major scheduled public transport networks in Wellington and Auckland and operations elsewhere in New Zealand. Until November 2005 it was owned by Stagecoach plc, a major international bus company based in Scotland. Since then NZ Bus has been a wholly owned subsidiary of Infratil, a listed infrastructure investor.

[20] Mana is a substantial local firm that is highly regarded in the industry for its efficiency and the quality of its management. It is controlled by the Waddell family. Blairgowrie Investments Ltd is controlled by John Waddell and his wife, whose name I was not given. Blairgowrie holds 60.65% of Mana. Kerry Waddell, Ian Waddell, and Jo Copland and their respective spouses or corporate investment vehicles hold the balance of the Waddell interests’ 74%. The shareholders are K Waddell and R Treadwell (3%), I Waddell and K Cosgrove (2.85%), and Copland Neyland Associates Ltd (7.5%).

[21] NZ Bus and Mana each own 50% of Wellington Integrated Ticketing Limited, which offers monthly, all-day and daily off-peak passes that are valid on NZ Bus and Mana Services. The daily off-peak pass is also valid on urban train services.

Buyers and regulators of subsidised public transport services [22] The Council is responsible for meeting the region’s transport needs generally, including provision of roads. Under the Land Transport Act 1998 it establishes a regional transport strategy that assigns a role to each mode of transport, including private cars, trains, and buses.

[23] The Council implements its strategy, in part, by subsidising public scheduled bus services. It also subsidises dedicated school buses in areas already served by scheduled public transport services. Bus services accounted for $24m of the $40.4m the Council spent on contracted public transport services in the 2004/05 financial year. From time to time it lets contracts by tender for provision of such services. It prescribes the service standards, including frequency and timing of service and bus quality, and fare levels. Tenderers compete by nominating the subsidy level at which they are prepared to contract. The subsidy level is the “price” in exchange for which the tenderer offers to supply the service.

[24] The Council also has a regulatory role in licensing commercial (that is, unsubsidised) bus services under the Transport Services Licensing Act 1989. The Council has limited power to refuse to register a service under s49, which provides so far as relevant:

49 Registration of notified service

(1) Subject to section 54 of this Act, a regional council shall, unless it declines registration under subsection (2) of this section, register a passenger service notified to it under section 48 of this Act within 21 days of receiving the [notice concerned].

(2) A regional council may decline to register a passenger service under this section where the service proposed—

(a) Is likely to have a material adverse effect on the financial viability of any contracted service; or

(b) Is likely to increase the net cost to the regional council of any contracted service; or

(c) Is contrary to sound traffic management or any other environmental factor identified by the regional council as being of importance to its region.

[25] The Ministry of Education lets subsidised contracts for school bus services in areas not served by public transport, and for technical classes. Not all schools have facilities for technical classes so pupils must be taken to schools that do. Technical routes operate throughout the region, normally at off-peak times. Mr Rawson’s evidence was that the Ministry’s total annual subsidy payments for the 100 routes involved are approximately $1m per annum. Of that, $340,000 is spent on technical routes, which assumed importance during the hearing because Mana and NZ Bus sometimes compete for them in Wellington City.

[26] Land Transport New Zealand (LTNZ) is a state funding agency, disbursing central government subsidies to regional councils. It is the source of some 45% of the GWRC’s annual bus transport subsidy payments. Ratepayers bear the balance. LTNZ was established in 2004 under the Land Transport Management Act 2003, which merged Transfund New Zealand and the Land Transport Safety Authority. LTNZ is required to allocate its resources and to undertake its functions in a way that contributes to an integrated, safe, responsive, and sustainable land transport system. Its functions are listed in s69, which provides so far as relevant:

69 Functions of Authority

(1) The functions of the Authority are—

(a) to promote land transport sustainability in New Zealand:

(b) to prepare and adopt a land transport programme under section 12A and a national land transport programme under section 19:

(e) to make payments from the national land transport account as authorised by this Act:

(f) to promote safe transport on land in New Zealand:

(i) to approve procurement procedures under section 25:

(2) The Authority's statutorily independent functions are—

(a) to determine whether particular activities should be included in a national land transport programme; and

(c) approving procurement procedures.

[27] It will be seen that LTNZ continues to approve procurement procedures under s25 of the Act, which provides that LTNZ must approve one or more procurement procedures that are designed to obtain the best value for money spent by approved organisations and persons, having regard to the purpose of the Act. Subsidy payments from a land transport disbursement account must be made in accordance with such a procurement procedure. Accordingly, the GWRC must comply with LTNZ-approved procurement procedures if it wishes to receive central government funding. When approving such procedures, LTNZ must also have regard to the desirability of enabling persons to compete fairly for right to supply outputs required for approved activities, if two or more persons are willing and able to provide those outputs, and encouraging competitive and efficient markets for the supply of such outputs. The Act accordingly presumes that competitive and efficient markets should result in the best value for money spent in procuring those services.

[28] The Ministry of Transport administers the Transport Services Licensing Act 1989, under which public transport operators are licensed, and the Land Transport Management Act 2003. Its objective under the latter legislation is an affordable, integrated, safe, responsive and sustainable public transport network. The Ministry is presently reviewing the Transport Services Licensing Act to determine the relationship between contracted and commercial bus services and the level of control local authorities have over these services. More is said about that review later in this judgment.

Public transport services in the greater Wellington region (excluding Wairarapa)

The Council’s transport strategy

[29] In its draft regional passenger transport plan dated December 2005, the GWRC divided public transport services into five transport corridors. The Western Corridor runs from Wellington to Otaki and includes the Kapiti Coast and the northern suburbs of Wellington City. Long distance services in this corridor are primarily rail-based, although there are limited peak commuter bus services from the Kapiti Coast and from Porirua and Tawa. Most bus services connect to the train stations at Paraparaumu, Paremata and Porirua. Accordingly, scheduled bus services in these areas are designed primarily to connect to commuter trains. This region is enjoying strong growth, and train services are facing capacity constraints, primarily because the route is single- tracked north of Pukerua Bay.

[30] The Hutt Corridor extends from Wellington to Upper Hutt. Again, rail is the primary long haul mode, although there are capacity and deferred maintenance issues with track and signalling infrastructure. There are timetabled bus connections at Upper Hutt, Trentham, Silverstream, Taita, Waterloo and Petone stations. The Hutt Corridor is experiencing little or no population growth but bus patronage has increased following a review of services in 2002. The CBD Corridor between Ngauranga and Wellington Airport includes the Wellington central business district area, which is served solely by bus.

[31] The regional transport plan states that the GWRC intends to maintain dedicated public transport corridors and improve integration, especially between feeder buses and trains. The evidence confirmed that it is not the Council’s policy to subsidise bus services that will compete with train services.

Route design

[32] The GWRC is responsible for route design. It reviews routes in each corridor periodically after public consultation. For example, in 2003 it reviewed routes in Lower Hutt, resulting in a 56-bus tender being let covering a mix of 9 old and new routes. One reason for bundling contracts in one request for tenders was that the GWRC wanted to encourage new entrants. In the result, NZ Bus was the sole bidder.

[33] Routes in Wellington City were the subject of some attention during the hearing because the Commission says that Mana is well placed to compete on a number of them, in particular those in north Wellington. Existing northern routes operate between Khandallah in the north and Strathmore in the south, passing through the central business district. It appears that many bus routes in the city follow a similar pattern, passing through the central business district rather than terminating in it.

Tendering rules

[34] LTNZ-approved procurement procedures are set out in the Competitive Pricing Procedures Manual (Volume 2) (the CPP Manual), the current version of which was issued on 1 July 2002 and last amended on 1 December 2003. The Manual is the source of some of the constraints that some larger firms have identified as barriers to entry, notably maximum contract size and lead times between requests for tenders (RFTs) and service commencement.

[35] Several features of the CPP Manual are worthy to note. First, when formulating the CPP Manual, LTNZ was required to consider the efficient application of government funds, the desirability of encouraging competition for the supply of goods or services and the undesirability of excluding from competition any party who might otherwise be willing and able to compete: s19 Transit New Zealand Act 1989. That provision was repealed in 2003. LTNZ interpreted the legislation to mean that it was to achieve efficient use of public funds principally by encouraging competition among potential providers of public transport services.

[36] The Manual accordingly provides that no single request for tenders may exceed 1,000 seats (or around 22 buses). Prospective entrants complain that the maximum contract size is too small. There is provision for an application to LTNZ for specific approval of an increased tender size if special circumstances exist. It does not appear that this procedure has ever been invoked in Wellington. A Council may group individual contracts in a single RFT, but each contract must be let separately, so that a firm bidding in the entire group may be offered only some of the contracts. One inhibiting consideration, still described in some detail in the CPP Manual, is the Court of Appeal decision in Ritchies Transport Holdings Ltd v Otago Regional Council CA 152/91 16 August 1991. The judgment is quoted for the proposition that tendering authorities must be cautious not to set up group tenders that are so large as to inhibit competition from smaller operators. I observe that that case was not brought under the Commerce Act but involved judicial review of initial tenders following deregulation. The Court’s conclusion rested on s19(3)(c) and (d) of the Transit New Zealand Act 1989, which formerly provided:

19 Competitive pricing procedure-

(3) In exercising its powers under subsection (1) or subsection (2) of this section the Authority shall have regard to—

(c) The desirability of encouraging competition in the sector of industry likely to supply goods or services in relation to the project or the class of project:

(d) The undesirability of excluding from competition for the project or the class of project any party who might otherwise be willing and able to compete: [37] By contrast, s25(2) of the Land Transport Management Act 2003 no longer focuses attention on the desirability of encouraging anyone who wants to compete to do so:

25 Procurement procedures

(2) In approving a procurement procedure, [the Authority] must also have regard to the desirability of—

(a) enabling persons to compete fairly for the right to supply outputs required for approved activities, if 2 or more persons are willing and able to provide those outputs; and

(b) encouraging competitive and efficient markets for the supply of outputs required for approved activities.

[38] Second, the Council is required to accept the lowest priced conforming tender. It may negotiate only where there is only one conforming tender, and then only with the bidder. The Commission maintains that this places the GWRC at a significant disadvantage. Any attempt to negotiate immediately discloses to the supplier that there was no other bid. Names of winning bidders and contract prices must also be published, along with the number of tenders and the price range. These requirements mean that incumbents can easily monitor tenders by potential entrants.

[39] Third, the Council may not allow more than eight months between the issue of a request for tender and the start of service. (Until 2005 the maximum lead time was six months.) It is encouraged to award contracts at least four months before service begins. The Commission says the lead times are too short for firms contemplating entry, because establishment of a depot, acquisition of buses and hiring of staff together require significantly larger lead times and an entrant will not make these commitments before winning a tender.

[40] Fourth, contract terms are ordinarily limited to five years. Since 2003, however, the Manual has permitted extensions or rollovers to a maximum term of eight years.

[41] The Manual provides for contracts to be let on gross or net bases. In a gross contract the tendering authority takes the gross revenues, while in a net contract the operator receives the gross revenues. A net contract accordingly assigns revenue risk to the operator. The GWRC ordinarily employs net contracts, which operators generally prefer. [42] In practice, GWRC specifies the conditions for the services offered for tender, such as the routes, contract term, the fare structure, any requirement to offer discounts for concession tickets, quality standards, frequency and times of bus services and information that must be supplied to GWRC by the operator. Tenders must pre-qualify by verifying health and safety procedures, insurance, management structure, facilities, experience and numbering and quality of buses. The actual tenders are submitted in a two-envelope sealed bid process. The first envelope describes the tender’s attributes and how it will resource the contract. The second contains the price.

[43] Some flexibility is permitted. A tenderer may submit an alternative bid. For example, a tenderer might submit a bid that covered the contracted service and included a proposal to contract over a commercial service offered by another operator.

[44] The Manual admits of variations with LTNZ approval, confined to the particular tendering authority and then further confined to particular contracts. Any such variation must be identified prominently in the request for tender, and LTNZ may consult interested parties before approving a variation.

[45] The Manual also provides for LTNZ approval of alternative competitive pricing procedures (CPP). Again, LTNZ may consult interested parties before approving an alternative CPP, and the Manual warns that any request for an alternative CPP should be made well before any tender that it would govern. The GWRC uses the standard CPP Manual. Alternative CPPs are rare. ARTA obtained one for use in tendering new services in the North Shore, allowing it to negotiate with the winning bidder followed by other bidders in turn. The justification was that ARTA did not know whether it could fund all the services tendered, so it sought flexibility to negotiate price and services.

[46] I am satisfied that alteration to criteria such as maximum contract size, lead times, and flexibility to negotiate are major changes that would require an alternative CPP rather than contract by contract variations. Such extensive change would likely require further consultation since Mr Whiteley’s view was that LTNZ’s review has not been taken to the point where it could be justified. His evidence was that until LTNZ’s review of tendering processes has been completed, it would be difficult to justify what he described as a “sea change” in the procurement regime. He accepted that LTNZ’s guiding principle would be whether the variation would secure value for money, and he acknowledged that there is a legal obligation to consider any such proposal, but he said that while a collaborative review is being undertaken he would not expect regional councils to come forward with new proposals. Because the Ministry of Transport review may result in legislation, he considered that the review may take two years. Mr Cross’ view was that it is not worthwhile approaching LTNZ for approval of increased contract sizes and lead times while the review is pending.

[47] I accept that LTNZ’s processes are necessarily time-consuming, involving as they do widespread consultation. But so far as some potential changes to the CPP are concerned, much of the work has already been done. There is a very substantial measure of agreement that larger maximum contract sizes are required. As Mr Goddard acknowledged, the Court is also an actor in this process: LTNZ can be expected to consider the evidence and the Court’s conclusions. LTNZ has already increased lead times and maximum contract terms in the CPP Manual, without any difficulty that was drawn to my attention. For reasons elaborated on later in this judgment, maximum contract size and lead times ought to be addressed now because the Commission has satisfied me that they operate as significant entry constraints in an industry that is presently characterised, in Wellington, by a lack of competition. It should go without saying that LTNZ could not justify delay by reference to a pending review, so long as s25 remains the law. Putting the prospect of legislative change to one side, LTNZ could complete such a review and issue an alternative CPP within a relatively short time. Even allowing for consultation, I am unable to see that it could take more than a year.

Relationship between Council procurement procedures and commercial registrations

[48] Unsubsidised commercial services must be registered with the Council under the Transport Services Licensing Act, hence the name “commercial registrations”. Operators have a right to register such services subject to s49 of the Act, which I have set out above.

[49] Approximately 20% of all services in the Greater Wellington region are commercial. Frequently commercial services are interwoven with contracted ones, in that commercial and contracted services will alternate on the same route during busy periods, with contracted services operating at peak periods, off-peak periods, and weekends. Or commercial services may operate at (say) 6am and 6pm or during the middle of the day, leaving the Council to subsidise peak services.

[50] Commercial registrations in Wellington are also stable. Most services were registered following deregulation in 1991.

[51] Consultants employed by LTNZ for its procurement review, LEK Consulting Pty Ltd of Australia, concluded that contracted services frequently subsidise commercial ones. By that they meant that commercial services are often close to break-even or negative profitability, while contracted services consistently show higher EBIT (earnings before interest) and tax margins. The evidence did not establish an economic cross-subsidy, in the sense that NZ Bus’ or Mana’s Wellington commercial registrations produce revenues that are less than the incremental costs of providing the commercial services concerned.

[52] However, the evidence did establish that operators are likely to surrender some revenue by maintaining commercial registrations, in that a Council is likely to subsidise a service if the commercial registration is withdrawn, and that operators are prepared to pay that price because they use commercial registrations tactically to secure an incumbent advantage where a council is registering a new service, or to defend subsidised routes. There are examples of NZ Bus or other operators registering commercial services for these reasons. For example, Mr Turner explained that in the early 1990s there were instances of NZ Bus losing a tender then registering a commercial service. Ms Waddell told me that Mana has done the same thing on one occasion, registering a service when an Invercargill firm won a contract in its area. In the result, the Council did not proceed with the contracted service and it seems nothing more has been seen of the Invercargill firm. In Auckland, NZ Bus registered a route on the North Shore during a tender process.

[53] Commercial registrations serve a defensive purpose because they cover some services on a given route, leaving the council to ‘contract around’ them for peak and off- peak services. Another firm winning a tender for the contracted service must take into account the risk that the incumbent will maintain its commercial service, so depriving it of marginal revenue on the route. Mr Turner accepted that NZ Bus has done so on occasion, although not recently. He described commercial registrations as a risk management technique.

