IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE CIV-2020-404-657 [2020] NZHC 1029 BETWEEN NZME LIMITED Plaintiff AND NINE ENTERTAINMENT CO. HOLDINGS LIMITED Defendant Hearing: 15 May 2020 Counsel: J E Hodder QC and J W J Graham for plaintiff J Dixon QC, K Massey and C Butters for defendant Judgment: 18 May 2020 JUDGMENT OF KATZ J This judgment was delivered by me on 18 May 2020 at 4:00pm Pursuant to Rule 11.5 High Court Rules Registrar/Deputy Registrar Solicitors: Chapman Tripp, Auckland Russell McVeach, Auckland Counsel: J E Hodder QC, Barrister, Auckland J Dixon QC, Shortland Chambers, Auckland NZME LIMITED v NINE ENTERTAINMENT CO. HOLDINGS LIMITED [2020] NZHC 1029 [18 May 2020] Introduction [1] NZME Limited is a publicly listed New Zealand media company with a portfolio of newspaper, radio, digital and magazine titles. [2] Nine Entertainment Co. Holdings Limited is a publicly listed Australian media company. Through its subsidiary Fairfax Corporation Pty Ltd, Nine is the ultimate owner of 100 per cent of the shares in the Stuff group of companies, which provide news, media, entertainment and other services in New Zealand. [3] Since September 2019, NZME has been negotiating with Nine regarding a possible purchase of Nine’s shares in Stuff. Nine recently terminated negotiations with NZME, however, and entered into negotiations to sell Stuff to a third party. NZME alleges that Nine’s conduct breaches the terms of an exclusivity agreement between the parties. It seeks an interim injunction to enforce the terms of that agreement. NZME’s application came before me on a Pickwick basis. Background The negotiations between the parties [4] In 2016, NZME and Fairfax sought clearance from the Commerce Commission to merge their respective New Zealand operations. The Commission declined to grant authorisation in May 2017.1 That decision was upheld by both the High Court and the Court of Appeal.2 [5] In September 2019, NZME and Nine resumed their discussions, focussing on a possible purchase by NZME of Nine’s shares in Stuff. Nine’s evidence is that, from the outset, it was not interested in any deal that would require Commission clearance, as this would likely involve a lengthy delay and an uncertain outcome. Nine was concerned that it may well be difficult to persuade the Commission to reach a different conclusion to that it had previously reached, and staunchly defended on appeal. 1 2 NZME Ltd and Fairfax New Zealand Ltd [2017] NZCC 8. NZME Ltd v Commerce Commission [2017] NZHC 3186; NZME Ltd v Commerce Commission [2018] NZCA 389, [2018] 3 NZLR 715. [6] Between October 2019 and March 2020, the parties worked together on an alternative transaction structure which would have required NZME to obtain government support to hold a “Kiwi Share” in Stuff. The aim was to allow editorial functions of the two entities to be kept separate, hopefully allaying competition concerns. By March 2020, however, the parties had not yet secured government support for this proposal. [7] Following the onset of the COVID-19 pandemic and an associated decline in Stuff’s advertising revenues, time became of the essence. [8] As an alternative approach, the parties decided to explore seeking Commission approval for NZME’s acquisition of Stuff Even if a transaction might otherwise have anti-competitive features, an application can be made to the Commission for clearance on the basis that The parties hoped that, if the matter was approached a formal clearance application would not be required. Alternatively, if it was required, the parties hoped that it would be able to be dealt with on a “fast track” basis, prior to the end of May 2020. [9] On 22 April 2020, NZME made a non-binding indicative offer (“NBIO”) for Nine’s shares in Stuff. The NBIO provided for a “top up” due diligence period from the date of the letter and “continuing for two weeks from the date that access has been granted to all of the top up due diligence materials.” NZME also requested an undertaking: …that Nine will not solicit or otherwise engage in negotiations with any other parties during this diligence period, that Nine notifies NZME of any competing proposals received during the exclusivity, and NZME has matching rights for any competing proposal received by Nine. [10] The following day Nine sent an email to NZME advising that “as discussed we would like to proceed on the terms as outlined in your letter”. I will refer to the binding aspects of the NBIO, namely the agreed access to the due diligence materials and the exclusivity arrangements as “the exclusivity agreement”. The competing offer [11] On 6 May 2020, Nine received an indicative offer to buy Stuff from a competing bidder. The proposed deal did not require Commission approval and therefore, in principle, could be concluded by 31 May 2020. [12] Nine