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[2019] ZACAC 2
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A'Africa Pest Prevention CC and Another v Competition Commssion of South Africa (168/CAC/Oct18) [2019] ZACAC 2 (2 July 2019)
IN
THE COMPETITION APPEAL COURT OF SOUTH AFRICA
Case
Number: 168/CAC/Oct18
In the
matter between:
A’AFRICA
PEST PREVENTION
CC
First
Appellant
MOSEBETSI
MMOHO PROFESSIONAL
SERVICES
CC
Second
Appellant
and
THE
COMPETITION COMMISSION OF SOUTH AFRICA
Respondent
Delivered:
2 July 2019
JUDGMENT
BOQWANA
JA (VICTOR JA
et
VAN DER LINDE AJA concurring)
Introduction
[1]
Section 4 (1) (b) of the Competition Act 89 of 1998 (“the
Act”), prohibits restrictive horizontal practices between firms
by stating that:
“
(1) An
agreement
between, or
concerted
practice
by,
firms
, or a decision by an association of
firms
, is prohibited if it is between parties in a
horizontal
relationship
and if -
(a)…
(b)
it involves any of the following
restrictive horizontal practices
:
(i) directly or indirectly fixing a purchase or
selling price or any other trading condition;
(ii) dividing markets by allocating customers,
suppliers, territories, or specific types of
goods or services
;
or
(iii) collusive tendering.”
[2]
The fundamental concern is that these
practices may deprive “
the marketplace
of the independent centers of decisionmaking that competition assumes
and demands”
[1]
,
in that “
two or
more entities that previously pursued their own interests separately
are combining to act as one for their common benefit.
This not
only reduces the diverse directions in which economic power is aimed,
but suddenly increases the economic power moving
in one particular
direction.”
[2]
[3]
These contraventions are commonly referred to as
per se
prohibitions, as the efficiency defence expressed in section 4 (1)
(a) cannot be raised, due to their being inimical to economic
competition.
[4]
In terms of section 4 (5), however, section 4 (1) prohibitions
do not apply to:
“…
(a) a
company,
its
wholly owned subsidiary
as contemplated in
section 1 (5) of the Companies Act, 1973
, a
wholly owned subsidiary of that subsidiary or any combination of
them;
or
(b)
the constituent firms within a single economic
entity similar in structure to those referred to in paragraph
(a)
.”
(underlined for emphasis)
[5]
The appeal before us concerns the interpretation of this
section. Pursuant to a complaint of price fixing and collusive
tendering,
referred by the Competition Commission (“the
Commission”) to the Competition Tribunal (“the
Tribunal”),
against the appellants (i.e. A’Africa and
Mosebetsi), the Tribunal found that the appellants had contravened
sections 4 (1)
(b) (i) and (iii) of the Act. This arose from
the appellants having submitted identical quotations for fumigation
services
at Hertzogville Magistrates Office to the Department of
Public Works (“the Department”). The appellants had
both
quoted an amount of R 2640.00 (excluding VAT in the case of the
Mosebetsi) to render the requested services.
Factual
background
[6]
The appellants are close corporations conducting business in
the pest control industry. A’Africa was established by
Aletta Labuschagne (“Labuschagne”) in October 2004, as a
sole member, to provide pest prevention and control services
to
customers in Bloemfontein and surrounding areas. In April 2006
she sold 49% of her member’s interest to Albertus
Smith
(“Smith”), which was initially registered in both his and
his wife’s names (“Mrs Smith”).
This
arrangement was later changed with Labuschagne acquiring a further 3%
of the member’s interest in the business.
Labuschagne
testified that by October 2015 she held 59% of the member’s
interest in A’Africa, whilst Mr Smith held
the remainder.
From its inception Labuschagne had managed the day to day activities
of A’Africa and its administration.
[7]
In 2008 Labuschagne and Smith incorporated another close
corporation, Mosebetsi, with the view to providing outsourced
cleaning
services; however, nothing came of this business objective,
and as a result Mosebetsi lay dormant for many years. They
decided
not to deregister it in case it became a necessary venture
for future business activities.
[8]
Meanwhile an important figure in this matter, Modise Maleho
(“Maleho”), had joined A’Africa in 2007 as a
trainee
pest control operator, later becoming a fully-fledged one.
Maleho proved to be a valuable employee. In order not to
lose
him, and to fulfil a growing demand for Black Economic Empowerment
(“BEE”) compliance so as to obtain business,
Labuschagne
and Smith decided that Maleho be offered 52 % interest in Mosebetsi,
whilst Smith and Labuschagne would hold the remaining
48% in equal
proportions. This was also because Maleho would not have been
able to buy into A’Africa.