[54] Councils have two weapons available to them to combat strategic use of commercial registrations. The first is refusing to register under s49. The second is contracting over the commercial registration by offering a subsidised contract for an entire route including peak and off-peak services.

[55] Neither GWRC nor ARTA has made use of s49. ECan has done so, controversially. Its stance is that commercial registrations inhibit competition by making the residual parts of the service less attractive to other entrants; accordingly, it offers contracted services as a complete package of morning and afternoon peaks as well as off-peak periods and weekends. Its approach was challenged in the District Court by Red Bus, a Christchurch incumbent, but the proceeding was settled.

[56] GWRC and ARTA are both reluctant to contract over commercial registrations. Mr Lambert of ARTA explained that contracting over commercial registrations frequently attracts criticism from the bus industry and accusations that ARTA is spending public funds on services that the industry is prepared to operate commercially. Mr Lawn of ECan described it as a brave step because the Council must be committed to covering the costs of the contracted service in circumstances where the incumbent may not discontinue its commercial service. Mr Cross said that GWRC contracted over existing commercial registrations on one occasion, following the review of bus services in the Hutt Valley. GWRC chose to let a 56-bus contract covering a mix of new and existing services, in a successful attempt to increase patronage. The decision was made to contract over commercial services because GWRC considered that existing commercial services were not realistically time-tabled, in that they allowed insufficient time for each journey or insufficient layover time at the end of each trip for the bus to catch up in the event of delays, which are a significant issue for bus users.

LTNZ and Ministry of Transport reviews of tendering rules

[57] LTNZ and the Ministry of Transport are separately reviewing bus and ferry procurement arrangements. The LTNZ review

[58] The stated object of LTNZ’s review is to develop procurement procedures and guidelines to provide a good quality, integrated and continually improving bus and ferry service for a fair price with reasonable return to operators, while contributing to the purpose of the Land Transport Management Act 2003 and New Zealand transport strategy objectives, with industry buy-in and confidence in the procedures and guidelines. LTNZ engaged LEK Consulting, which interviewed industry representatives, including those of Stagecoach and Mana, and spoke to overseas firms that are interested in entering the New Zealand market.

Impetus for LTNZ reform of tendering rules

[59] The consultants carried out a comparative survey of public funding in New Zealand and Australia, and found that subsidy levels in New Zealand are substantially lower (at less than $1 per passenger compared to Australian levels of about $2.50 per passenger) but New Zealand fares are almost 50% higher. In other words, the New Zealand consumer pays a greater share of the total price for the service.

[60] In their first report of 20 December 2005, the consultants recorded that operators and regional councils appeared to agree that the appropriate contract duration is five to seven years, but that the current upper limit on contract size (1,000 seats or 22 buses) is too restrictive. The operator perspective was that the mix of contracts might include contracts of 100 to 200 buses in size in larger markets. Smaller regional councils had mixed views on contract sizes, believing that large contracts would reduce existing competition in their areas.

[61] The consultants recorded that the number of bids per tender is low in Wellington at just 1.12. In other words, nearly 90% of tenders in the Wellington Region receive only one bid. The corresponding number in Auckland is 1.33, and in Christchurch 2.39. Unsurprisingly, the incumbent wins about 87% of Wellington tenders. (I note in passing that Mr Turner confirmed in evidence that there is more competition on small GWRC and Ministry of Education contracts, suggesting that there is little if any competition on larger contracts.) LEK recorded that operators maintain that the threat of competing bids leads to competitive prices, but the regional councils believe that tenders with few bids attract a price premium. A review of tender results for one area confirmed this.

[62] LEK reviewed financial data supplied by New Zealand operators on a confidential basis and concluded in a subsequent report that Mana’s EBIT/revenue margin is [ ] while NZ Bus’ nationwide EBIT/revenue margin is [ ], both significantly higher than the figure of approximately 11% supplied by overseas benchmarks. LEK’s work was peer reviewed by Professor David Hensher, an Australian consultant, who agreed that the New Zealand margins reported for Mana and NZ Bus appeared high when contrasted to comparable operations in similar risk settings. Margins should fall within the range 11-13%.

[63] The consultants also recorded that regional councils believe operators are registering commercial services tactically, to inhibit competition for subsidised services. Commercial registrations may also lead to increased overall public funding requirements because operators are likely to register only profitable peak-hour trips, yet the public will expect a comprehensive on and off-peak service. This can lead to pressure on councils to ‘contract around’ the commercial services to ensure comprehensive coverage. In addition, councils believe that operators have an incentive to first register and then deregister commercial services, which may result in councils having to issue a request for tenders at short notice to fill the gap. Lastly, the consultants also referred to a council perspective that operators have an informational advantage over them, making it difficult to plan and to achieve best value for money.

The Ministry of Transport review

[64] Commercial registrations are a focus of the Ministry of Transport review, which inquires whether its objective of developing an integrated, safe, responsive, and sustainable land transport system requires greater council control over commercial registrations and their relationship to contracted services. The review was instigated by ARTA, which is concerned at the prevalence of commercial registrations, the difficulties they cause for service planning and competition, and its inability to control them.

[65] The Ministry’s review extends beyond commercial registrations, however. It is considering whether there is a need for changes to the Transport Services Licensing Act, the policy of which is that public transport is best delivered by the private sector on a commercial, competitive basis. The Ministry considers that its objectives under the Land Transport Management Act (affordability, integration, responsiveness and sustainability) may require changes to that model.

Timing and likely shape of future changes

[66] It is difficult to predict what changes may result from the Ministry of Transport review. There is nothing to suggest that competition will be abandoned, but there are suggestions in Professor Hensher’s peer reviews of LEK’s work that tendering has certain disadvantages that may get in the way of securing best value for money, particularly where competition for contracts has been weak. For example, tendering requires that all contract terms be set at the outset, precluding performance-based contracts that permit some negotiation during the contract term. Extensive changes to the present model will require legislation, which Mr Whiteley suggested could take two years. As noted above, it is possible in the meantime for LTNZ to approve an alternative CPP that addresses maximum contract sizes and lead times, although changes to commercial registrations or the tendering model are likely to require legislation. Mr Whitely predicted that LTNZ’s own review is likely to result in councils being given more flexibility.

The relationship between NZ Bus and Mana

No historic competition

[67] There is no history of competition between Mana and NZ Bus. Competition was not feasible until 1989, when the Transit New Zealand Act required that all publicly funded passenger transport be tendered. Until then the Wellington City Council owned and operated the public bus network in the city. Following deregulation and the introduction of competition, the Council sold its bus services to Stagecoach plc in 1991. The Heads of Agreement

[68] The Narain family owned Newlands Coach Services until 1998, when they and the Waddells merged the two businesses in Mana. Each family took 50% of the shares, with the Waddells’ shareholding being held through Blairgowrie Investments Ltd. Conflicts over management meant the joint venture was not a success. By 2000 the Narains and the Waddells had achieved through mediation a settlement under which one side would buy out the other. The Waddells agreed to make a once-only offer. The Narains could choose to accept it or buy the business by responding with a higher bid. This mechanism placed the Narains at an obvious advantage and so encouraged the Waddells to put their best price forward or lose the business.

[69] The Waddell bid involved Blairgowrie but also introduced the other second defendants. It required capital. The Waddells opted for some debt funding (I was not told how much but was given to understand that the family is averse to debt) and some equity participation.

[70] The Waddells chose to involve Stagecoach as an equity participant. No other investor was approached, although Tranzit Group had already made overtures to the Waddells. They reached an agreement under which NZ Bus or its nominee (together called “Stagecoach” in the agreement) would take 26% of Mana, paying the same price per share that the Waddell interests paid for the balance of the Narains’ shareholding.

[71] In return for its participation, Stagecoach secured a number of benefits, which were recorded in a Heads of Agreement dated March 2000. It appears that this agreement was substantially negotiated before the Waddells made their bid but not signed until after the transaction had been completed. First, Stagecoach secured 26%, which gave it a power of veto over any major transaction requiring the support of holders of 75% or more of Mana’s shares. Second, NZ Bus obtained pre-emptive rights over the remainder of the Waddell interests’ shares: although these were reciprocated, it does not appear that Stagecoach saw itself as a seller of its stake. Third, Stagecoach acquired the right to appoint one of Mana’s four directors and receive financial information. Fourth, it secured an agreed dividend policy. Fifth, it secured restraints of trade. [72] There were two restraints of trade. Clause 5(c) operated only if the Waddells’ bid was accepted. It provided:

If any of the parties sells, or enters into an agreement to sell, more than 20% of their respective shares in the Company (“a selling Shareholder”), then from the day that any consideration is first paid to, or to the order of, the selling Shareholder, the selling Shareholder will not for the next following three years, compete, whether, directly or indirectly, and whether as principal or as an owner, shareholder, director, partner, agent, employee or contractor of a business that competes, whether directly or indirectly, with:

(i) In the case of Blairgowie [sic] and the Individual Participants, any business which is owned by Stagecoach or any subsidiary of Stagecoach; and

(ii) In the case of Stagecoach, with the Company.

[73] The Individual Participants were John, Kerry, and Ian Waddell, and Jo Copland.

[74] Clause 6 operated in consideration of Stagecoach entering the Heads of Agreement; that is, it took effect whether or not the bid was accepted. It provided that the Waddells agreed not to compete with Stagecoach for three years if Blairgowrie sold more than 20% of its shares in Mana:

In consideration of Stagecoach entering into this Heads of Agreement, Blairgowie [sic], John Alexander Waddell, Ian Waddell and Kerry Leigh Fergusson Waddell each agree that if Blairgowie [sic] sells, or enters into an agreement to sell, more than 20% of its shares in the Company, then from the day that any consideration is first paid to, or to the order of, Blairgowie [sic], none of them will, for the next following three years, compete, whether directly or indirectly, and whether as principal or as an owner, shareholder, director, partner, agent, employee or contractor of a business that competes, whether directly or indirectly, with any business in the Wellington region which is owned by Stagecoach or any subsidiary of Stagecoach.

[75] Clause 7 provided that clauses 5(c) and 6 would be triggered in the event of a change of control in any shareholder which was itself a company. Understanding that Mana and NZ Bus would not compete

[76] The Commission says it is implicit in the Heads of Agreement that Mana and NZ Bus would not compete with one another while NZ Bus held its shares in Mana. Mr Goddard submitted that the parties have set up a “cosy duopoly”, with a clear expectation on both sides that NZ Bus will not enter Mana’s territory so long as Mana does not compete further in NZ Bus’ territory.

[77] The defendants deny any arrangement or understanding. Mr Ridley-Smith opined that the restraints have an orthodox business justification. Having purchased 26% of Mana, and having paid goodwill as part of the price, NZ Bus would naturally wish to protect its investment should the Waddell interests sell. It would not want their capital and expertise deployed against it in the same area.

[78] This justification manifestly cannot apply to clause 6 because it took effect whether or not the bid was accepted, and so operated even if NZ Bus bought no shares. Mr Ridley-Smith speculated implausibly that clause 6 was there to ensure that the issue was not lost sight of right from the start of the negotiations, and NZ Bus pointed out that the bid had been accepted by the time the Heads of Agreement was signed. Mr Ridley- Smith was at a disadvantage, however, because he had no personal knowledge of the negotiations. Stagecoach’s principal negotiator was Mr Ross Martin, the chief executive of NZ Bus. He did not give evidence, although he was available, swore an affidavit in opposition to the Commission’s application for an injunction, and attended the hearing. Mr Turner, who did give evidence, had a peripheral role in the negotiations. He said he did not understand at the time that clause 6 took effect whether or not the bid was accepted.

[79] Ms Waddell was also involved. She explained that her understanding of clause 6 was that should the Waddell family sell out, its members would not use their capital and expertise to compete with Stagecoach. She maintained, as did Mr Turner, that the question of not competing in the meantime has never been discussed, and that there is no other arrangement between NZ Bus/Stagecoach and the Waddell interests concerning competition. [80] In practice NZ Bus has been a passive shareholder. It chose to appoint an existing shareholder, Ian Waddell, as its representative on the Mana board. Mr Turner regularly attends Board meetings but has no vote and does not receive papers that the Waddells consider particularly commercially sensitive. Ms Waddell and Ms Copland continue to run Mana.

[81] The question whether Mana and NZ Bus have a market-sharing arrangement is relevant to the Waddell interests’ accessory liability, to market definition, and to the likelihood of increased competition in the counterfactual. The last of these issues is also influenced to some extent by the question whether any such arrangement breaches s27 of the Commerce Act, which prohibits contracts, arrangements or understandings having the purpose or likely effect of substantially lessening competition, and so could not survive its disclosure in this proceeding. For the purposes of s27, an arrangement or understanding requires a consensus or meeting of minds giving rise to an expectation that the parties will behave in a particular way, and the existence of such arrangement or understanding is to be judged objectively from evidence of the parties’ conduct: Giltrap v Commerce Commission [2004] 1 NZLR 608 at [15]-[23] (CA) per Gault and Tipping JJ. However, Mr Goddard did not ask me to find that there has been a breach of s27. He simply maintained there is a tacit understanding that the firms will not compete more than they do now.

[82] In “E.C. Competition Law and the Regulation of Passive Investments Among Competitors” (2006) 26 OJLS 327. Ariel Ezrachi and David Gilo examined the phenomenon of cross-shareholdings and investments among competitors in industries such as banking, energy, automobiles, air travel, and car rental. They suggested that passive investments among competing firms can facilitate anti-competitive conduct, which may take a unilateral form (in which competition is attenuated as the investing firm protects its investment) or manifest itself as explicit or tacit collusion. Such conduct may not violate competition laws: the authors defined tacit collusion as a situation where cartel-like prices are sustainable without communication among the firms, each of which eschews competition for fear of a price war. Such unilateral or collusive effects are most likely in oligopolistic markets in which there are a few significant firms whose products are differentiated such that price is usually above marginal cost. Differentiation may occur where the product is functionally indistinguishable but geographic location of the supplier is important to consumers. [83] In this case, NZ Bus witnesses observed that NZ Bus would suffer loss should it compete with Mana, in that Mana’s earnings (and hence dividends and presumably the value of its shares) would be affected. Ms Waddell agreed that if Mana were to enter the Wellington area in any serious way then NZ Bus would likely retaliate, but that NZ Bus is unlikely to think it is in its interests to compete so long as Mana does not initiate competition. NZ Bus witnesses confirmed that good cause to enter Mana’s territory would exist, were Mana to compete in Wellington or the Hutt Valley. Mr Martin also made that point in an interview with the Commission, saying that if Mana did that “we’ll just tender in their area next time.” Indeed, NZ Bus made a good deal of the risk of retaliation should Mana enter its area, arguing that a new owner of Mana would opt to behave just as Mana does now. Explaining why NZ Bus as a minority shareholder would discourage Mana from competing with it, Mr Ridley-Smith said that the threat of retaliation was something that Mana would have to take into account should it try to compete with NZ Bus. In short, the defendants maintained that self-interest leads the two firms not to compete despite low barriers to entry, while firmly denying a consensus or meeting of minds about competition.

[84] I find that there does exist between NZ Bus and Mana an understanding that they will not compete for anything other than Ministry technical routes. The evidence begins with the fact that the Waddell interests approached Stagecoach. They did not do so because of its expertise in running a bus company. Ms Waddell’s evidence led me to conclude that their purpose in seeking out Stagecoach as a shareholder was to secure a quiet life. This is not a case of the larger firm buying a stake in its rival uninvited. I am satisfied that Mana initiated the acquisition to protect itself from competition. This ambition explains the willingness of the Waddell interests to grant NZ Bus pre-emptive rights, restraints of trade, negative control over major transactions, some control over dividend policy, and a seat on the board. These things collectively have considerable value.

[85] The restraints of trade in the Heads of Agreement tend to confirm the understanding, particularly clause 6, which operated whether or not the bid was accepted. I do not think it matters that negotiations were concluded, and the agreement signed, after the bid was accepted: clause 6 was part of a closely negotiated agreement and must be taken to record the parties’ bargain. In reaching this conclusion, I do not find it necessary to draw an inference against NZ Bus because of Mr Martin’s absence, as Mr Goddard invited me to do. The agreement speaks for itself. I accept the Commission’s contention that it is scarcely plausible in the circumstances that the parties would devote so much attention to restraints upon competition following a future sale of shares by the Waddell interests without also reaching an understanding about competition in the meantime.

[86] There is competition at the margin and a degree of overlap in services, but it is not inconsistent with such an understanding. As already noted, the two firms compete for Ministry of Education technical routes, some of which Mana has operated in Wellington City for a number of years. They also competed for a single GWRC route between Porirua and the Hutt Valley. Ms Waddell explained that by saying Mana thought the route was in “our” area.