advised NZME of the competing proposal on 7 May 2020 and told NZME that if it did not match it within 24 hours, Nine anticipated terminating negotiations with NZME. Nine subsequently did terminate the negotiations and withdrew NZME’s access to the due diligence data room. Nine then progressed negotiations with the competing bidder. NZME’s position – the exclusivity agreement has been breached [13] It is common ground that access to the data room was withdrawn during the exclusive 14-day period provided for in the exclusivity agreement.3 Based on Nine’s evidence, it is also clear that negotiations with the competing bidder took place within the exclusive 14-day exclusivity period. [14] NZME accordingly alleges that Nine has breached the exclusivity agreement. It seeks various interim orders aimed at obtaining specific performance of that agreement. These include orders that, until the due diligence period is completed, Nine be restrained from entering into any agreement to sell shares in Stuff, or engaging in negotiations with any third party in relation to such a sale. NZME also seeks an order requiring Nine to give it access to the due diligence materials until the 14-day exclusive period has expired. [15] NZME’s view is that if the interim orders it seeks are not granted it will be deprived of the opportunity to put forward a proposal that matches, or essentially matches, the competing proposal Nine says it has received. Mr Boggs, the Chief Executive Officer of NZME, deposed that NZME is progressing matters with the aim 3 There is a dispute between the parties as to whether or not the due diligence period has yet commenced. Nine say it commenced when it gave NZME access to a data room, and eight days of the due diligence period have now elapsed. NZME says the period has not yet commenced as it has outstanding requests for further material and the two-week due diligence period will only commence when that information is provided. that at the end of the exclusivity period it will be able to advance an unconditional offer for Stuff that would match any competing offer. NZME does not accept that there is no prospect of it being able to match the competing offer. For example, Mr Hodder QC suggested the prospect of last minute government intervention to enable an NZME/Nine deal to proceed without Commission clearance cannot be ruled out. Further, NZME might still be able to obtain clearance by the end of the month particularly if Nine were to co-operate in the process and the third-party offer is not credible. Alternatively, NZME could decide not to seek clearance (albeit Mr Hodder acknowledged this would be a bold and highly unusual move). [16] Mr Hodder emphasised the sanctity of contract and the importance of the court upholding commercial agreements. Finally, he submitted that Nine’s argument that the exclusivity agreement has come to an end as a result of frustration is untenable. Nine’s position – the exclusivity agreement has been frustrated [17] Nine, on the other hand, submitted that there is no realistic prospect that NZME will be able to meet the competing offer, even if it is given a further period in which to attempt to do so (and further access to the due diligence materials). That is because the competing offer is not conditional on Commission clearance. Even if NZME could match all the other terms of the competing offer, it would still need to obtain Commission clearance. Any suggestion that Commission clearance could somehow be side-stepped is entirely unrealistic. [18] Nine’s evidence was that all efforts to find an alternative way to proceed, avoiding the need for a formal clearance application, have now failed. The Commission has advised that it will not address the matter informally and requires a formal clearance application. Attempts to find a political solution have also been unsuccessful. For example, the Minister of Broadcasting has advised that no special legislation will be forthcoming to enable NZME to circumvent the Commission’s processes. [19] [20] Because of these developments, Nine’s view is that the exclusivity agreement became frustrated by no later than 6 May 2020 (when the competing offer was made) and has now come to an end. The doctrine of frustration recognises that there will be circumstances where the sanctity of contract should yield to the impossibility, or futility, of performance under the contract.6 [21] Nine submitted that the practical reality of the current situation is that NZME is seeking to compel Nine’s subsidiary Stuff to provide NZME – its closest competitor – with highly confidential/commercially sensitive information about its business so that NZME can conduct due diligence for an acquisition that no longer has any practical likelihood of occurring. [22] Mr Dixon further submitted that the interim orders sought can only compel access to the due diligence information and a ceasing of negotiations with the competing bidder for a limited further period (NZME says 14 days or more, Stuff says eight days). At the end of that time, Nine would be free to (and says that it will) terminate discussions with NZME and seek to strike a deal with the competing bidder. Nine’s view is that if the interim orders are made, the resulting delay could result in the failure of an alternative transaction that Nine believes has a real prospect of success and which would preserve jobs within Stuff and ensure robust competition in the media marketplace. 