[9]
Maleho started working as an employee of Mosebetsi in March
2014. It was agreed that initially A’Africa would cover
all the costs of establishing Mosebetsi, and thereafter it should
become self-sufficient. Maleho operated out of A’Africa’s
offices. A’Africa provided all the tools, equipment, the
material that Maleho required, and administrative services
needed to
operate the business, including its administrative assistant, Marlene
Kruger (“Kruger”), when required.
It also funded
Maleho’s salary, by loaning Mosebetsi such and all cash that it
needed to operate.
[10]
Informal members’ meetings were held monthly, which
concerned mostly discussions on problems. According to
Labuschagne,
this was where she and Smith would give Maleho
directions and in essence they “
exercised strategic and
management control
”, in that their view on an issue would
be determinative. According to Maleho, decisions were by
discussion and persuasion,
but he always looked to Labuschagne and
Smith for guidance as they were more experienced in the industry.
[11]
It is alleged that Maleho struggled to get the business off
the ground, and that as a result A’Africa, and sometimes
Labuschagne,
and/or Smith and/or A’Africa Trust (which owned
A’Africa’s intellectual property), often had to advance
funds
to Mosebetsi, allegedly “
on A’Africa’s
behalf”,
which funds “
would be accounted for in
Mosebetsi’s books as a group loans payable.
”
When Maleho did not have sufficient duties in Mosebetsi, he would
often do work for A’Africa. This became
more frequent the
longer Mosebetsi struggled.
[12]
For all intents and purposes, Mosebetsi was commercially
wholly parasitic on A’Africa. It had neither vehicle,
premises,
pesticides, telephone line, nor staff other than Maleho.
[13]
On or about 12 October 2015 Maleho broached the news of his
resignation to Labuschagne, to take up a position in Rentokil (a
bigger
competitor). On 16 October 2015 he left Mosebetsi,
offering nothing in writing. According to Labuschagne, she had
informed
him that he had to give them a written letter of
resignation, for the purposes of registering Mosebetsi’s change
of membership
with the Companies and Intellectual Property Commission
(“CIPC”). This was not done. Maleho
testified,
however, that he did not know that he had to give anything
in writing, but nevertheless viewed himself as having resigned as
both
an employee and a “shareholder”, as he put it.
He only learnt later that he was “still” a member of
Mosebetsi, in that his name was still registered with the CIPC.
[14]
It is alleged by both Labuschagne and Maleho, that since his
resignation on 12 October 2015, Maleho had not been involved in the
affairs of Mosebetsi in any capacity whatsoever. At the time of
Maleho’s departure, Mosebetsi was indebted to the A’Africa
Trust in the amount of R32 780, and to A’Africa in the
amount of R116 992. Since it had no contacts, customers,
employees or assets, it is alleged that Mosebetsi did not have any
foreseeable opportunity to trade out of these difficulties.
[15]
Labuschagne alleges that on 19 November 2015 she received two
sets of tender forms, addressed to A’Africa and Mosebetsi
individually,
from Kruger, in relation to an invitation by the
Department to submit a bid for the removal of bees at Hertzogville
DOJ & CD,
under reference number BFN/1015/102304 (“the
tender”). Kruger apparently completed the forms in
respect of both,
leaving the pricing of the quotes and signatures
blank. Labuschagne then calculated the price using A’Africa’s
hourly rates, taking into account distance and travelling times.
She further asserted that “[
g
]
iven that the same pest
control operator would be providing the service, the price was the
same for A’Africa and Mosebetsi
.” The only
difference between the quotes was VAT, which was not included in
Mosebetsi’s pricing, as it was not
a registered VAT vendor.
Labuschagne returned the completed and signed documents to Kruger,
who arranged for them to be delivered
to the Department.
[16]
During the screening of the bids, the Department noticed that
the forms submitted by A’Africa and Mosebetsi were identical,
or contained similarities in many respects, ranging from the
handwriting, address, signatures and an indication that Smith and
Labuschagne appeared on the CIPC documents of both firms, showing
that they were members of both firms. There was also no
disclosure on the quotations submitted that the firms were related.
The appellants, in fact, answered this question in the
negative.