[87] For reasons elaborated on later in this judgment I am also satisfied that there is potential for competition between NZ Bus and Mana, particularly in north Wellington. The absence of competition is explained by deliberate restraint on both sides. Of course that is not conclusive, since the firms might have reached their decisions independently, but it does lend support to my finding.

[88] The witnesses denied an understanding, but while I found their evidence credible in other respects I do not accept what they had to say on this point. To some extent they were also debating the question whether the understanding amounts to an agreement. The evidence that an understanding exists is compelling. I do accept that it falls short of a contract or agreement that the parties consider enforceable. The appointment of Mr Waddell as NZ Bus’ representative on the Mana Board and the practice of keeping very commercially sensitive information from Mr Turner tend to support that conclusion. The scope of the understanding is also uncertain at the margin, as evidenced by competition over the Hutt Valley-Porirua route. Rather, the stake in Mana creates an incentive for NZ Bus not to compete in Mana’s territory without good cause and the parties have reached an understanding that good cause would exist were Mana to provoke NZ Bus by initiating competition.

[89] Whether or not I am correct in this conclusion, the evidence establishes that the parties have chosen to refrain from competing in circumstances where competition is possible. It is the effect of their behaviour that must be taken into account when evaluating the likelihood of competition in the counterfactual. Put another way, analysis of the effect of the transaction on competition does not depend on the conclusion that their behaviour is attributable to a meeting of minds rather than decisions independently reached. It rests rather on the question whether a new owner would behave differently.

The transaction

Proposed sale of Waddell interests’ 74% to Stagecoach: the 9 November letter agreement

[90] In July 2005 the Waddell interests decided to sell out for family reasons. They approached NZ Bus, which was still owned and operated by Stagecoach plc. By letter of 9 November 2005, the Waddell interests agreed to sell the remaining 74%. The letter agreement was subject to Commerce Commission clearance. It anticipated due diligence (to be completed by February 2006) and an agreement for sale and purchase, but provided that it was to bind the parties immediately. It also terminated the Heads of Agreement, and with it the restraints of trade. In consideration for the letter agreement, the Waddell interests were to be paid a non-refundable deposit of $3m.

Sale of NZ Bus by Stagecoach plc to Infratil

[91] Stagecoach plc had been negotiating for some time to sell NZ Bus to private equity investors. Infratil learned of these negotiations shortly before 9 November and immediately expressed interest. A price was agreed by letter on 11 November and the sale was completed on 25 November.

[92] Because of the need to act in haste, Infratil did not undertake due diligence before settling upon a price with Stagecoach plc. However, Mr Ridley-Smith was shown the 9 November letter agreement before it was signed, NZ Bus executives recognising that it was a significant transaction.

[93] The Commission’s case is that NZ Bus was anxious to have the restraints removed in case the transaction did not proceed. In that event, their removal meant that NZ Bus would be free to compete with Mana. Mr Ridley-Smith explained, however, that the need to remove the restraints arose because the sale of NZ Bus by Stagecoach plc would trigger them against NZ Bus. Clause 7 of the Heads of Agreement provided that the restraints took effect on change of control of a corporate shareholder of Mana, including NZ Bus. Legal advisors to the previous bidders for NZ Bus had suggested that should Mana choose to compete in Wellington, NZ Bus would be unable to bid against it. Removal of the restraints was intended to address this unintended consequence of the Heads of Agreement. I accept that the Heads of Agreement might have that effect, which sufficiently explains Infratil’s willingness to see NZ Bus pay a non-refundable $3m deposit as the price for having them removed. Of course the payment was also an acknowledgement that Mana would pose a competitive risk in Wellington, should NZ Bus and the Waddell interests not reach agreement.

The Waddell-NZ Bus agreement for sale and purchase

[94] On 23 December 2005 the Waddell interests executed an agreement to sell their shareholding in Mana to NZ Bus, which as a result would own 100% of Mana. The agreement was conditional on the purchaser obtaining a clearance or authorisation from the Commerce Commission. Clause 7.2 provided that the purchaser would apply to the Commerce Commission for a clearance by 9 January 2006. Should that application be declined, or should the vendors determine that it was likely to be declined, the purchaser would apply to the Commission for an authorisation. The purchaser would keep the vendors fully informed of the progress, status, and details of the application, and the vendors would provide the purchaser .

[95] Clause 16 provided that should a clearance or authorisation not be obtained by 28 April 2006, the vendors would extend the confirmation date to a date not later than 30 June 2006, if the purchaser had demonstrated to the vendors’ satisfaction that it was pursuing clearance or authorisation with all due effort. Unless the vendors agreed to a further extension in writing, the agreement would be at an end.

[96] The settlement date was defined as the later of 3 April 2006 or 7 business days after the date on which the last of the conditions in Clause 16 was satisfied.

[97] NZ Bus paid a deposit of $3m, which was non-refundable unless the Waddell interests failed to comply with a settlement notice, in which case NZ Bus might cancel and sue for damages and return of the deposit. On settlement, the vendors are required to deliver executed share transfers, resignations of directors, statutory books, Board resolutions sanctioning the share transfers, revoking bank mandates, and appointing NZ Bus representatives as directors from settlement date, a new restraint of trade signed by existing directors, and a waiver of pre-emptive rights.

NZ Bus’ application for clearance

[98] NZ Bus moved for clearance on 9 January. Because NZ Bus and Mana had not competed in the past, NZ Bus maintained that there would be no reduction in actual competition as a result of the acquisition. Nor would there be any significant lessening of potential competition because many existing bus operators in New Zealand and abroad would continue as competitive threats. Tenders are issued on an Australasian basis. Barriers to entry are low. Depot space is a barrier, but NZ Bus does not have better or cheaper access to depot space than any other operator. The Council has strong countervailing power as the funder and regulator of public transport services in Wellington. It is the Council’s practice to issue tenders under individual contracts that are limited to about 20 buses so as to encourage tendering by small bus companies. Accordingly, the council has the power to package tenders in a way that encourages existing competitors to expand and new competitors to enter.

[99] NZ Bus maintained that the relevant market is the market for the provision of personal transport services in the greater Wellington Region, divided into five geographic regions. Buses compete with or are constrained by other modes of transport such as trains, taxis, shuttles, private vehicles, ferries or walking or cycling. It maintained that there were separate markets for the provision of bus charter services (including school bus charters) in the Wellington region and for provision of coach charter tour services through the North Island.

[100] Alternatively, NZ Bus maintained that if the Commission was not willing to consider a personal transport services market then the relevant markets for bus services comprised no less than 16 separate geographic markets such as the market for scheduled bus passenger services in the Porirua area with limited services to Wellington Central Business District (CBD) and the market for scheduled bus passenger services in the Kapiti Coast with limited services to Wellington CBD. NZ Bus and Mana do not compete in these markets.

[101] NZ Bus’ application was supported by an economic assessment by Castalia Limited. That firm contended that the acquisition would not substantially lessen competition because barriers to entry are low. Castalia discounted other barriers to entry such as network efficiencies and sunk costs. Notwithstanding low barriers to entry, NZ Bus and Mana have not competed in the past because the Council has preferred to deal with one company in each area. The council presumably did so because its countervailing power precluded excess profit-taking by service providers.

[102] In something of a contrast to the application, Castalia’s report focused on tendered bus services and did not discuss substitutability between bus services and other modes of transport. The reason for doing so was that the Council provides subsidised bus passenger services to the community, so determining fares and services. The services make losses in cash terms, but are subsidised because the council regards provision of public bus services as socially advantageous.

Withdrawal of the clearance application

[103] On 9 March the Commission wrote to counsel for NZ Bus expressing concern about high barriers to entry and a likelihood that the counterfactual would result in greater competition than the proposed transaction. The Commission’s concern was that barriers of entry are so high that fresh entry is unlikely. The Council does not structure tenders in large enough blocks to encourage substantial entry, nor does it let contracts of sufficient duration. The costs of submitting tenders, commercial registration, and integrated ticketing were also significant. With respect to competition in the counterfactual, many of the firms the Commission had spoken to said they would compete aggressively against NZ Bus should they acquire Mana. If so, there might be a substantial difference between the factual and counterfactual.

[104] This letter did not augur well for the application. NZ Bus’ counsel, Mr Millard QC, replied on 10 March, requesting a meeting and setting out NZ Bus’ views at some length. The letter repeated and to some extent expanded on what was in the application, taking issue with the Commission’s proposed market definition. Because tendering practices are under review there is currently no market at all for acquisition of rights to operate subsidised services. Barriers to entry are low. Counsel also argued that the Council has exploited its countervailing power in a fully effective way, partly by keeping tenders small and frequent. NZ Bus earns an inadequate return on its investment. The counterfactual is a third party acquirer that behaves in much the same way as Mana does now ie a firm that does not compete with NZ Bus but operates in separate geographic markets.

[105] The application for clearance was withdrawn following a meeting between NZ Bus representatives and Commission staff on 14 March. NZ Bus reviewed its position after the meeting and the condition requiring clearance or authorisation was waived by agreement between NZ Bus and the Waddell interests. Withdrawal led to a meeting with the Commission Chair, Paula Rebstock, on 21 March and the filing of this proceeding on 30 March as the Commission moved to restrain settlement.

[106] I record that the circumstances in which the application was withdrawn are controversial. NZ Bus maintains that Commission staff encouraged it to proceed without a clearance. The Commission denies that. Counsel agreed before trial that it may be necessary to determine that question should the Court be called upon to impose penalties following a future hearing. Accordingly, the evidence about it is presently incomplete. I inquired of counsel at trial whether accessory liability could be determined on the evidence before me in the circumstances. However, counsel accepted that it could be, perhaps because as matters turned out it became common ground that NZ Bus knew that the Commission might decline clearance and that it withdrew at its own risk.

[107] The decision to withdraw was made following the meeting of 14 March with Commission staff, who doubted whether the Commission could be satisfied that the transaction would not substantially lessen competition. If so, a clearance would have to be declined. This view was expressed in circumstances where delay was beginning to cause concern. The application had been made on 9 January and there had been a series of extensions as NZ Bus responded to the Commission’s inquiries.

[108] Mr Ridley-Smith accepted that NZ Bus representatives did not leave the meeting with the impression that the Commission would grant a clearance. Rather, they appreciated that the Commission was reaching a point where it might decline a clearance on the ground that it could not be satisfied that the acquisition would not substantially lessen competition. He also learned for the first time at the meeting that NZ Bus had the option of proceeding without a clearance or authorisation, so taking the risk that the Commission or any other person might intervene. He understood that the Commission might choose to intervene and that the decision to withdraw would be taken at NZ Bus’ own risk.

[109] The NZ Bus’ representatives convened immediately after the meeting. Mr Millard suggested that if there was no substantial lessening of competition NZ Bus should withdraw the application for clearance. Advice was also taken from NZ Bus’ solicitor, a Mr Wilson. NZ Bus representatives concluded that their preference was to proceed without a clearance.

[110] The Infratil board held a late-night meeting to consider a paper prepared by Mr Ridley-Smith. It recorded that Commission staff had left NZ Bus with a “reasonably clear’” indication that the decision was a close call. Mr Ridley-Smith predicted that the Commission might conclude that it was not satisfied that an anti-competitive outcome would not result, partly because the Commission found it difficult to identify the appropriate counterfactual and partly because the Commission could not easily predict what new tender regime GWRC may introduce following the LTNZ and Ministry of Transport reviews. If the clearance application was declined, NZ Bus could seek an authorisation, appeal, or acquire without a clearance. The latter course would likely provoke Court action, and if that was the likely outcome it would be better to withdraw immediately.

[111] Mr Ridley-Smith recorded that NZ Bus’ view was that the least risk, highest benefit strategy was to withdraw the clearance application and complete the acquisition. That view was shared by the legal advisors, one of whom said that, on the papers he had quickly read, he expected the clearance to be given. Mr Ridley-Smith then examined the risk of litigation, noting that the Commission is overworked and short of resources, that NZ Bus would expect to win, and that there would be opportunities to “do a deal” with the Commission to divest Mana before the next major tender round occurs, while in the meantime NZ Bus would avoid losing the $3m deposit and gain more time to find an appropriate home for Mana. [112] NZ Bus then sought Mana’s consent to waiver of the condition. Mana was approached through Mr Tizard, and Ms Waddell attended a meeting with Mr Ridley- Smith and the legal advisors on both sides. NZ Bus offered the Waddells an indemnity that purported to extend to costs and any fines or expenses, so drawing their attention to a risk of litigation. But Mr Ridley-Smith also told Ms Waddell that Infratil’s advice was that the clearance application should be withdrawn and need not have been filed in the first place. That view was also expressed in a letter of 14 March from Mr Wilson to Mr Tizard. Mr Ridley-Smith also told Ms Waddell that those who had attended the meeting with the Commission the previous day had concluded they were being given a firm hint to withdraw the application. Ms Waddell accepted the proposal conditional on consulting the other Mana shareholders, who duly approved of it. In a letter of 16 March, Mr Tizard recorded that the Waddell interests agreed to the waiver on the basis of information NZ Bus had supplied and the advice of Messrs Millard and Wilson.

[113] It appears the waver was agreed on 15 March, and NZ Bus withdrew its application on that day. It was common ground before me that NZ Bus acquired the shares in equity at that time, the agreement having become unconditional on the waiver. For the purposes of the Commerce Act, a “share” includes a beneficial interest in any such share. Accordingly, it was also common ground there was an acquisition for purposes of s47. It follows that I need not concern myself with the Commission’s alternative plea that there was an attempt to acquire the shares.

Staff report of 30 March

[114] The withdrawal led to a Commission investigation, which resulted in a draft staff report of 30 March. It concluded that the acquisition would be likely to have the effect of substantially lessening competition in a market, being the market for acquisition of rights to operate subsidised regular and/or school bus passenger services in the greater Wellington region, excluding Wairarapa.

[115] Commission staff also identified entry conditions: the establishment of depots, the structure of tenders, the costs of preparing bids, commercial registration of routes, problems posed by integrated ticketing, acquisition of buses and hiring of drivers, and incumbent advantage/retaliatory response. Some of these entry conditions amount to entry barriers that were considered significant in aggregate. The structure of tenders appeared to present the greatest problem for potential bidders. Most large potential entrants indicated they would not attend enter unless the size of the tenders was approximately 50 to 200 buses and the duration of resulting contracts from 5 to 7 years in length. The Council presently lets smaller contracts, although it may let several at any one time, and they are for a duration of only 3-5 years. The Council acknowledged that larger and longer tenders would attract larger entrants, but it is awaiting the outcome of LTNZ’s procurement review before changing the way in which it structures tenders. In light of that, most large potential bidders indicated they would enter the regional market only by acquiring Mana. The temporal dimension of the market was taken to be 6 years, because that period extended far enough into the future to include the markets for contracts for all school and regular passenger transport services in the greater Wellington region.

[116] The report rejected NZ Bus’ suggestion that there were discrete geographical markets. The districts concerned adjoin one another, and the areas identified by NZ Bus did not correspond to the way in which the GWRC groups bus routes into six major transport corridors. Nor did the Council use those corridors for operational planning or tendering of contracts. Although NZ Bus operates largely in Wellington central and the Hutt Valley, and Mana is mainly confined to North Wellington, Porirua and Kapiti, those areas do not form separate geographic markets. They share a common boundary, especially that between Wellington City and north Wellington. There is considerable scope for each to expand into the adjacent areas of the other. The lack of competition at present may be attributable to the relationship between NZ Bus and Mana and the opportunity for Mana to concentrate its efforts on expanding regular scheduled bus services in areas that present low risk but yield high returns. And there is evidence of crossover in geographic coverage between NZ Bus and Mana: for example, NZ Bus operates commuter services between Hutt Valley and Porirua.

[117] The report concluded that the Council can exert countervailing power through the setting of fare levels and structuring of tenders, although the Council itself apparently did not think so. But it concluded that the Council is not currently exercising the full extent of its countervailing power and is much less likely to be able to do so should NZ Bus complete the acquisition. Countervailing power largely depends on having alternative credible bidders, which would not be the case if the acquisition were completed. After interviewing other bus companies, the Commission concluded that barriers to entry were substantial.

[118] Turning to the counterfactual, a number of parties had told the Commission’s staff that they would be interested in purchasing Mana, but not in entering de novo. Acquisition would preserve current market structure, in which there are two large and six small incumbents that are regular bidders for Council and Ministry of Education contracts. Some of those interested in purchasing Mana indicated that they would compete more aggressively than Mana does now.