4 5 6 Commerce Commission Mergers and Acquisitions Guidelines (July 2019), Commerce Commission Mergers and Acquisitions Guidelines (July 2019), See, generally, Planet Kids Ltd v Auckland Council [2013] NZSC 147 at [60]-[62]. Should NZME’s application be granted? [23] The High Court Rules provide, in relation to without notice applications, that the Court may make the orders sought in the application; make any other order the Judge thinks just in the circumstances; or dismiss the application.7 [24] The general principles relating to interlocutory injunctions are well established.8 The Court must have regard to:9 (a) whether there is a serious question to be tried in the proceeding; (b) where the balance of convenience lies; and (c) ultimately, the overall justice of the case. Is there a serious question to be tried? [25] There is clearly a serious question to be tried as to whether the exclusivity agreement has been breached. Determination of NZME’s breach of contract claim will likely turn on whether, at trial, the Court accepts Nine’s argument that the exclusivity agreement was frustrated and therefore came to an end. If the exclusivity agreement was not frustrated, then (on the information currently available) the exclusivity agreement appears to have been breached. Where does the balance of convenience lie? [26] The next step is to consider where the balance of convenience lies. Determining the balance of convenience requires consideration of the impact on the parties of the granting of, or the refusal to grant, the interim orders sought by NZME. How will NZME be impacted if interim orders are not made and it is later held at trial that its contractual rights were breached? On the other hand, how will Nine be impacted if the interim orders are made and NZME later fails to establish its case at trial? Ultimately, I must determine whether granting or refusing NZME’s application 7 8 9 High Court Rules 2016, r 7.46. American Cyanamid Company v Ethicon Limited [1975] AC 396, [1975] 1 All ER 504 (HL); Consolidated Traders Limited v Downes [1981] 2 NZLR 247 (CA); Harvest Bakeries Ltd v Klissers Farmhouse Bakeries Ltd [1985] 2 NZLR 129 (CA). Harvest Bakeries Ltd v Klissers Farmhouse Bakeries Ltd [1985] 2 NZLR 129 (CA). is the course which, after NZME’s claims have eventually been determined, would allow the adjustment of the rights of the parties in a way that accords with fairness and justice.10 Maintaining the status quo is a relevant factor in assessing the balance of [27] convenience. Determining precisely what the status quo is in this case, however, is not straightforward. From Nine’s perspective the status quo is that it is currently in advanced negotiations with a competing bidder. The status quo prior to Nine’s alleged breach of contract, however, was that the exclusivity period still had some time left to run. On balance, the stronger argument appears to be that preserving the status quo favours holding Nine to the exclusivity agreement. The next consideration is whether damages would be an adequate remedy for [28] NZME if I declined to make the interim orders it seeks, and it was subsequently successful at trial. The costs that NZME has incurred in attempting to negotiate an agreement with Nine would presumably be fairly easy to quantify. Any losses associated with NZME’s loss of opportunity to complete the due diligence process and attempt to match the proposal of the competing bidder, however, are likely to be harder to quantify. On the other hand, there appears to be considerable force in Nine’s submission [29] that a further period of due diligence will not alter the fact that NZME will not be able to match the competing bid in at least one key respect, namely that the competing bid is not conditional on Commission approval. Given the tight timeframes involved that appears likely to be the critical (and determinative) difference between the competing offers. [30] Further, Nine has no obligation to conclude a deal with NZME, even if the interim orders are made. The need to obtain clearance, the time it would take to achieve that, and the uncertainties around the outcome, all lend credibility to Nine’s claim that it cannot and