Labuschagne’s explanation for this, was that she had always
answered “no” to this question, well
before Mosebetsi
came into existence. Kruger, who took over the completion of
forms and who completed the current ones, simply
copied what
Labuschagne had previously done. Without question when
receiving the forms from Kruger she, Labuschagne, did
not pay that
much attention to that question; she simply filled in the missing
information and signed. Kruger was not called
as a witness to
verify this. Maleho’s explanation as to why he completed
the forms in the manner he did when still
with Mosebetsi, was that he
had thought that the question was directed at him as a person.
[17]
Pursuant to these perceived irregularities, Petrus Whielers
(“Whielers”) of the Department lodged a complaint with
the
Commission, on behalf of the Department, regarding possible
collusive tendering in respect of the above tender. The
Commission
conducted an investigation and concluded that the
appellants had contravened the Act, as they appeared to have engaged
in collusive
tendering. Whielers also submitted quotations
submitted by the appellants in the past, at the request of the
Commission.
These were the subject of the striking out
application at the Tribunal, which was unsuccessful. I deal
with that later.
[18]
The Commission referred a complaint to the Tribunal on the
basis that the appellants “…
whilst being firms in
the horizontal relationship have entered into an agreement and/or
alternatively engaged in a concerted practice
to fix prices and
tender collusively when bidding”
for the tender, and that
“[
t
]
his conduct may amount to
price fixing
and
collusive tendering
in contravention of
sections 4(1)(b)(i) and (iii) of the Act.” (Own
emphasis.)
Further that “[
t
]
he respondents
have entered into
an agreement or an arrangement to
coordinate their tender bids
when bidding for tender
…
in that they charged similar prices
.”
(Underlined for emphasis.) Further that “
the
tender documents of the respondents were completed and signed by the
same person. In addition, the respondents have common
shareholders and directors, namely, Ms Aletta Magrieta Elizabeth
Labuschagne and Albertus Joubert Smith
.”
[19]
The appellants raised contentions that at the relevant period,
they were constituent firms within a single economic entity, as
envisaged
in section 4 (5); that, in any event, properly
characterised, their conduct did not coincide with the character of
the prohibition
in section 4 (1) (b) (i) and (iii) of the Act; and
that they were not in a horizontal relationship.
The
Tribunal’s decision
[20]
The Tribunal found that the threshold in section 4 (5) (b) of
the Act, requiring the concerned firms to be “
similar in
structure
” to a parent and a wholly owned subsidiary
(whilst the subordinate need not be wholly owned), was not met.
This was
because the common membership that existed between Mosebetsi
and A’Africa (Labuschagne and Smith) was capable of only
exerting
partial or joint control over one of the two firms (i.e.
Mosebetsi).
[21]
It held that Labuschagne and Smith did not have
de jure
control of Mosebetsi as they together held only 48% members
interest. It also found that, in its view, the evidence
indicated
that, factually, the majority of strategic decisions
regarding Mosebetsi were made jointly with Maleho, “
Mosebetsi
did enjoy a degree of autonomy in determining its course of action in
the market, even bidding for tenders without instruction
from Mr
Smith or Ms Labuschagne
” and “[
t
]
he fact
that the respondents shared premises, equipment and consumables is
not sufficient to constitute a complete unity of interest,
especially
considering that A’Africa recorded these expenses as loan
accounts payable to A’Africa by Mosebetsi
.”
(Footnote omitted.)
[22]
In its view, the fact that Labuschagne and Smith may have had
negative control over Mosebetsi, for the purposes of section 12 (2)
(g) of the Act, did not make the firms exempt from section 4 (1)
(b). It noted that Maleho’s departure as a
de facto
joint controller did not significantly change the structure of the
relationship between the appellants; he remained a 52%
de jure
member in Mosebetsi, allowing it to retain its status as a majority
BEE owned entity, benefiting from the public procurement advantages
that came with it. Finally, on this point, the Tribunal pointed
out that “
any control exercised by Ms Labuschagne and Mr
Smith, was done solely as members of Mosebetsi, and not in the
capacity of A’Africa.
To thus conclude that Mosebetsi and
A’Africa are part of a single economic entity would be
incorrect
.”
[23]
As to the issue of characterisation, the
Tribunal concluded that the “suppression” involved in
this case was the kind
that could not be characterised in the manner
envisaged in
ANSAC
[3]
,
because even if the two firms formed part of a single economic
entity, they fell within the scope of section 4 (1) (b) by virtue
of
submitting two bids, which inhibited competition; the two firms
purported to be in competition with one another, whereas they
were in
fact one entity, which conduct undermined the very object of calling
for tenders. In its view, because bid-rigging
is an antithesis
of competition, it did not allow for characterisation. Even
were that to be done, the Tribunal did not see
how the two firms’
conduct was efficiency enhancing or pro-competitive.