[119] The report concluded that the transaction would be likely to have the effect of substantially lessening competition in the market.

Section 47

[120] Section 47 of the Commerce Act prohibits a business acquisition that would have or would be likely to have the effect of substantially lessening competition in a market.

47 Certain acquisitions prohibited

(1) A person must not acquire assets of a business or shares if the acquisition would have, or would be likely to have, the effect of substantially lessening competition in a market.

(2) For the purposes of this section, a reference to a person includes 2 or more persons that are interconnected or associated.

(3) For the purposes of this section, a person is associated with another person if that person is able, whether directly or indirectly, to exert a substantial degree of influence over the activities of the other.

(4) A person is not able to exert a substantial degree of influence over the activities of another person for the purposes of subsection (3) by reason only of the fact that—

(a) those persons are in competition in the same market; or

(b) 1 of them supplies goods or services to the other.

[121] The legal principles were not in dispute. The question whether a substantial lessening of competition is likely is determined by comparing the likely state of competition should the acquisition proceed (the factual) with the likely state of competition if it does not (the counterfactual): Tru Tone Ltd v Festival Records [1988] 2 NZLR 352 (CA). “Competition” means workable or effective competition and a reference to the lessening of competition includes hindering or preventing it. The Act defines “substantial” to mean real or of substance, and a “likely” effect is one that involves a real and substantial risk that the stated consequence will happen: Port Nelson Ltd v Commerce Commission [1996] 3 NZLR 554, 562 (CA). Substantial lessening of competition is a relative rather than an absolute standard; it examines the state of competition with and without the transaction to determine whether, and to what extent, market power will move along the spectrum from perfect competition to monopoly: Air New Zealand/Qantas v Commerce Commission (No 6) (2004) 11 TCLR 347 at [42] (HC). It must be assessed in the particular circumstances of the case: ANZCO Foods Waitara Ltd v AFFCO NZ Ltd (2005) 11 TCLR 278 at [240] (CA).

[122] The Act provides for clearance or authorisation of a business acquisition, by application to the Commission. The Commission shall grant a clearance if it is satisfied that the acquisition is not likely to have the effect of substantially lessening competition in a market: s66(3). The Commission may also authorise a business acquisition if it will result or is likely to result in such a benefit to the public that it should be permitted. Nothing in s47 or s27 applies to a transaction where the assets or shares have been acquired under a clearance or authorisation. That obviously creates an incentive for firms to apply, but there is no obligation to do so. They may choose to take the risk that the Court will intervene at the instance of the Commission, which can seek an injunction and pecuniary penalties, or a competitor.

The relevant market

Market definition principles

[123] The Act defines a market as “a market in New Zealand for goods or services as well as other goods or services that, as a matter of fact and commercial common-sense, are substitutable for them”. The boundaries of the market are defined by substitution between one product and another and between one source of supply and another, in response to changing prices: Re Queensland Co-operative Milling Association Ltd (1976) ATPR 40-012 at 17,247. Market definition is a tool for competition analysis rather than an end in itself: Brambles New Zealand Limited v Commerce Commission (2003) 10 TCLR 868 (HC). It is intended to reveal the effective constraints upon a firm’s business behaviour: Maureen Brunt Economic Essays on Australian and New Zealand Competition Law (2003) at 203. Accordingly, it should focus on the real competition issue in the case, while recognising potential substitutability and constraints from products or services that may fall outside the chosen market definition.

Product market

[124] It was common ground that the relevant product market was a market for the rights to provide subsidised bus services. As Dr Bamberger put it, analysing the proposed transaction in such a product market is appropriate because the extent to which other modes of transportation (such as private cars) constrain bus fare levels is not relevant to the competition issue raised by the merger. The GWRC pays attention to other modes of transportation when it designates routes and sets fare and service levels to encourage bus patronage. But once that has been done, bidders for a particular contract compete on the amount of subsidy they require to provide the specified services. Competition from other modes of transport has little or no effect on competition among bus companies in this market, which in economic terms is called a bid or auction market.

Geographic market

[125] The parties joined issue on geographic market definition. The case for a number of geographic markets (corresponding to the GWRC’s transport corridors) is that the region’s geography and the transport policy of the GWRC combine to create bus transport networks that do not overlap in any significant degree, as evidenced by the lack of competition at present. The GWRC itself treats them as separate regions, as Mr Watson explained. Geographic considerations also dictate that any firm that wishes to compete in the Western Corridor or Wellington City or the Hutt Valley must have a depot, or at least a yard, in the area concerned. As Mr Tizard pointed out, the bus business is all about moving people from A to B. Geography matters. That is especially so when the evidence established that operating costs form a high percentage of total costs, such that efficiency depends on reducing idle time and dead running (empty running between the depot or yard and terminal point of a route). A number of witnesses, such as Mr Watson and Mr Overington, interpreted the absence of competition as evidence that there are distinct markets. Mr Mellsop also suggested that competition occurs “for” markets defined by the routes that the GWRC establishes, an approach that could be used to justify a series of contract by contract markets.

[126] The central question is what potential exists for supply side substitution by Mana or a new entrant. (Demand side substitution is not a significant consideration because consumers are not likely to regard one bus journey as substitutable for another.) A regional market better allows the Court to examine that question than a series of contiguous geographic markets. That is particularly so when the defendants maintain that barriers to entry are low, such that potential competition is a real and present threat. There is something of a contradiction in the defendants’ argument that there is a series of geographic markets within the Wellington region (excluding Wairarapa) yet barriers to entry are low.

[127] The absence of competition at present is also attributable, at least in substantial part, to the understanding that the two firms will not compete. The parties confirmed in evidence that there is potential for competition. As Mr Ridley-Smith candidly explained, NZ Bus would use its seat on the Mana board and its 26% shareholding to discourage Mana from competing with NZ Bus should the Waddell interests sell their stake to another entrant. They would do so by contending that it cannot be in Mana’s best interests to provoke a competitive response in the Western Corridor. I have already referred to Mr Martin’s advice to the Commission that NZ Bus would tender in Mana’s area were Mana to tender in NZ Bus’ area. NZ Bus plainly considers that it can compete with Mana in the Western Corridor, and that Mana could compete effectively with NZ Bus in the latter’s territory. The potential entrants who gave evidence before me were also consistent in viewing the Wellington region as a single market. Commercial common sense thus dictates a regional market.

[128] In the end, the defendants’ position was that the Court might adopt a regional market, so long as it did not lose sight of what would be required for Mana to compete in Wellington City or the Hutt Corridor, or for NZ Bus to compete in the Western Corridor. They submitted that Mana should not be considered an incumbent in any market that includes NZ Bus’ territory. In particular, they emphasised that Mana and NZ Bus would have to establish depots and acquire buses, staff, and information should each enter the other’s area, in exactly the same way as any potential entrant would be required to do. Those contentions can be evaluated when examining competition in a regional market, and that is what I propose to do. I will adopt the Commission’s proposed market definition.

The market participants

[129] I have already outlined the Wellington operations of NZ Bus and Mana. Tranzit Group Limited is a substantial privately owned bus company that runs urban bus services in the Wairarapa, Palmerston North, and Wanganui, and school bus services in Wellington, Wairarapa, Manawatu, Taranaki and Auckland. It also runs charter and long-distance bus services (including Newmans and Intercity). Mr Snelgrove explained that it operates around 220 buses throughout the lower North Island. Tranzit has a Kilbirnie depot from which it runs Ministry of Education technical services along with its charter and long distance runs. But it has never bid on GWRC urban or school bus contracts, regarding the urban passenger market as too resource-intensive. It calls for super low floor buses, drivers are not attracted to urban work, and Tranzit would need a larger depot. NZ Bus’ commercial registrations are a barrier. So is contract size; some scale is needed to justify investment in Wellington. Tranzit was interested in acquiring Mana; indeed, it had approached Mana but “for whatever reason” Mana went to NZ Bus. Tranzit’s pattern has been to grow by acquisition. He accepted that as an owner of Mana, Tranzit might not compete with NZ Bus; it would depend on the opportunities available.

[130] Madge Coachlines Limited is a long-established Manawatu company that operates commuter services in the Manawatu and Horowhenua. It operates around 40 buses.

[131] Classic Coaches Limited is based in Wainuiomata where it operates school buses and charters using fewer than 10 buses.

[132] Paraparaumu Taxis and Community Coach Services provides some minor services for GWRC using taxi vans.

Market share data and correlation between rivalry and price [133] The Council paid $17.1m to NZ Bus in bus subsidies in the 2004/05 financial year, including $3.1m paid for trolley bus services, which are not subject to competitive tender as NZ Bus is the only supplier. (NZ Bus runs 60 trolley buses, which operate alongside diesel buses on major routes throughout Wellington City.) Mana was paid $6.4m. The next largest payment was $164,000 made to Classic Coaches for 2 school bus contracts.

[134] I had difficulty reconciling the various figures I was given for Ministry of Education expenditure, but I do not think anything turns on the differences. Figures I received in closing indicated that in the most recent tender rounds the Ministry let contracts worth $795,000, of which NZ Bus won contracts worth $357,000, while Mana and Tranzit won worth $326,000 and $204,000 respectively. NZ Bus and Mana were frequent bidders; NZ Bus bid on 53 contracts while Mana bid on 42. They bid against one another on 12 or 14 contracts worth in aggregate $45,000.

[135] Mr Dodgson’s evidence was that of 154 GWRC calls for tender, 134 (or 87%) attract only one bid while 17 attracted two bids and three attracted three bids. He also analysed Ministry of Education technology contracts issued in the December 2004 tender round and found that there is a strong correlation between number of bids and price. Where there was one bid, the average winning price was $14.21 per vehicle km. Where there were two bids, the average was $7.47 per km, and the price fell to $7.58 and $4.61 where there were three and four bids respectively. Analysis of Ministry daily bus contracts in the 2001 and 2002 tender rounds confirmed this pattern, with prices ranging from $2.66 for one bid to $1.88 for four.

[136] New entry or incumbent loss of contracts is rare. Since 2000 three smaller contracts have changed hands, two in Kapiti and one in Eastbourne. One of those contracts, an Otaki – Paraparaumu service, also involved ‘new’ entry by Tranzit, which won the contract when it was trailed, and Madge, which won it when it was made permanent. Other New Zealand markets have greater experience of entry, mostly by acquisition. There have been a few instances of de novo entry, notably in Christchurch.

NZ Bus and Mana profitability [137] NZ Bus witnesses suggested that prices in Wellington are already competitive, pointing to the subsidy per passenger, which is low relative to other regions, and contending that the GWRC is receiving fair value. For its part, the Commission did not set out to prove that NZ Bus and Mana are earning monopoly profits. But it did rely on evidence of profitability to suggest that barriers to entry are substantial and potential entry is a correspondingly weak restraining force, because entry is conspicuous by its absence although the market has long been uncompetitive. And it sought to distinguish Southern Cross Medical Care Society v Commerce Commission (2001) 10 TCLR 25 at [75], in which historically low profits were treated as prima facie evidence that the market was competitive.

[138] The evidence established to my satisfaction that both firms are very profitable by international standards despite, in NZ Bus’ case, operational inefficiencies associated with, among other things, the Kilbirnie depot and legacy employment arrangements. NZ Bus criticized LEK’s EBIT margins of [ ] and [ ] for Mana and NZ Bus respectively, but LEK based the calculation on data that the operators supplied and Professor Hensher generally confirmed LEK’s calculations. Mr Overington disputed LEK’s figures, saying he could not replicate them using the same data, but I was not told what his own results were. Dr Bamberger examined an analysis prepared by Ernst and Young for NZ Bus and found that it implied the EBIT ratio for NZ Bus’ Wellington business was [ ] in 2004. Infratil’s own Board papers suggest that NZ Bus’ EBITDA (earnings before interest, tax, depreciation, and amortisation) margin in 2003 was [ ], and is still more than [ ], and that Infratil hopes to increase that margin to [ ] or more. The economists accepted that accounting data are a poor guide to economic profits: in particular, EBIT margins do not take into account the cost of capital. But a conclusion that NZ Bus and Mana are very profitable by international standards is nonetheless justified on the evidence before me. Their EBIT margins compare very favourably with Professor Hensher’s international benchmark of 11-13% for firms with a comparable risk profile. And the margins are consistent with the evidence that there is a correlation between numbers of tenders per RFT and contract price, in which tenders that attract a single bid result in a higher price than those that attract multiple bids. Few GWRC contracts attract more than one bid.

Potential entrants [139] Ritchies Transport Holdings Limited is the largest privately-owned bus operator in the country. In addition to charter, tour and long-distance services, it operates urban bus services in Auckland, Timaru, and Marlborough, and school bus services in Auckland, Northland, Bay of Plenty, Canterbury, Marlborough, Otago and Southland. It operates more than 550 buses throughout the country. Mr Ritchie confirmed that his company is interested in entering the Wellington market, and described his experience as an entrant in Auckland. Barriers include commercial registrations, depots, tender size (which is far too small at 22 buses), staffing, buses, substantial start-up costs, and lead time. Start-up costs in Auckland were very substantial at $[ ], excluding buses and a depot. Ritchies has been attracted to Wellington for a long time but has not tendered because contracts for 10-15 buses are too small. It prefers to enter by acquisition, although it has entered de novo. It is much easier to grow incrementally, tender by tender, once the firm has an existing operation. He illustrated this provision by reference to Ritchies’ growth after acquiring an existing operation in Auckland. De novo entry is risky because the bidder lacks information about patronage, revenue, costs, depot location, and staff availability. Mr Ritchie agreed in cross-examination that Ritchies would not necessarily compete with NZ Bus were it to acquire Mana. As with Mr Snelgrove, I understood him to mean that he would assess Mana’s business opportunities following acquisition.

[140] Transdev-TSL is a joint venture between Transdev SA and Transfield Services. It operates trams, ferries, and buses in Australia. Mr Mackiggan confirmed that Transdev’s barrier plan involves targeting markets in New Zealand, including bus services in Wellington. In 2002 Transdev tendered to form a joint venture with GWRC to acquire Wellington’s urban rail service from Tranz Rail, but the sale did not proceed. Entering de novo is not an option. Contracts are too small and of too short a duration. Contracts should be of 8-10 years duration, and around [ ] buses in size. Depot location, finding drivers and fleet at short notice, commercial registrations, and difficulties of bidding against incumbents with local knowledge, all combine to deter entry. Transdev is interested in acquisition followed by incremental growth. If it acquired Mana, its strategy would be to take market share from NZ Bus. It regards NZ Bus’ acquisition of Mana as an attempt to secure market power before reform of tendering rules. In cross-examination it was suggested that Transdev has not adequately researched the market, and so overstates both the barrier to entry and its own interest. As with other potential entrants, however, I formed the view that Transdev is genuinely interested in acquisition.

[141] Veolia Transport Australia Pty Limited is the largest private transport operator in Australia, running the Melbourne metro rail system and buses in New South Wales, Brisbane and Perth. It operates the Auckland rail service in partnership with ARTA. Mr Lodge confirmed that Veolia is interested in New Zealand, and is focused on growth. It would look for a 150-bus operation. The New Zealand market is characterised by high entry barriers that become an advantage following entry. Veolia would enter by acquisition but regards de novo entry as too hard at this stage, for reasons essentially identical to those given by Mr Mackiggan. He also stressed the informational advantages of incumbency and the ability to grow an established business incrementally, using the flexibility offered by an existing depot, fleet, and labour force. Like Mr Mackiggan, he exhibited a lack of familiarity with Mana’s business, but he pointed out that those issues would be addressed if Veolia was given the opportunity to undertake due diligence.

[142] Swan Transit operates buses in Perth and Adelaide and ferries in Brisbane. It is a substantial operator. Mr Smith confirmed that it is interested in the New Zealand market, but would require an operation substantially larger (around [ ] buses) than the maximum contract size of 22 buses. Swan Transit has tendered in Auckland but found the process difficult because it lacked information about depots commercial registrations, and patronage. Short lead times and contract sizes are significant problems. Swan Transit is interested in Mana for essentially the same reasons as Veolia. It has a New Zealand subsidiary, Pacific Transit, which has been registered for the purpose of tendering in New Zealand and bid unsuccessfully on a North Shore contract in 2005.