will not do a deal with NZME, regardless of the outcome of the present application. Quite simply, from Nine’s perspective time has run out for 10 Congoleum Corp v Poly-Flor Products (NZ) Ltd [1979] 2 NZLR 560 (CA) at 571. the NZME deal. There is no longer any realistic prospect of the deal coming to fruition in a time frame that is acceptable to Nine, for the reasons outlined previously. [31] It necessarily follows that the transaction that appears to have the best (Nine would say the only) prospect of success is that with the competing bidder. If the interim orders were granted this would inevitably delay Nine being able to progress matters with the competing bidder. I accept Mr Dixon’s submission that this could potentially be fatal to that transaction [32] Of course, there is always a prospect that things could change, as Mr Hodder pointed out. The government may change its position on promoting legislation to bypass the need for Commission clearance. The competing offer may fall over. All of these possibilities, however, are speculative. I must determine NZME’s application on the information currently before me. Obviously, however, if circumstances do change, it is open to NZME and Nine to resume their commercial negotiations at any time, prior to a deal being concluded with a third party. Nine is no doubt motivated to achieve the best deal it can. [33] If I grant the interim orders sought, and NZME’s claims later fail at trial, it will likely to be very difficult to quantify Nine’s losses in monetary terms, particularly if the delay results in Nine failing to conclude a deal with the competing bidder. Damages are therefore unlikely to be an adequate remedy for either party. [34] Ultimately, however, I have concluded that the risk of doing an injustice to Nine (by granting the injunction) is greater than the risk of doing an injustice to NZME (by not granting the injunction). [35] If an injunction is not granted, NZME will lose the opportunity to try and match any competing offer over the remainder of the due diligence period. For the reasons previously outlined, however, the prospect of NZME being able to match a competing offer that is not conditional on Commission approval currently appear to be extremely low. Further, Nine has no obligation to enter into a deal with NZME and says that it will not do so. If that is so, then all that NZME may realistically be able to achieve, if an injunction is granted, is to delay any negotiations between Nine and the competing bidder. Given this context, any “loss of a chance” damages suffered by NZME as a result of a breach of the exclusivity agreement may ultimately prove to be very modest. [36] Nine, on the other hand, could potentially suffer very significant losses if it is unable to conclude a transaction with the competing bidder by 31 May 2020, as a result of delays caused by an injunction. Further, the consequence of making the interim orders sought would be to compel Stuff to provide NZME, its main competitor, with highly commercially sensitive information about its business. This would occur in circumstances where there no longer appears to be a realistic prospect of a deal between NZME and Nine being concluded by 31 May 2020 (barring a material change in circumstances). [37] Overall, taking the various matters I have outlined above into account, it is my view that the balance of convenience weighs against granting the interim orders sought by NZME. The overall interests of justice [38] The third and final stage in the inquiry is to assess whether the overall interests of justice dictate a different result. For the reasons I have outlined, it appears that granting the interim orders sought by NZME may increase the risk of Stuff ceasing operations. This would have two consequences that are relevant to the overall interests of justice: (a) a loss of competition in the media marketplace, which would be contrary to the public interest; and (b) [39] significant job losses. The courts have consistently emphasised that the impact on third parties (here, Stuff’s employees) is a “highly significant factor”11 that should be given 11 McLeish v Rock Hill Ltd (2011) 12 NZCPR 409 (HC) at [30]. “significant weight”.12 Both the public interest and the interests of third parties therefore weigh against granting the orders sought. Taking these additional factors into account, I am satisfied that it is in the overall interests of justice not to make the interim orders sought by NZME. Result [40] NZME’s application for interim orders is dismissed. [41] Costs are reserved until the substantive proceeding is determined. ____________________________ Katz J 12 Alarm New Zealand Ltd v 15 Hopetoun Ltd [2016] NZHC 813 at [63]; and The Dunes Cafe and Bar Ltd v 623 Rocks Road Ltd HC Nelson CIV-2006-442-481, 6 November 2006 at [32].