Issues
[24]
The appellants challenge the Tribunal’s
interpretation of section 4 (5), its findings on horizontal
relationships, and on
characterisation, as being contrary to the
ANSAC,
and this
Court’s own, jurisprudence
[4]
,
which in its view demand characterisation of the conduct to establish
whether it falls within the prohibited conduct as set out
in section
4 (1) (b).
[25]
It was accepted by both parties that if the appellants’
argument is good on the single economic entity principle, then
characterisation
and horizontal relationship points do not arise.
[26]
While I question whether this is a proper test case, owing to
the small amounts and sizes of the firms involved, it is true that
this Court is yet to grapple with a case where the section 4 (5) (b)
exemption is raised as a defence to an alleged violation of
section 4
(1) (b).
Single
economic entity
[27]
The doctrine has its origins in the United
States and Europe, and notably in the
Copperweld
[5]
judgment, where the Court held that:
“…
the coordinated
activity of a parent and its wholly owned subsidiary must be viewed
as that of a single enterprise for purposes
of § 1 of the
Sherman Act. A parent and its wholly owned subsidiary
have
a complete unity of interest
.
Their objectives are common, not disparate; their general corporate
actions are guided or determined not by two separate
corporate
consciousnesses, but one.
They are
not unlike a multiple team of horses drawing a vehicle under the
control of a single driver.
With
or without a formal "agreement," the subsidiary acts for
the benefit of the parent, its sole shareholder. If
the parent
and a wholly owned subsidiary do "agree" to a course of
action, there is no sudden joining of economic resources
that had
previously served different interests, and there is no justification
for § 1 scrutiny….in reality, a parent
and a wholly owned
subsidiary
always
have
a "
unity of purpose or a common
design.
"”
(Underlined
for emphasis)
[28]
In
Century Oil
[6]
the single economic entity concept was applied beyond a parent and
wholly-owned subsidiary. In that case two companies were
separately incorporated, but commonly owned by three men, two of whom
each owned 30 percent of each corporation, and one of whom
owned the
remaining 40 percent of each corporation. All three were
directors and officers of each corporation. One
drew his
compensation from one company and the other two from the other
company, but the compensation of each was based on his
percentage of
ownership of both corporations. The court saw no relevant
difference between a corporation wholly owned by
another corporation,
two corporations wholly owned by a third corporation, or two
corporations wholly owned by three persons who
together manage all
affairs of the two corporations. It said “[
a
]
contract between them does not join formerly
distinct economic units. In reality, they have always had “a
unity of purpose
or a common design.”” (Footnote
omitted.)
[29]
The appellants argue that they perfectly fit within this
scenario, i.e. after Maleho’s departure, A’Africa and
Mosebetsi
had exactly the same members.
[30]
In the European Union (“EU”)
the position, as pronounced in
Viho
[7]
,
is that where the subsidiaries
did not enjoy
real autonomy in determining their course of action in the market
,
but carried out the instructions issued by the parent company, they
formed a single economic entity.
[8]
The point is categorised in the European Commission’s
Guidelines
[9]
as “[
w
]
hen
a company exercises decisive influence over another company
they form a single economic entity and, hence,
are part of the same undertaking
.”
[10]
(Own emphasis, text footnote omitted.)
[31]
A number of features that can be derived from the cases above
are: (a) that a parent and its wholly owned subsidiary have a
complete unity of interest
(i.e. their objectives are common,
not disparate); (b) their general
corporate actions
are
guided
or determined not by two separate
consciousnesses, but by one;
and (c) they are akin to a team of horses
under the control of a
single driver
. In other words, a parent exercises decisive
influence over the subordinate entity, such that the latter does not
enjoy
real autonomy in determining its own market conduct
.
[32]
This is indeed the test that the appellants seek this Court to
adopt: to find that following Maleho’s departure, Labuschagne
and Smith exercised decisive influence over Mosebetsi; and that even
if the period prior to Maleho’s departure is considered
(which
should not be done), A’Africa and Mosebetsi always had a
complete unity of interest (as the real drivers had always
been
Labuschagne and Smith), and the fact that Maleho’s name
remained in the CIPC records after his departure made no real
difference as he had nothing to do with Mosebetsi’s affairs
after his resignation. In the appellants’ view, to
regard
as determinative their failure to ensure the removal of Maleho’s
name from the CIPC records, when Maleho regarded
himself as having
left both as employee and “shareholder” (as he put it in
evidence), is to put form over substance.