[143] The evidence satisfied me that there is genuine interest in market entry and strong interest in entry by acquisition. All potential entrants exhibited a strong preference for acquisition, which is an established pattern in the industry in New Zealand and elsewhere. Indeed, NZ Bus made the same point itself when the Commission interviewed its representatives in March 2005 about entering the Christchurch market. Mr Martin explained that Stagecoach had expanded by acquisition in New Zealand and around the world, and had never contemplated de novo entry in Christchurch. Acquisition is preferred because it allows an entrant to exploit existing depot, fleet, staff, local knowledge, and scale to manage risk while providing a base for incremental expansion. The risks concerned relate to knowledge of patronage, relationships with the Council and community interests, depot location, obtaining and managing staff, securing buses, and competitive risks such as those posed by commercial registrations. Mr Ritchie, whose evidence I found persuasive, illustrated how his firm had been able to expand onto the North Shore in Auckland using an existing West Auckland depot, fleet and staff, before establishing a depot on the North Shore and contrasted unfavourably his firm’s experience of de novo entry.

[144] Most of the prospective entrants would also consider de novo entry, but for reasons just given I find that it is significantly less likely than entry by acquisition. Mr Ritchie’s view was that de novo entry in Wellington is ‘too hard’ in the present environment, partly for reasons just given and partly because maximum contract sizes are too small. His firm has a history of expansion into new markets in New Zealand and a longstanding interest in Wellington, and I found his view persuasive. I conclude that a contract of 50 buses or more with lead times of 12 months would be needed to remove a substantial barrier to entry by major overseas firms, and that such firms would not enter unless they see potential to increase their fleets to at least twice that number.

Barriers to entry and conditions of entry

[145] In a well-known passage in Re Queensland Co-operative Milling Association (above), the Trade Practices Tribunal held at 17,246:

Competition is a process rather than a situation. Nevertheless, whether firms compete is very much a matter of the structure of the markets in which they operate. The elements of market structure which we would stress as needing to be scanned in any case are these:

(1) the number and size distribution of independent sellers, especially the degree of market concentration;

(2) the height of barriers to entry, that is the ease with which new firms may enter and secure a viable market;

(3) the extent to which the products of the industry are characterized by extreme product differentiation and sales promotion;

(4) the character of “vertical relationships” with customers and with suppliers and the extent of vertical integration; and (5) the nature of any formal, stable and fundamental arrangements between firms which restrict their ability to function as independent entities.

Of all these elements of market structure, no doubt the most important is (2), the condition of entry. For it is the ease with which firms may enter which establishes the possibilities of market concentration over time; and it is the threat of the entry of a new firm or a new plant into a market which operates as the ultimate regulator of competitive conduct.

[146] The proposition that a firm’s market power depends substantially on the level of barriers to entry and expansion in the relevant market is well established in New Zealand competition law: Southern Cross Medical Care (above) at [69].

[147] Although barriers to entry matter, their definition causes difficulty at the level of principle, for two reasons. The first is that the leading definitions attributed to the economists Joe Bain and George Stigler focus on the long run; that is, a barrier to entry is something that will deter entry indefinitely. Bain defined a barrier to entry as any entry condition allowing for an elevated long run price. Stigler defined it as a cost advantage that an incumbent enjoys compared to entrants, implicitly focusing on the long run steady state. But the long run is of little assistance when it comes to evaluating conditions confronting a new entrant. A time dimension must be introduced, because the legislator, the enforcement agency, and the Court are concerned to identify a socially acceptable period within which an incumbent may exploit market power before it is disciplined by new entry. The second and related reason is that there is controversy whether some barriers to entry, those that have already been surmounted by incumbent firms, ought to be ignored a priori on the ground that to do otherwise would be to encourage inefficient entry.

[148] Mr Goddard referred to an article by Professor Dennis Carlton “Why Barriers to Entry are Barriers to Understanding” (2004) 94 AER 466:

Entry barriers are frequently an issue in antitrust cases and regulatory proceedings. Aside from the imprecision in its meaning, a problem with using the concept is that entry barriers are concerned with the long run, yet the long run may not be relevant for antitrust or regulatory proceedings. What matters for antitrust and regulation is not what might happen in some year far off in the future but what will actually happen now and in the near future. Rather than focusing on whether an “entry barrier” exists according to some definition, analysts should explain how the industry will behave over the next several years. That will force them to pay attention to dynamics and adjustment costs, the importance of which are recognized by some (e.g., Richard Posner (2001) and the other papers in this session). The Horizontal Merger Guidelines of the Department of Justice and Federal Trade Commission do a good job of explaining that entry matters in merger analysis only when it is timely (e.g., within two years) and of sufficient magnitude to keep price from rising above current levels. One may quibble about the “timely” definition but the point is clear. What should matter to policy makers is how fast entry erodes any price increase caused by a merger and not whether it eventually does so.

[149] Professor Carlton prefers the term ‘conditions of entry’ in this context to distinguish dynamics and adjustment costs from barriers to entry, because to an economist a barrier to entry means a cost which must be incurred by a new entrant that incumbents do not (or have not had to) bear. An alternative approach is to define a barrier to entry as something that permits incumbents to price monopolistically for a socially unacceptable period of time before effective entry restores price and output to the competitive level: Herbert Hovenkamp Federal Antitrust Policy: The Law of Competition and its Practice (1994).

[150] The Commerce Act recognises the importance of time. Section 47 is concerned with acquisitions that are likely to lessen competition substantially. Competition means workable or effective competition. It occurs in a market, the definition of which focuses on substitutability as a matter of fact and commercial common sense. The concept of substitutability – the potential for consumers to switch suppliers and suppliers to switch productive capacity, in response to price signals - must incorporate a time dimension. Lessening of competition includes hindering or preventing it. In Commerce Commission v Port Nelson Ltd (1995) 5 NZBLC 103,762, 103,781, McGechan J held that to hinder competition includes delaying it. That passage was approved on appeal: [1996] 3 NZLR 554, 566 (CA). The time dimension may also influence the Court’s answer to the question whether any lessening of competition is real or of substance. These criteria for decision all require judgement about the power that market forces may exert in any given case, and that necessarily incorporates a time dimension. Section 2(3) also recognises the importance of time; it provides that an arrangement may have an anti- competitive effect at one time but not another. It is true, as the Act’s purpose statement implicitly recognises, that competition is a process that must also benefit suppliers if it is to serve the long-term interests of consumers. That consideration may influence the period of time that must be adopted when assessing whether entry conditions are such that an acquisition will substantially lessen competition, but it does not mean that the time dimension may be ignored. [151] Where potential entry assumes importance, as in this case, the Commission’s own Mergers and Acquisitions Guidelines apply the LET test; that is, whether entry is Likely, sufficient in Extent, and Timely. The Court of Appeal adopted the LET test in Southern Cross (above) at [32] and [72], in a case concerned with the former dominance standard under s47. The question was whether competition was likely from expansion by existing market participants. The LET test was also applied in Air New Zealand/Qantas (above).

[152] The Court of Appeal in Southern Cross also adopted a long-run definition of a barrier to entry:

73. Anything is capable of being a barrier to entry or expansion if it amounts to a significant cost or limitation which a person has to face to enter a market or expand in the market and maintain that entry or expansion in the long run, being a cost or limitation that an established incumbent does not face. The height of the barrier is a function of the degree of the differential. A barrier to entry or expansion reflects the extent to which an established firm can, in the long run, raise price above marginal cost (supra-competitive pricing) without inducing potential competitors to enter or expand in the market. It is not necessary to explore the subject of barriers to entry in any detail because the Commission was of the view that they were low. It did not separately address the concept of barriers to expansion, albeit, as earlier noted, the Commission observed that they too appeared to be low. Subject to the discussion which follows, we can see no logical reason why the barriers to expansion in this case should be higher than the barriers to entry.

[153] But the Court also observed that it was not necessary to explore barriers to entry in that case, in which the distinction between barriers to entry and barriers to expansion assumed great significance for reasons peculiar to that litigation. (See David Round and Rhonda Smith “Southern Cross: A Stellar Constellation” (2002) 20 NZULR 171 for discussion of this issue.) The Court actually held that expansion by existing market participants would meet the LET test, so providing a substantial and sufficient constraint on the exercise of market power by the merged entity.

[154] In any event, the statute does not refer to barriers to entry, nor does it comprehensively define the term market (a market is “a market…for goods or services…that, as a matter of fact and commercial common sense, are substitutable….”). These are primarily economic and factual rather than legal questions. Market definition is an analytical tool that aids the Court when isolating market power and the effect of the particular transaction upon it, and barriers to entry form part of that analysis. [155] The economists appearing before me agreed that conditions of entry should be analysed by applying the LET test, with the relevant time horizon being three years rather than the two years that the Commission normally adopts as a first approximation. NZ Bus also agreed that that is also the correct approach on the current state of the law, following Air New Zealand/Qantas (above). I will adopt that approach.

[156] The introduction of a time dimension significantly affects the conditions that may be taken into account. Specifically, it precludes a priori exclusions on efficiency grounds, since it does not seem relevant that an incumbent may have had to incur a cost in the past if a merger means that consumers are likely to face materially higher prices for (in this case) three years because new entrants must incur that cost, among others.

[157] Mr Goddard took matters a step further, arguing that it is not necessary for the Commission to catalogue barriers to entry and prove their individual or cumulative effect. Rather, empirical data about entry and prices in this and similar markets may justify a conclusion that substantial conditions of entry exist. Specifically, he referred to evidence of a correlation between single bids and higher contract prices in this case. In support of this approach, Mr Goddard relied on Dr Bamberger’s evidence that it can be difficult to identify barriers to entry, and observed that their effect may be cumulative. He also pointed out that the Court took such an approach in Air New Zealand/Qantas (above). The question was whether entry by Virgin Blue would suffice to restore prices to levels that existed without the Air New Zealand/Qantas alliance under consideration. The Court identified frequent flyer schemes and incumbent response as potential barriers to entry but did not attribute its conclusions to them. Rather, the Court found that it was difficult to explain why entry or the threat of it is often insufficient to constrain prices in airline markets, but held that evidence from other markets established that actual market participants constrain prices more than potential ones do. Accordingly, the existence of material entry conditions could be inferred from the evidence.

[158] I accept that there may be cases in which the evidence of market behaviour over time justifies an inference that substantial conditions of entry exist, although they cannot readily be identified. But in this case conditions of entry can be identified and must be analysed, if only because evidence of market behaviour must be approached with care when competition in the factual may differ from the historical pattern. Some conditions of entry may be overcome within the three-year period established using the LET test. The claims of aspiring entrants that they would like to enter but have been deterred from doing so must also be assessed by evaluating the conditions that they identify.

[159] It is also inherent in the Commission’s approach that no condition of entry could be put aside. Mr Goddard submitted that all conditions in a market that affect entry and expansion must be taken into account, including ‘frictions’ or short term constraints. But some conditions of entry may also confront incumbents as they respond to entry. It may be necessary to discount them, recognising that only costs that are asymmetric (that is, not incurred by the incumbent during the same period) are relevant. Depots provide an example of an entry cost that should be discounted in this case, to the extent that Mana would have to acquire new depots or yards to compete with NZ Bus in the latter’s territory, and vice versa. Indeed, the Commission implicitly acknowledged that some conditions of entry should be discounted; it treated acquisition of buses and staff as a condition of entry primarily because of short tender lead times imposed by the GWRC.

[160] That said, I accept that it is difficult to assign cause and effect to conditions of entry, still more so to quantify their impact. In the end, the Court must exercise what has often been called a value judgement: Air New Zealand/Qantas at [117]. In this context, that term means simply that the Court must predict what is likely to happen in the future, with the aid of abstract economic principles applied to what frequently are not primary facts. I adopt what William Young J said in ANZCO Foods Waitara (above) at [150]-[151]:

[150] In this context, it is important to recognise that assessment of anti- competitive effect is necessarily uncertain. Market definition is a fertile source of disagreement. Assessment of “effect” and “likely effect” under s 28 involves counter-factual analysis, ie a hypothetical question comparing competition as events have panned out with the level of competition which would have obtained if the covenant had not been insisted on. A high level of evaluation is required and there is necessarily scope for differing opinions.

[151] I see as highly relevant the following passage from Areeda et al, Antitrust Law: An Analysis of Antitrust Principles and Their Application, Vol IV, New York, Aspen, 1998, at p 31, despite it being written directly in relation to mergers:

“In a world of perfect information and error-free and costless decision- making processes, the ideal approach to mergers would take into account all relevant facts in trying to determine whether substantial anticompetitive consequences would result. In such a world we could predict costlessly and accurately what price effects and efficiency effects attended any merger, and could compute immediately whether it would be, on balance, a social benefit or burden. Unfortunately, the world we live in is characterised by flawed and incomplete information and decision processes that are both imperfect and very costly. To be sure, we may be able to articulate numerous factors that could be relevant to the competitive consequences of any merger. Such articulations are quite common, and any text on industrial organization will list numerous such factors. But assigning weight or significance to individual factors in a real case poses enormous difficulties, both empirical and conceptual. For that reason, the effort to employ many factors often degenerates into a focus on a key fact supplemented by loose and usually unpersuasive talk about other evidence, some relevant and some not. The fact is that refined appraisals resting on every theoretically relevant variable are beyond the capacity of the legal enforcement process.”

Conditions of entry in the regional market

[161] The evidence identified a number of conditions of entry. Of these, the Commission focused particularly on establishment of a depot and associated facilities in a location that minimises dead running costs, short lead times under the CPP Manual, size and duration of GWRC contracts, commercial registrations, and incumbent response. It accepted that integrated ticketing is not a constraint in this case.

Lead times

[162] As noted, the maximum lead time for requests for tender under the CPP Manual is eight months, and contracts may not be let until four months before commencement. While entrants know when contracts will be tendered, and so can plan before a request for tenders is issued, the witnesses generally agreed that an entrant would be reluctant to invest significantly before knowing that it had won a contract. They debated whether it might purchase an option over depot land but there was no suggestion that it would commit to building a depot or buying buses, let alone seeking staff, until the contract had been won.

[163] I am satisfied that eight months is not sufficient time to organise de novo entry on any scale. Indeed, some of the other conditions of entry that the Commission relied upon (such as procuring buses) are problematic only because of short lead times.

Contract term [164] Mr Goddard submitted that maximum terms of five years, or up to eight years if rolled over, are too short for most entrants. I accept that the potential entrants generally preferred contracts that ranged variously between five and 10 years, but I do not find that this is a significant constraint. As Mr Carruthers submitted, the present maximum term seems to be adequate to address the preferences of most potential tenderers.

Maximum contract size

[165] I have already referred to the LEK reports and the evidence of the potential entrants, which together establish that in a larger market such as Wellington the maximum contract size is a significant constraint. It is alleviated somewhat by the ability to bundle groups of contracts in a single request for tenders, but as Mr Lambert observed, bundling is no substitute. Each such contract must be let individually, so a winning bidder might be awarded only a subset, and it is difficult for the Council to evaluate a mixture of bundled and unbundled bids.

Scale

[166] Scale economies are not normally regarded as barriers to entry: Southern Cross (above) at [90]. However, they are related in this case to incumbent response, which Mr Mellsop characterised as a strategic barrier to entry, and maximum contract sizes.

[167] The evidence suggested that the principal cost drivers are morning peak bus numbers, which determine the number of buses required, and distances travelled and hours of operation, which cause labour, fuel, and maintenance costs. Witnesses suggested that 70-80% of costs are incurred on “the turn of the wheel”. Depot expenses cause only 2-3% of operating costs, although depot location matters because efficiency demands that operators focus on reducing dead running and idle time. It follows that, as Mr Carruthers submitted, returns to scale are limited.

[168] But, as Mr Dodgson pointed out, the emergence of major firms such as Stagecoach plc establishes that scale economies do exist. The evidence of the potential entrants also confirmed that scale is a consideration. I have found that contracts of at least 50 buses would be needed to attract tenders. A further consideration is that successful retaliatory action is less likely if a substantial firm enters on a significant scale, because a firm that wins one small contract is vulnerable to retaliatory action because NZ Bus is well placed to win it back next time, as Mr Turner’s evidence made clear. I concluded that NZ Bus is not too concerned about the activities of its small rivals because it is easy to monitor them and react if required. By contrast, it would be costly for NZ Bus to win a substantial volume of business back when it was next tendered and it might not make the effort if it recognised that the new entrant was there to stay.

Commercial registrations

[169] I have already found that there is no evidence that commercial services are cross- subsidised, but they are deployed tactically. While an entrant might tender for a contract in the hope that it would drive out the incumbent, for whom the commercial services would be barely profitable, commercial registrations do inhibit competition. The incidence of commercial registration is relatively modest at 20% of services in Wellington, but their stability since 1991 suggests that incumbents have not found it necessary to register more services to achieve their defensive purpose. Their persistence in Wellington and occasional use elsewhere suggests they are a significant constraint. They are helpful when it comes to retaining GWRC contracts, as Ms Waddell accepted. Overseas firms also regard them as important because they contribute to the perceived opacity of New Zealand markets.

Information

[170] NZ Bus and Mana regard patronage information as commercially sensitive and will not consent to its release to other bidders. The GWRC could insist on disclosure when setting contract terms, as ARTA has done recently, but such information would not be available until the next series of contracts has been completed. Thus incumbent control of patronage data will remain an issue for the foreseeable future.

[171] I am satisfied that patronage information is a significant condition of entry in an environment where contracts are normally let on a net basis, in which revenue risk lies with the operator. Mr Turner considered that an error of say 20% in estimating patronage could wipe out an operator’s profit margin. Entrants could compensate by seeking to measure patronage in other ways, such as hiring students to count passengers. Such methods are inherently unreliable, however, since patronage is affected by many variables, including weather. Operator control over patronage information is an advantage with respect to both potential entrants and the GWRC itself.

[172] I accept that patronage information would also be an issue for Mana should it enter NZ Bus’ territory, but with its knowledge of the region it nonetheless should be better placed than any new entrant to assess the risk that its patronage estimates are wrong.

Local knowledge

[173] Knowledge of the ways of the GWRC and the Ministry, and the community generally, is also useful to any public transport operator, as Mr Overington accepted. The prospective entrants attached considerable significance to local knowledge. Mr Carruthers pointed out that tenderers must pre-qualify and the lowest conforming bid wins. But an entrant is likely to factor intangible risk into its price. The evidence satisfied me that all operators attach importance to local knowledge. Indeed, Mr Ridley- Smith advanced it as a rationale for the restraints of trade in the Heads of Agreement.

Depot location and establishment

[174] NZ Bus and Mana maintained that dead running costs make expansion into other areas uneconomic without establishing a new depot there. The evidence of Mr Stewart and Mr Turner together established that dead running costs are substantial. A firm servicing a group of north Wellington routes from a depot in Porirua would incur labour costs that are 20-22% higher, and distances travelled that are 41-50% greater, than a firm servicing the same routes from Kilbirnie. As noted above, distances travelled and hours of operation contribute substantially to operating costs, which in turn form a high proportion of total costs. The evidence suggests that a Porirua-based operation could not service Wellington routes competitively, although that does not preclude use of a Porirua base in the establishment phase. I have already referred to Mr Ritchie’s evidence that his firm serviced North Shore routes in Auckland from a depot at Swanson, in West Auckland, before establishing a North Shore depot.

[175] The Commission’s case was that Mana could service some Wellington routes from Newlands. Mana and NZ Bus contended that the Newlands depot is at full capacity already. However, I am satisfied that it could be used as a base for servicing north Wellington routes. Mana made that very point in a document prepared during negotiations with NZ Bus. While characterising it as a sale pitch, Ms Waddell accepted that she had in mind running some of NZ Bus’ Khandallah services from Newlands. The depot presently provides maintenance and parking facilities, but major maintenance is required monthly and could be handled at Porirua, leaving room to park more buses at Newlands. Ms Waddell also confirmed that an adjoining landowner is willing to sell land to Mana although she regards the cost ([$ ] including development) as excessive.

[176] Mr Stewart was asked to model dead running costs using the Newlands depot in lieu of the Porirua one. A firm servicing a bundle of northern routes from Newlands would incur distances travelled that are only 7.9% greater than NZ Bus, assuming a layover is available at the Wellington railway station. No doubt that explains Mana’s view in negotiations that the Newlands depot could service those routes. There is also clear evidence that Mana is a significantly more efficient firm. Together with Mr Ritchie’s evidence, this evidence satisfies me that Mana could compete with NZ Bus on northern routes using its existing resources.

[177] NZ Bus pointed out that the northern routes account for only about $1.7m of the value of GWRC contracts. But the impact of Mana competing for north Wellington routes is not confined to those routes alone. It would signal that all routes are contestable, even if Mana would have to establish a depot should it win other Wellington or Hutt Valley routes.

[178] I accept that full-scale competition in Wellington City or the Hutt Valley would require a depot or a yard in those places. Mana would have to acquire such a facility, as would any firm entering de novo. The evidence confirmed that suitable (and appropriately zoned) sites are available, although establishment of a depot or yard can take up to a year even where it is a permitted use under the District Plan. Provision must be made for security, and a full depot also requires fuelling, cleaning and maintenance facilities. Nonetheless, Mana’s existing depots afford it a substantial advantage over any new entrant, because it can use them to expand before acquiring a new depot. Short lead times also inhibit entry at present because a new entrant would require a full depot and would find it difficult to establish one within four or even eight months.

Staff

[179] Acquisition of staff is not ordinarily considered a barrier to entry. Further, difficulties confronting a new entrant in this area are partly a function of short lead times. Staff cannot realistically be hired before an entrant has won a contract. It did become clear during the hearing that a firm’s workforce is a real competitive advantage. Mana is admired partly for its skills in hiring and managing staff. Bus drivers are not especially well paid, and public transport work is unattractive to them because it requires shift work. Thus hiring drivers is a significant if short-lived entry constraint. As with depots, the capacity to use existing staff and fleet to service new routes is an advantage that any incumbent has over a de novo entrant.

Buses

[180] The evidence established that buses are readily available, albeit that most contracts require some fitted with super low floors. New and used buses are imported and there are New Zealand firms that fit them out. It would take about six months, however, to have a substantial number of buses in place. Accordingly, this constraint is also largely a function of short lead times.

Tendering costs

[181] Tendering costs are not particularly significant but they are asymmetric. Mr Overington considered that a new entrant would incur costs of about $[ ], while those for an incumbent would be a little more than one-third of that figure, or approximately $[ ].

Retaliatory action [182] The Commission did not attach particular significance to incumbent retaliation, which ordinarily would be characterised as competition in action: Air New Zealand/Qantas at [105]. I have found that potential entrants would enter on a significant scale or not at all, partly because a small entrant is vulnerable to retaliation. Ms Waddell confirmed that retaliation is a risk for smaller firms competing with NZ Bus because of its greater capacity to absorb losses.

The factual

[183] It is now possible to establish the appropriate factual and counterfactual.

[184] Mr Ridley-Smith suggested that Infratil may position Mana as a sister company rather than a subsidiary of NZ Bus, but there was no evidence that Mana would compete with NZ Bus. I find that it would not. Accordingly, the factual would result in cessation of competition that presently exists for Ministry technical routes along with any residual risk that Mana or NZ Bus will break ranks and tender for GWRC contracts in the other’s area.

[185] I find that in the factual the GWRC would structure its contracts so as to address lead times and maximum contract sizes, as noted above. By doing so it would remove a substantial barrier to entry. These aspects of contract structure make entry, particularly entry on an effective scale, very unlikely, as shown by its absence over a long period of time.

[186] It doe not follow from removal of these constraints, however, that new entry would become likely. De novo entrants are at a significant disadvantage. I have found that firms that enter by acquisition can compete incrementally, exploiting existing depots, fleet, staff, scale and knowledge to manage risk. Entry must be timely (after the GWRC has removed contractual barriers but within three years) and on sufficient scale to impose an effective competitive constraint. The Ministry of Transport review supplies an element of uncertainty that may not be removed for some time. A further consideration is the sequencing of GWRC contract renewals; 33% of them are due for renewal in 2007, and a further 30% in 2008. I was not told whether these particular contracts can be packaged in a way that is attractive to a new entrant. The combination of contract restructuring, bundling of routes, and lead times together contribute to a conclusion that new entry will remain possible but is not likely to occur in an effective and timely way.

The counterfactual

[187] It was common ground that the counterfactual involves the sale of the Waddell interests’ 74% shareholding to a new entrant. If the NZ Bus transaction does not proceed, the Waddell interests will offer their shareholding for sale. While a sale is obviously contingent upon a satisfactory price, it is appropriate to proceed on the basis that the counterfactual does involve sale. The sale would be a major and rare opportunity for substantial firms to enter the Wellington market, and I have found that all would prefer to do so by acquisition. However, two dimensions of the counterfactual are controversial: the destiny of NZ Bus’ 26% shareholding, and whether the new entrant would mimic Mana’s present behaviour.

[188] On the view I take, it is not necessary to determine whether the counterfactual would also involve the sale of NZ Bus’ 26% to the new entrant. That is because it was common ground that, as a matter of company law, NZ Bus and its nominee director could not preclude Mana from competing incrementally with NZ Bus. The most that NZ Bus could do qua shareholder is to point out that competition would attract retaliation and so might not be in the best interests of Mana. Nor do I accept that an uncomfortable relationship with NZ Bus as a minority shareholder would make such an acquisition untenable. Indeed, it is at least equally plausible that, having failed to secure its strategic objectives, NZ Bus would elect to sell.

[189] Mr Mellsop contended, however, that the counterfactual would involve the purchaser of the Waddell interests’ shareholding behaving in much the same way as Mana has done to date; that is, a purchaser would be likely to concentrate on avoiding competition with NZ Bus and developing Mana’s existing business in the Western Corridor. He based that view on the historic absence of competition and what he saw as a pragmatic and commercial assessment of what an acquirer would be likely to do. Mana might prefer to exploit growth opportunities in its own territory. Ownership of 74% with NZ Bus as a minority shareholder and vigorous competitor would be an uncomfortable arrangement, and indeed might be unworkable. Such a party might enter only if it could be satisfied that it would secure NZ Bus’ 26% as well but, recognising the strategic value of that interest, NZ Bus would extract a price that fully compensated it for the expected costs of extra competitive pressure. He considered that, in the absence of evidence to the contrary, it must be assumed that Mana is acting rationally and in a profit-maximising manner by not competing with NZ Bus. Mr Carruthers submitted that a new owner of Mana would not compete because it would earn a low return by doing so and would risk retaliation.

[190] I prefer the view that the counterfactual involves acquisition of the 74% by a substantial entrant that would use it as a springboard to compete in the Wellington regional market, notwithstanding that such strategy would result in NZ Bus retaliating. That was the preferred strategy for each of the interested firms whose executives gave evidence before me, and Mr Dodgson confirmed that it is a pattern commonly observed elsewhere. Such an entrant would differ from the Waddell family in ways that would likely alter Mana’s behaviour significantly. Firms such as Veolia, Transdev and Swan Transit have strong growth aspirations and the resources to compete. The Waddells lack their depth of resources and long-term growth aspirations; Ms Waddell was clearly sensitive to Mana’s capacity to absorb losses, relative to that of NZ Bus. In the circumstances, I do not think the existing understanding (or mutual restraint) between NZ Bus and Mana is likely to survive. The pending Ministry of Transport review will also have a destabilising influence to the extent that it may allow Councils to move away from the present tendering model.

[191] My conclusion that LTNZ would alter lead times and maximum contract sizes in the factual applies also to the counterfactual. Thus potential entry would remain a possibility, but it is not likely to occur in an effective and timely way.

Significance of countervailing power

[192] The economist John Kenneth Galbraith suggested that countervailing power could arise as a response to market power; for example, labour unions could be seen as a reaction to the growth of large employers: Galbraith American Capitalism: The Concept of Countervailing Power (1952). In a subsequent article, he suggested that countervailing power may ensure price remains at the competitive level while offering social benefits, such that it enhances total welfare (as opposed to consumer welfare): Galbraith “Countervailing Power” (1954) 44 AER 1. Galbraith’s work was and remains controversial; George Stigler described it as a dogma rather than a theory: “The Economist Plays with Blocs” (1954) 44 AER 7. In a recent survey of the literature, Antra Hood suggested that countervailing power may not benefit consumers: for example, a buyer and a seller may collude to share monopoly rents to the detriment of the ultimate consumer, and both firms may invest in attempts to circumvent one another’s market power: Hood “The confused case of countervailing power in Australian competition law” (2000) 8 CCLJ 1. A further objection to reliance on countervailing power, as Mr Goddard pointed out, is that there is no way of knowing whether a price affected by countervailing power is a competitive one.

[193] The concept has nonetheless found a place in New Zealand competition practice. The Commission’s Mergers and Acquisitions Guidelines state that in some circumstances countervailing power may constrain a firm’s market power sufficiently to eliminate concerns that an acquisition would substantially lessen competition. It has been relied upon in a significant number of Commission decisions: see by way of example Gallagher Holdings Ltd v Tru-Test Corporation Limited Commerce Commission Decision No. 545 23 February 2005. Alternatively, where countervailing power results in price remaining near the competitive level, the detriments resulting from a lessening of competition may be offset more readily by public benefits.

[194] The parties accepted that the GWRC’s and Ministry’s countervailing power is relevant to the extent that they are likely to deploy that power to alter conditions of entry in ways that encourage competition. They differed over whether the Court must inquire not only whether the buyers have power to do so but also whether they will exercise that power at all or in a timely way.

[195] Analysis of market power is ordinarily concerned with a firm’s capacity to exercise control over price, not with the question whether it exploits its power in fact. A monopolist may be indolent or public-spirited. Mr Goddard’s submissions to the contrary, I can see no reason why the same approach should not be taken when assessing countervailing market power. I accept, however, that the inquiry is a factual one. The analysis must recognise the practical and political constraints under which the GWRC labours. Its decision-making processes are not those of a commercial firm. They are political in nature, involving consultation and search for consensus, so they are time- consuming. There was no evidence that the Ministry is so constrained. [196] I have already discussed the extent to which it is within the GWRC’s power to alter conditions of entry by seeking alternative CPPs that address contract size and lead times. Although changes require LTNZ’s approval, LTNZ is bound to approve changes that meet the statutory criteria, which are designed to facilitate competition. Thus the capacity to seek changes that facilitate competition affords the GWRC a degree of countervailing power.

[197] The Council’s countervailing power will remain modest, however, until new entry occurs on a substantial scale. That is so because many tenders attract only one bid. While the GWRC can decline to contract in such circumstances, it must provide bus services to meet public demand and comply with its own transport strategy by ensuring people may move about by one mode of transport or another. As such, it is presently in a weak bargaining position vis-à-vis NZ Bus and Mana. LEK also recorded that regional councils believe that it is difficult for them to secure value for money when contracting over commercial registrations, and complain that they lack information about commercial services. I accept that operators have an advantage over buyers in that they are better informed regarding costs and total patronage.

[198] NZ Bus pointed out that GWRC is now legally able to enter the bus services market itself, although it would have to tender along with other operators. None of the Councils appearing before me has seriously considered that, however, and there was no evidence to suggest it is likely within the next few years.

The likely effect of the acquisition on competition

[199] I now turn to examine the question whether there is likely to be a substantial lessening of competition in the factual when compared to the counterfactual. The analysis requires comparison of the likely state of competition in the factual with the likely state of competition in the counterfactual (in particular, the likelihood that a new owner of Mana would use the company to compete with NZ Bus in ways that Mana does not do now).

[200] I begin by noting that the market share of the merged entity would be 97% by value. While that is not determinative, it does call for inquiry into the presence of barriers to entry that might cause that market share to be sustained in the long run, or conditions of entry that might preserve market power for longer than (in this case) three years.

[201] I have found that Mana and NZ Bus have a tacit understanding under which neither firm competes for GWRC contracts in the other’s area. I am satisfied for reasons given above that such understanding (or mutual restraint) is not likely to survive transfer of control of Mana to a new entrant. The importance of this conclusion cannot be underestimated. The absence of competition at the moment is explained by conscious choice, not by market conditions that preclude competition. I have found that there is potential for competition in NZ Bus’ area, using the Newlands depot as a base initially, and that NZ Bus has the capacity to compete in the Western Corridor. Competition on northern Wellington City routes would affect market behaviour in the region as a whole by signalling that all routes are contestable.

[202] The economists agreed that merger of the two rivals with lowest costs of service will lessen competition in a bid or auction market. They also agreed that from an economic perspective it is appropriate to infer that the operators with lowest costs are those with local assets, in circumstances where bids from firms without such assets are rare. Dr Bamberger reviewed evidence of bids in Wellington, Auckland, and Christchurch, and concluded that the economic evidence strongly indicates that possession of local assets is an important determinant of a firm’s costs.