[33]
According to the Commission, the South African position is
nuanced compared to other jurisdictions. The difference lies in
the “additional” requirement, which requires the single
economic entity to be “
similar in structure to those
referred to in paragraph (a)
.” In other words, it is
not sufficient for constituent firms to be firms within a single
economic entity, they must
also show that the entity is similar in
structure to a company and a wholly-owned subsidiary and / or other
forms of relationships
within that structure as indicated in
paragraph (a).
Interpretation
of section 4 (5) (b)
[34]
As already mentioned, section 4 (5) disqualifies the
application of section 4 (1) to an agreement between, or concerted
practice
engaged in by, - (a) a company, its wholly-owned subsidiary
as contemplated in section 1 (5) of the Companies Act, 1973, a
wholly-owned
subsidiary of that subsidiary, or any combination of
them; or (b) the constituent firms within
a single economic entity
similar in structure
to
those referred to in paragraph (a)
.
[35]
The Act defines neither what a single
economic entity is, nor what a similar structure necessarily
entails. Section 4 (5)
(b) has been criticised as being vaguely
drafted and problematic
[11]
,
and somehow superfluous, in view of the fact that the prohibitions in
4 (1) are directed at firms in horizontal relationships,
which firms
in a single economic entity necessarily would not be.
[12]
[36]
The position as to how a statute should be
interpreted needs no repetition, save to mention that it must be
given its grammatical
meaning (except where it would lead to
absurdity), be properly contextualised, interpreted purposively and
be construed consistently
with the Constitution.
[13]
The
scheme of the Act
[37]
Any discussion of the meaning and reach of
the concept of “
single economic entity
”,
as also of the phrase “
similar in
structure”
, begins with expressly
acknowledging that the Act is intended to reach widely into the
economic sphere: it “
applies to all
economic activity within, or having an effect within, the
Republic...”
[14]
These are “
words of great generality”
extending the operation of the section to the
“
countless forms of activity which
people undertake in order to earn a living
.”
[15]
[38]
The scheme of the Act defines the economic units that
participate in this economic milieu as “
firms
”.
It is notable that the expression “
firm
” is used
in paragraph (b) of section 4 (5), as opposed to “
company
”
in (a). This is in keeping with the wide application of the
Act, and also an indication that (b) is not confined to
company
relationships, but to firms in general.
[39]
The Act does not tell us what a “
firm”
actually is, but it defines the word to include “
a person,
partnership or a trust
”. And a “
person”
,
according to the Interpretation Act 33 of 1957 (“the
Interpretation Act”), includes “
(a) any divisional
council, municipal council, village management board, or like
authority; (b) any company incorporated or registered
as such under
any law; (c) any body of persons corporate or unincorporate”.
It includes also, self-evidently, natural persons.
[40]
The expression “
includes
” clearly widens
its meaning to be beyond limited liability companies, partnerships,
and trusts. It may include sole
proprietorships, joint
ownerships, and any other actors who carry out economic activity.
[41]
When are two or more firms conjoined
within a single economic entity? A factual answer beckons; and
this court has indeed
responded in such terms when called on to
comment on section 4 (5):
[16]
“
[28] The contention raised by the s 4(5)(b)
claim is not an alternative claim based on the same facts as the main
claim but
adding nothing to the factual material that the Tribunal
will have to consider at the hearing. It is a separate and
distinct
claim on a novel legal ground seeking to attach liability to
parties who have not hitherto been regarded as liable in respect of
the particular complaints that are at present before the tribunal for
determination.
In order to pursue this claim it will be
necessary for the commission to show that Steinhoff International and
Steinhoff Africa
are, together with Loungefoam and Vitafoam, an
economic unit. That will require a consideration of the
corporate structures
of the group, the manner of its management and
the relationship between the different companies in the group.
In order to
deal with it the Steinhoff appellants will be required to
lead evidence of the operation of the different entities within the
group.
This goes beyond merely the relationship between
Loungefoam and Vitafoam…” (Underlined for
emphasis, footnote
omitted.)
And
again, referring to section 4(5):
“
[65]
The purpose of this section is to prevent
companies operating within a group of companies, or
firms
operating within a single economic entity similar to a group of
companies, from being accused of perpetrating restrictive
horizontal
practices in consequence of their interactions with one another as
part of the group.