[203] While accepting this approach in principle, NZ Bus argued that the issue cannot be determined in the abstract. Mr Carruthers submitted that there is no evidence that NZ Bus and Mana are the lowest cost competitors. I find, however, that they are. They are the only market participants with significant local assets available for public scheduled services, accounting between them for 97% of subsidised contracts by value, and the economists agreed that firms with local assets are likely to have the lowest costs. The evidence also established that Mana is significantly more efficient than NZ Bus. I accept that the Commission’s case rests on an economic principle in this respect, but the economists were agreed on the principle, and Mr Bamberger supported his analysis by reference to bids in Wellington and other markets. The evidence is sufficient to satisfy me that that Mana and NZ Bus are the lowest cost providers, such that their merger will lessen competition relative to the counterfactual. That is, rivalry in the counterfactual should cause prices to fall towards the competitive level. [204] The factual would also involve loss of existing competition between NZ Bus and Mana on Ministry of Education technical routes. Mr Goddard argued that the loss of this competition is a substantial lessening in itself. I do not think that can be right, in circumstances where NZ Bus and Mana have competed recently for 12 or 14 contracts worth only $45,000, in a market in which NZ Bus alone is paid annual subsidies of $20m. The question whether a lessening of competition is substantial must be determined by reference to the size and characteristics of the market. There is no evidence that these routes have significance beyond the face value of the contracts in that, for example, competition on technical routes has somehow constrained NZ Bus in its bidding on GWRC routes. I accept, however, that loss of competition on technical routes must be brought into account when assessing the overall effect of the transaction.

[205] Mr Carruthers argued that potential entry will remain a major constraint in the factual, and submitted that the Court need not be satisfied that entry is presently likely. Rather, the question is whether entry would be likely in response to a price increase or other future change in incumbent behaviour. He pointed to the discussion of the LET test in Progressive Enterprises Ltd v Woolworths (NZ) Ltd Commerce Commission Decision No. 448 14 December 2001as authority for this proposition. The Commission stated (at [250]) that entry must be likely in response to the exercise of market power. I reject this submission, and with it the proposition that the Court should discount historic absence of entry when evaluating potential entry as a competitive constraint. In this case, in which there is evidence that NZ Bus and Mana already possess market power and the counterfactual involves acquisition by another competitor, the question posed by the LET test is whether and how far prices will fall in the counterfactual relative to the factual.

[206] I do accept that potential entry will remain a constraint in the factual, in which I have held that the GWRC should be able to offer contract terms that are somewhat more likely to encourage entry by major international firms. But I am satisfied that entry will occur in the counterfactual, while it remains only a possibility in the factual. For reasons given when discussing the factual, potential entry will continue to be a relatively weak restraining force. Although there is some evidence of firms entering other markets de novo, the preference to enter by acquisition is universal. I accept Mr Turner’s evidence that NZ Bus does keep potential entry in mind, and was particularly concerned when confronted with a 56-bus group request for tenders in the Hutt Valley. But that concern does not establish that potential competition is an effective constraint. It may be that NZ Bus is pricing at levels that risk inducing entry. I have referred to evidence that a very high proportion of Wellington tenders receive only one bid and that there is a correlation between number of bids and price.

[207] I conclude that the acquisition is likely to result in a substantial lessening of competition.

The associated parties issue

[208] The defendants also contended, in the alternative, that they are associated persons for purposes of s47, so that any increase in NZ Bus’ shareholding in Mana is to be treated as an internal transfer that does not substantially lessen competition.

[209] Section 47 provides that a person may not acquire assets of a business or shares if that would be likely to substantially lessen competition. A “person” includes two or more persons that are interconnected or associated. One person is associated with another if that person is able, directly or indirectly, to exert a substantial degree of influence over the activities of the other.

[210] Mr Carruthers submitted that the rationale for the legislative requirement that associated persons be treated as one is that they cannot be expected to provide any material competitive constraint on one another and accordingly should not be regarded as competitors. He submitted that the Commission itself has consistently taken this approach in its clearance decisions. As a matter of practice, it has also accepted that a 20% shareholding generally is enough to establish a substantial degree of influence.

[211] The substance of Mr Carruthers’ argument is that an existing association between acquirer and target creates a safe harbour for the acquirer. As a matter of construction, however, s47(1) is addressed to a person who acquires assets of a business, or shares, and subsection (2) extends the class of persons to whom the prohibition is addressed to two or more persons who are interconnected or associated. The legislature was evidently concerned that associated persons might circumvent s47 through separate acquisitions, none of which would substantially lessen competition in itself. It would turn the section on its head to presume that it creates an exception where acquirer and target are already associated, whether or not the acquisition substantially lessens competition on the facts. Sections 43-45 (which create carefully crafted exceptions to Part II) suggest that had the legislature intended to create a class of exceptions to s47 it would have done so explicitly.

[212] It is true that there are decisions in which the Commission has granted a clearance on the ground that an increase in shareholding would not substantially lessen competition because the acquirer and the target were already associated. See for example PPCS Ltd v Venison Rotorua Ltd Commerce Commission Decision No. 550 12 May 2005. But such decisions rest on findings that the parties were already associated so that competition was unlikely in the counterfactual. The questions whether parties are associated and whether competition is likely in the counterfactual must be determined on the facts.

[213] On the facts of this case, the counterfactual involves control of Mana passing to a new entrant that is likely to compete with NZ Bus. It was common ground that NZ Bus could not prevent Mana from competing with it by reason of its 26% shareholding and seat on the Board, although the defendants suggested in closing that it might prevent Mana bidding for a 50-bus contract because that would be a major transaction. The right to appoint a director does not of itself establish that NZ Bus is able to exercise a substantial degree of influence. The appointee is but one of four directors, with no control over board decisions, and in any event the director must act in the best interests of Mana.

[214] It follows that NZ Bus does not have a substantial degree of influence over Mana for purposes of this transaction. I record that in its clearance application, NZ Bus maintained that it and Mana were not associated persons. And at a meeting with Commission staff on 14 February, NZ Bus representatives doubted that its 26% shareholding was sufficient to give the company influence over Mana.

Accessory liability

[215] The Commission seeks a penalty against the Waddell interests, saying that by agreeing to waive the condition requiring clearance or authorisation they aided and abetted, or conspired with, NZ Bus to contravene s47, or were directly or indirectly knowingly concerned in, or party to, contravention by NZ Bus. It makes the same allegations against Infratil, but also alleges that Infratil counselled or procured NZ Bus to contravene s47.

[216] Section 83 of the Commerce Act provides:

83 Pecuniary penalties

(1) If the Court is satisfied on the application of the Commission that a person—

(a) Has contravened section 47 of this Act:

(b) Has attempted to contravene that section:

(c) Has aided, abetted, counselled, or procured any other person to contravene that section:

(d) Has induced, or attempted to induce, any other person, whether by threats or promises or otherwise, to contravene that section:

(e) Has been in any way, directly or indirectly, knowingly concerned in, or party to, the contravention by any other person of that section:

(f) Has conspired with any other person to contravene that section,

the Court may order the person to pay to the Crown such pecuniary penalty as the Court determines to be appropriate, not exceeding $500,000 in the case of a person not being a body corporate, or $5,000,000 in the case of a body corporate, in respect of each such act or omission.

(2) In determining an appropriate penalty under this section, the Court shall have regard to all relevant matters, including—

(a) The nature and extent of the act or omission:

(b) The nature and extent of any loss or damage suffered by any person as a result of the act or omission:

(c) The circumstances in which the act or omission took place:

(d) Whether or not the person has previously been found by the Court in proceedings under this Part of this Act to have engaged in any similar conduct.

(3) The standard of proof in proceedings under this section shall be the standard of proof applying in civil proceedings.

(4) In any proceedings under this section, the Commission, upon the order of the Court, may obtain discovery and administer interrogatories.

(5) Proceedings under this section may be commenced within 3 years after the matter giving rise to the contravention arose. (6) A person is not liable to a pecuniary penalty under both section 80 of this Act and this section in respect of the same conduct.

Whether a vendor’s agreement to sell unconditionally, or to waive a condition requiring clearance or authorisation, may contravene s83

[217] The Act’s sanctions for breach of s47 ought to discourage contraventions and encourage acquirers to take marginal transactions to the Commission for clearance or authorisation. The accessory liability provisions serve that purpose by deterring those without whose assistance an acquirer could not obtain shares or assets.

[218] The Commission has not previously invoked s83. Conscious of the potential exposure of vendors and a risk of over-deterrence, it attempted to formulate the test for liability under s83 in a way that would not ordinarily capture vendors. It focused on the “actus reus” or action required for accessory liability. It sought, for example, to distinguish between a vendor who sells shares or assets of a business without insisting upon a condition requiring clearance or authorisation from a vendor who – as happened in this case - waives such a condition. In the former case, the vendor could not be said to be part of the acquirer’s “support crew”; in the latter, it could.

[219] Mr Goddard developed his case by analysing the components of s83(1). He began by pointing out that the vendor does not fall within ss1(a) or 1(b). Section 47 is addressed to the acquirer of assets or shares, so a vendor may be liable only as a party. Putting the mental element to one side for the moment, Mr Goddard contended that as a party the vendor must provide assistance or support or encouragement. Something more than selling is required to aid and abet. The prohibition on counselling or procuring an acquisition does not naturally apply to a vendor, and it seems unnatural as a matter of ordinary language to describe a vendor as concerned in, or a party to, the acquiring of the assets, since the vendor is on the other side of the transaction. Thus selling an asset, even with the knowledge that the acquirer is taking a significant Commerce Act risk, does not breach s83 in or of itself. According to Mr Goddard, examples of conduct that might contravene s83 include involvement on the acquisition side, through setting up a joint venture into which the assets are sold, or explicitly taking responsibility for some aspect of the transaction normally performed by the purchaser. [220] I accept that there is a risk of over-deterrence. It does not arise in the criminal law, from which s83 is drawn, because offences attach to conduct that is normatively wrong. Accessories to a criminal offence are likely to know, or ought to know, that what the principal is doing is wrong even if they do not realise that it is illegal. The same is not true of s47. Participation in markets for corporate control is regarded as a good thing, up to a point. The question whether that point has been reached is answered by examining the economic effect of the transaction in the market as a whole. That exercise requires predictions about the economic effect of future behaviour of the merged firm and other existing or potential market participants. The vendor may be in a poor position to know the essential facts, let alone to appreciate its legal risk.

[221] An undiscriminating approach to accessory liability also risks over-deterrence for others concerned in the transaction, such as advisors, who are involved in the transaction but do not share directly in the principal’s gains. Contravention carries a stigma. Those who contravene s83 are exposed to a pecuniary penalty, which is analogous to a fine. Indemnities may not be available. Prosecutorial discretion affords limited comfort, because the facts of this case suggest the Commission is now likely to intervene in a transaction whenever it considers that the acquirer ought to have sought a clearance.

[222] In these circumstances, vendors and their advisors have an incentive to insist upon selling on terms that require the purchaser to seek clearance or authorisation, whether or not the transaction is likely to contravene s47. (Vendors cannot apply for clearance or authorisation in their own right.) But a clearance is not a minor matter. It introduces delay, risk, and expense, which the present voluntary clearance regime was intended to avoid. As originally enacted in 1986, the Act prohibited implementation of a merger or takeover unless it had received a clearance or authorisation. The prohibition applied to merger or takeover proposals exceeding a certain threshold and value, and to certain industries. In the result, many mergers were notified although they raised no competition concerns. In the interests of reducing compliance costs imposed on the business community, the legislation was amended in 1990 to remove this notification regime: M Berry and A Riley “Beware the New Business Acquisitions Provisions in the Commerce Amendment Act 1990” (1991) 21 VUWLR 91. (Section 83 was inserted at the same time: its predecessor created an offence punishable by a fine.) [223] The Commission’s wish to exclude at the first (or “actus reus”) stage vendors who do nothing more than agree to sell assets or shares is thus understandable and proper. But it asks too much of the language of the statute. It is true that much of s83(1) is drawn from the criminal law, which requires that an accessory do something positive by way of assistance or encouragement. But the legislature has gone beyond the notions of aiding, abetting, inciting, counselling, procuring, or conspiring. Section 83(1)(e) attaches to a person who has been “in any way directly or indirectly, knowingly concerned in, or party to, the contravention” of s47. In that context, “party to” simply means “participates in” or “takes part in”: Re Maidstone Buildings Provisions Ltd [1971] 1 WLR 1085, 1092. The term also includes one side to a contest, litigation, or contract, as opposed to another, as the Shorter Oxford English Dictionary makes clear. The contravention to which the accessory must be party involves acquisition of assets of a business or shares from another person; by definition, a vendor (or existing owner) must participate. The statutory language is plainly apt to capture a vendor. Nor can I see any meaningful distinction between a vendor who sells assets or shares without a condition requiring a clearance and a vendor who, having agreed to sell subject to such a condition, later agrees to waive it. Any distinction between them must lie in the mental element.

The mental element of accessory liability

[224] The Commission accepted that each of the accessory provisions in s83(1) require that a person liable is a secondary party have “an element of intention based on knowledge”, but contended that liability is established if the person was aware or should have been aware of the relevant facts giving rise to the contravention. Mr Goddard contended, first, that since s47(1) creates a form of strict liability, it is sufficient to show the accessory knew the essential facts, without proof of an intention to assist the principal and, second, that constructive knowledge of the essential facts suffices. For these propositions he relied upon Yorke v Lucas (1983) 80 FLR 143 (FCA), confirmed by the High Court of Australia, reported at (1985) 158 CLR 661.

[225] The obvious derivation of most of s83 from s66 of the Crimes Act confirms that accessory liability includes a mental element. With respect to aiding and abetting, the Court of Appeal in Specialised Livestock Imports Ltd v Borrie CA 72/01 20 September 2002 at [155] cited R v Samuels [1985] 1 NZLR 350 for the proposition that the essence of aiding and abetting is intentional help. In Yorke v Lucas, the Full Federal Court also held that conspiracy involves intention, requiring an agreement between two or more people to carry out a proscribed act. It also held that the word “counsel” is probably equivalent to “instigate”, and adopted Attorney-General’s Reference (No.1 of 1975) [1975] 1 QB 773 for the proposition that to procure means to produce by endeavour. The Court held that counselling and procuring involve an element of intent. In the New Zealand statute, s83(1)(e) expressly requires that the accessory “knowingly” participate.

[226] Yorke v Lucas dealt with accessory liability for misleading and deceptive conduct under the Trade Practices Act 1974. (The corresponding provisions in New Zealand law are to be found in the Fair Trading Act, which contains accessory liability provisions in s43.) The Australian accessory liability provision (s75B of the Trade Practices Act 1974) was materially identical to s83. The Full Federal Court noted that s75B applied the doctrine of aiding and abetting to a statutory offence involving no element of intention, and held that it is sufficient that the accessory know the essential matters that constitute the wrong. That is, the mental element of the wrong was established by proof of knowledge of the essential facts.

[227] The Court also held that it was enough if the accessory had actual or constructive knowledge of the essential facts, following R v Glennan (1970) 91 WN (NSW) 609, in which the Court of Criminal Appeal in New South Wales held that a person may be convicted as an aider and abettor if he or she deliberately failed to obtain knowledge by making reasonable inquiry in circumstances where he or she suspected the existence of a fact that may be revealed upon inquiry. The element of knowledge or intention could be proved by showing that the person knew or suspected the existence of facts that would constitute the commission of the offence or, perhaps, that he acted carelessly, not caring whether the facts existed or not. The Court also referred to Lenzi v Miller [1965] SASR 1, a decision of the Full Court of the Supreme Court of South Australia, in which the Court held that a person cannot be convicted of aiding and abetting in the commission of an offence unless he knew the essential facts that must be proved, subject to the qualification that anyone may be deemed to know anything to which he shuts his eyes.

[228] However, Yorke v Lucas does not appear to state the law in Australia with respect to the mental element of accessory liability. In Giorgianni v R (1985) 58 ALR 641, the High Court disapproved of both R v Glennan and Lenzi v Miller. The case concerned the offence of dangerous driving, which referred to the behaviour of the driver and did not require any given state of mind as an element of the offence. The appellant, who was the employer of the driver, was charged as an accessory. The High Court held that both knowledge of the circumstances and intention to aid, abet, counsel or procure were necessary to render a person liable as a secondary party. That corresponds to the position in New Zealand criminal law, which recognises that inadvertent or accidental assistance is not culpable.

[229] Giorgianni v R was followed in Specialised Livestock Imports Limited v Borrie (above), which concerned the accessory liability provisions of the Fair Trading Act. The Court held, per McGrath J, that as those provisions import the requirements of the criminal law, accessories must know of the principal’s contraventions and intentionally participate in them.

[230] I conclude that an accessory is liable under s83 only if its participation was intentionally aimed at the commission of the acts that form the principal’s contravention, namely the acquisition of assets or shares. Mr Goddard pointed out that it will be a rare case in which participation is not deliberate. That may be true of the major participants, but it need not be so of those at the margins of the transaction.

[231] Nor does it appear that Yorke v Lucas is still good law to the extent that it holds that constructive knowledge suffices for accessory liability. In Giorgianni v R, Gibbs CJ also held, at 648 that it is not enough to render a person liable as a secondary party that he ought to have known all the facts and would have done so if he had acted with reasonable care and diligence. More recent decisions under s75B have treated a requirement for actual knowledge as settled law: Caple v All Fastener [2005] FCA 1558, Compaq Computer Australia Pty Ltd v Merry (1998) 157 ALR 1.

[232] Constructive notice is the knowledge that the Courts impute to a person who knows something that ought to have put him on inquiry or who wilfully abstains from inquiry; Espin v Pemberton (1859) 3 De G and J 547. It imports a duty of inquiry. It is an equitable doctrine that is not lightly imported into commercial transactions: see for example Equiticorp Industries Group Limited (In Statutory Management) v The Crown (Judgment No. 47) [1998] 2 NZLR 481 at 633. In my view, it has no place in a case involving accessory liability provisions drawn from the criminal law and civil penalties the closest parallel to which is a fine.

[233] The Federal Court in Yorke v Lucas may have intended by the term “constructive knowledge” to refer to wilful blindness, which may found liability. That is so because it may justify an inference that the accessory actually knew the facts and, perhaps, deliberately refrained from further inquiry so that knowledge could later be denied: Giorgianni at 664, per Wilson, Deane, and Dawson JJ, followed in Compaq Computer Australia Pty Ltd v Merry (1998) 157 ALR 1, 5. Thus it is not an exception to the rule that actual knowledge is required.

[234] I find support in s90 for my conclusion that actual knowledge is necessary. That section provides that where it is necessary to establish the state of mind of a body corporate or principal, it is sufficient to show that an agent of that person, acting within the scope of his actual or apparent authority, had that state of mind. This language does not naturally extend to constructive knowledge, which presumes that the person concerned does not have the necessary state of mind but deems him to have it because he was under a duty to inquire.

[235] The purpose of the 1990 amendments may also be taken into account. One purpose of legislation intended to reduce compliance costs must be that, where possible, vendors and others should be able to judge before concluding a transaction whether they risk liability. An actual knowledge standard is no bright-line rule, but it does allow participants to assess risk by examining what they (and their agents, where s90 applies) know; constructive knowledge would compel them to do so by reference to further facts they would have learned had they made reasonable inquiries.

What must an accessory know?

[236] It was common ground that an accessory must know essential facts, being facts that sufficiently establish a contravention of s47. Mr Goddard contended that it need not know that the facts contravene the section. For the latter proposition he cited Rural Press v ACCC [2003] HCA 75, in which the High Court confronted a submission that the defendants must be shown to know that the principal’s conduct was engaged in for the purpose or had the likely effect of substantially lessening competition. Gummow, Hayne, and Heydon JJ held at [48] that:

It is wholly unrealistic to seek to characterise knowledge of circumstances in that way. Only a handful of lawyers think or speak in that fashion, and then only at a late stage of analysis of any particular problem. In order to know the essential facts, and thus satisfy s75B(1) of the Act and like provisions, it is not necessary to know those facts are capable of characterisation in the language of the statute.

[237] I accept that the Commission need not show that the accessory was conscious that the facts known to it established a contravention of s47. Mr Carruthers resisted this conclusion, pointing out that in this case it could result in liability although Infratil had legal advice to the effect that the transaction did not contravene s47 and knew that the Commission itself had expressed uncertainty. But a requirement that an accessory know the transaction contravened s47 would deprive s83 of most of its substance; as the Court pointed out in Rural Press, few people think in those terms. Nor would it be consistent with accessory liability provisions in the criminal law, where it is immaterial to liability that the accessory did not appreciate that the principal was committing an offence.

[238] What then are the essential facts that an accessory must know? They are not easily stated, at least in the abstract, but I was told that the claim against the Waddell interests and Infratil has caused concern among practitioners and the Commission invited me to provide such guidance as I can. Mr Goddard submitted that the essential facts are the nature of the businesses of the two parties to the transaction, the general market environment in which they operate, that the two parties are actual or potential competitors, and that the transaction is likely to substantially lessen competition in the market. I observe that the last of these points is a conclusion rather than a fact.

[239] The test must be directed to the facts that have led the Court to conclude, as against the acquirer, that the acquisition is likely to substantially lessen competition. In that context, the essential facts must begin with the knowledge of the number and size distribution of the market participants. That in turn involves an appreciation of the extent to which substitution occurs, since that defines the boundaries of the market. There must also be some appreciation of the things that create market power (such as barriers to entry, product differentiation, and vertical integration). This is an imposing list, but it comprises things that any substantial and longstanding market participant is likely to know, at least in general layman’s terms, because success in business depends on them. Nor must the Commission prove a comprehensive knowledge of the facts; it is enough if the known facts establish a breach. Turning to the transaction, the essential facts must include facts that led to the Court’s conclusions about the likely market position of the merged firm and what is likely to happen to the assets or shares concerned if the transaction does not proceed, since these facts establish the factual and counterfactual against which the Court applied the competition test. The essential facts must further include facts that establish a significant competitive advantage is likely to result from the transaction. That knowledge is likely to be derived from awareness of the market position of the merged firm upon the merger.

Attribution of an agent’s state of mind to a principal

[240] Section 90 provides for attribution of knowledge both to a corporate defendant and to a person other than a body corporate. In each case, it is sufficient to show that a servant or agent (or a director in a case of a body corporate) had the required state of mind. That requires proof that the person whose knowledge is to be attributed to the principal was indeed a director, servant or agent and was acting within the scope of his actual or apparent authority. The section provides:

90 Conduct by servants or agents

(1) Where, in proceedings under this Part of this Act in respect of any conduct engaged in by a body corporate, being conduct in relation to which any of the provisions of this Act applies, it is necessary to establish the state of mind of the body corporate, it is sufficient to show that a director, servant or agent of the body corporate, acting within the scope of his actual or apparent authority, had that state of mind.

(2) Any conduct engaged in on behalf of a body corporate—

(a) By a director, servant, or agent of the body corporate, acting within the scope of his actual or apparent authority: or

(b) By any other person at the direction or with the consent or agreement (whether express or implied) of a director, servant, or agent of the body corporate, given within the scope of the actual or apparent authority of the director, servant or agent—shall be deemed, for the purposes of this Act, to have been engaged in also by the body corporate.

(3) Where, in a proceeding under this Part of this Act in respect of any conduct engaged in by a person other than a body corporate, being conduct in relation to which a provision of this Act applies, it is necessary to establish the state of mind of the person, it is sufficient to show that a servant or agent of the person, acting within the scope of his actual or apparent authority, had that state of mind.

(4) Any conduct engaged in on behalf of a person other than a body corporate—

(a) By a servant or agent of the person acting within the scope of his actual or apparent authority; or

(b) By any other person at the direction or with the consent or agreement (whether express or implied) of a servant or agent of the first-mentioned person, given within the scope of the actual or apparent authority of the servant or agent

shall be deemed, for the purposes of this Act, to have been engaged in also by the first-mentioned person.

(5) A reference in this section to the state of mind of a person includes a reference to the knowledge, intention, opinion, belief or purpose of the person and the person's reasons for that intention, opinion, belief or purpose.

Standard of proof

[241] The civil standard of proof applies. In penalty cases, the Court applies the principle that the more serious the issue the greater should be the care used in assessing it: Commerce Commission v Fletcher Challenge Ltd [1989] 2 NZLR 554 at 573 (HC). In proceedings under s83, the Commission does not enjoy the benefit of s79, which provides that the Court may receive in evidence any otherwise inadmissible statement, document, or information that may in the Court’s opinion assist it to deal effectively with the matter.

Liability of the vendors

[242] The Commission commenced its case against the Waddell interests by pointing out that the letter agreement of 9 November 2005 required that NZ Bus involve them in its clearance application, consult them as to its contents, and update them regularly as to its progress. Clause 7.2 of the agreement for sale and purchase was to similar effect. The evidence established that Infratil and NZ Bus did involve the Waddell interests to some extent. It provided a draft clearance application and discussed facts that related to the Mana business, and also provided them with some of the copies of correspondence from the Commission, although Ms Waddell did not see the letter of 9 March 2006. [243] The Commission next pointed out that, following discussions with Ms Waddell and Mr Tizard, the Waddell interests agreed to waive the condition requiring clearance or authorisation on condition that NZ Bus supplied an indemnity against costs, fines, expenses, losses and legal fees. This action was sufficient to establish participation in the breach, for reasons outlined above, and knowledge of the acquisition.

[244] Turning to the question of knowledge, the Commission pointed out that the indemnity established that the Waddell interests knew litigation was possible. In supplementary submissions, the Commission observed that Ms Waddell had a good understanding of the Mana business and the bus industry in Wellington. All of the vendors were parties to the Heads of Agreement. There is an irresistible inference that those defendants who are executives or directors of Mana have the requisite level of familiarity with the business environment and the circumstances of the transaction. I was invited to attribute the directors’ knowledge to other shareholders on the ground that Mana is a family company.

[245] Mr Tizard submitted that the Waddell interests lacked the necessary knowledge of essential facts. One of them, Ms Waddell, saw the application for clearance and supplied some unspecified factual information upon request in respect of the application. She had not seen the Commission’s letter of 9 March 2006, and was not involved in discussions between the Commission and NZ Bus. Nor did she know that the Commission was being told by other operators that they would only enter Wellington by acquiring Mana. She was not told that there was a real risk that the Commission would decline the clearance application: on the contrary, she was told that the Commission had hinted that the application should be withdrawn and that NZ Bus’ legal advice was that the application need not have been made.

[246] On the facts, the managers and directors of Mana knew of the market position of NZ Bus and Mana before and after the transaction, that both Mana and NZ Bus have power over price vis-à-vis the GWRC and the Ministry (because contract prices are higher where there is no competition), that Mana and NZ Bus can compete in one another’s territory (in Mana’s case by exploiting existing assets), that there is a tacit understanding that the two firms will not do so, and that the counterfactual is sale to another major bus company. They also knew of the waiver. Kerry Waddell, Ian Waddell, and Jo Copland have a longstanding involvement in Mana. All were parties to the invitation to NZ Bus to invest in Mana and the Heads of Agreement, which created the restraints of trade. Ms Waddell and Ms Copland are managers of the business. In the circumstances of this case, their knowledge of these facts is sufficient for purposes of s83.

[247] The Commission attached much weight to knowledge of its own concern that the transaction might breach s47. I am unable to see that Mana’s knowledge of the views of Commission staff takes the Commission very far, even had those conclusions been definite and authoritative. Awareness of potential litigation is not synonymous with knowledge of the essential facts, which relate to the conduct of Mana’s business over a long period of time. And Ms Waddell had been told that the Commission itself had hinted that the clearance application should be withdrawn.

[248] The next question is whether the knowledge of Mana’s directors and executives can be attributed to the Waddell interests. The question does not arise insofar as the executives and directors are shareholders in their own right. It does arise, however, with respect to their spouses or investment vehicles, and with respect to Blairgowrie Investments. The facts knowledge of which must be attributed to the remaining shareholders are not confined to the waiver, in respect of which Ms Waddell clearly acted as agent of the other shareholders since she procured their consent. That evidence does not establish a general agency, and it proves only knowledge of the act (the acquisition) that contravened s47.

[249] A director or executive is not ordinarily an agent of a shareholder. On the facts, there was no evidence to justify an inference that the directors and executives of Mana were agents of the other shareholders, let alone to establish the scope of their actual or apparent authority. (Nor was my attention drawn to evidence that any of the Mana directors is also a director of Blairgowrie Investments or Copland Neyland Associates.) Family relationships alone do not justify an inference that the directors of Mana are agents of its shareholders.

[250] It follows that the Commission has established contravention of s83 against Kerry Waddell and Ian Waddell, but not against Ms Copland’s investment vehicle, Copland Neyland Associates Ltd (Ms Copland herself is not a defendant.) There will be a declaration that Kerry Waddell and Ian Waddell have contravened s83(1)(c) and (e). The Commission has failed against the other second defendants.

Liability of Infratil

[251] The Commission relies upon Infratil’s admitted involvement in the dealings with the Commission, its awareness of the Commission’s letter of 9 March, and its involvement in the waiver. Mr Ridley-Smith accepted in evidence that his decisions were effectively made for both Infratil and NZ Bus, whose involvement in the purchase he was co-ordinating. He also confirmed that the decision to waive the condition was made by the Infratil Board on his advice. There can be no doubt that Infratil was concerned, and assisted NZ Bus, in the decision to waive the condition.

[252] Mr Goddard submitted that the accessory provisions must be intended to capture a parent company that effectively runs a transaction, makes all the relevant decisions, and is aware of but elects to runs a Commerce Act risk. For reasons outlined above, I prefer the view that the Commission must show that Infratil deliberately assisted NZ Bus, knowing as it did so essential facts sufficient to establish contravention. It knew the Commission might sue – indeed, it took a calculated risk - but that does not mean it knew the essential facts, as I have found them to be. Equally, its belief (on legal advice) that the acquisition probably complied with s47 does not supply a defence, although it may affect penalty. The most that can be said is that Infratil knew of the facts that the Commission had identified as the source of its belief that the transaction may not be lawful.

[253] Turning to Infratil’s knowledge of essential facts, it was plainly aware of the waiver and hence the acquisition itself. But Infratil acquired NZ Bus only in November 2005. I assume it knew little if anything about NZ Bus, Mana, and the Wellington market at that time. It did appreciate from the beginning that there was potential for competition between NZ Bus and Mana, because it authorised payment of the non- refundable $3m deposit. By 15 March, if not before, Infratil also knew the impact that the transaction would have on market share, and the likely counterfactual. That must be so, because it had been closely involved in the clearance application and the dialogue with the Commission. During that process it learned a good deal about the market, including market participants and perceived barriers to entry. Infratil knew that Mana was a substantial and efficient firm, significantly more efficient than NZ Bus itself. It thus knew that in the hands of a major rival, such as Ritchies, Mana would be a real competitor.

[254] But in this case, knowledge that Mana could compete is not enough to establish knowledge of facts establishing a substantial lessening of competition. NZ Bus’ position in the clearance application, in which Mr Ridley-Smith was involved, was that Mana could compete but that it was in no better position to do so than any new entrant, in that it too would have to acquire a new depot, fleet, and staff. There is no evidence that Mr Ridley-Smith knew that Mana could use its existing assets to compete on northern routes; the Waddell interests disclosed that in the earlier negotiations with Stagecoach plc. Nor does the evidence show that he knew of the tacit understanding, or at least that Mana and NZ Bus had chosen not to compete in circumstances where competition was viable. He did not attend the 14 February meeting with the Commission, at which Mr Martin made it clear that NZ Bus would retaliate if Mana initiated competition.

[255] The Commission’s claim against Infratil fails.

Decision

[256] There will be a declaration that the acquisition of the Waddell interests’ shareholding on 15 March 2006 is likely to substantially lessen competition in the Wellington regional market for rights to supply subsidised scheduled public and school bus services, and so contravened s 47.

[257] I have found that Kerry Waddell and Ian Waddell contravened s 83(1)(c) and (e) by participating in the waiver with knowledge of essential facts sufficient to establish contravention of s.47.

[258] Questions of relief and penalty remain to be settled, and the proceeding should be called before me to set a timetable. There will be leave to apply, on short notice if need be.

Costs [259] The Commission has succeeded overall and will have its costs. Recognising the expertise required, the complexity of the evidence, and the urgency with which the proceeding was brought on, costs will be awarded on a 3C basis with provision for two counsel. Because Infratil and NZ Bus are closely identified and were represented by the same solicitors and counsel, I will not award costs to Infratil. Rather, the Commission will have one set of costs only. Allocation between the unsuccessful defendants may be controversial, so I will not fix their individual liability for costs in this judgment. Counsel may file memoranda if costs or their allocation cannot be agreed.

In accordance with r540(4) I direct the Registrar to endorse this judgment with the delivery time of …2.15pm……..on the29th day of June 2006.

F Miller J

Solicitors: K Grau, Commerce Commission, Wellington for Plaintiff Buddle Findlay, Wellington for First and Third Defendants Oakley Moran, Wellington for Second Defendants