The purpose of the section is
exclusionary. …It permits companies or
firms forming part
of a group to engage in conventional corporate trading activities
such as joint purchasing or co-ordinated price-setting
. One
can readily imagine a retail group operating under five different
brands and five separate subsidiaries, consolidating
its purchasing
power to purchase goods collectively for the group. Equally it
would be understandable if two or more subsidiaries
traded in the
same category of goods that the group might think it undesirable to
engage in price competition with itself.
The purpose of s 4(5)
is to exclude such conduct from the ambit of restrictive horizontal
practices.” (Underlined for
emphasis.)
[42]
The test propounded by the appellants as
to what standard should be adopted for a single economic entity,
essentially employing
the imagery of a carriage drawn by multiple
horses under the control of single driver
[17]
,
has not been quibbled with by the Commission.
[43]
The facts too, seem to support a finding that the two
appellants were, certainly by the time the quotes were submitted and
despite
a viable argument that it had not necessarily always been the
case, a single economic entity, given the complete conflation of
their affairs and management. Section 4 (5) (b), however,
requires a single economic entity “
similar in structure”
to those referred to in paragraph (a).
Similar
in structure
[44]
The words “
similar
in structure”
must be given a meaning
separate and distinct from “
a single
economic entity”.
This is in
accordance with the rule of interpretation that each word of a
statute must be given a meaning. Further
elaboration of this
rule is found in
The Law of South Africa
,
2
nd
Edition,
Volume 25, Part 1, paragraph 353.
[18]
[45]
And the recent
dictum
of Van der Westhuizen J in
National Credit Regulator v Opperman and Others
2013 (2) SA 1
(CC) is apposite:
“
[99] A longstanding precept of interpretation is
that every word must be given a meaning. Words in an enactment
should not
be treated as tautologous or superfluous. This is
for good reason. Interpretation is a cooperative venture
between
legislature and judge, bounded by mutually understood rules,
in which the latter seeks to give meaning to the text enacted by the
former. The mutual suppositions, and the constraints of
principle and constitutional precept on the judge's role, enable
the
joint process to reach a coherent and practical outcome. For
this, it has to be assumed that the legislature's enacted
text
includes only words that matter. For to enact words that do not
would violate the most basic supposition of the shared
enterprise.
Hence none can be ignored.
[100]
The shared enterprise is imperilled if this precept is too readily
ignored. It could seem to license judges to pick
and choose
among words and phrases, and to omit those considered inconvenient.
That cannot be. Everything the legislature
has enacted must be
included in the meaning assigned to the whole. The rule
performs a boundary-setting function. Its
observance shows that
judges are staying within their assigned role of interpretation, and
not straying outside it into amendment,
enactment or innovation.
As this court pointed out in its very first judgment, if the language
used by the lawgiver is ignored
in favour of other pursuits, 'the
result is not interpretation but divination'. Though said in a
different context, the point
is that constitutionalism has not
upended the basic rules of interpretation.” (Footnotes
omitted.)
And
further:
“
[105] …..There is then no particular
constitutional imperative to squeeze a meaning from the provision.
Rather, we
must accept the words of the provision for what they say,
even at the cost of accepting that the provision is ineffectual.
It is better, in my view, to acknowledge the drafting error, and to
leave parliament to correct it.”
[46]
With these considerations as background, one therefore begins
with the straight-forward proposition that it is not sufficient for
the invocation of section 4 (5) that the two protagonists are bound
together within a single economic entity. Their unison
must
also be “
similar in structure to those referred to in
paragraph (a)
”. The Commission stressed this
requirement, and – referring to section 1 (5) of the Companies
Act 61 of 1973
- laid particular emphasis on the notion that the
holding company must be the owner of the entire interest in the
subsidiary.
[47]
According to section 1 (5) of the Companies Act 61 of 1973
(“the 1973 Companies Act”), a wholly-owned subsidiary has
no members except the holding company (or another wholly-owned owned
subsidiary). It provides that:
“
(5) For the purposes of this Act, a subsidiary
shall be deemed to be a wholly owned subsidiary of another company
if
it has no members except that other company and a wholly owned
subsidiary of that company and its or their nominees.
”(Underlined
for emphasis.)
[48]
The important point to note here is that the 1973 Companies
Act was concerned, in the context of the relationship between a
holding
company and its subsidiary, with a proprietary interest in,
or ownership of, the shares of the company lower down in the
hierarchy.
However the 1973 Companies Act has of course now
been repealed by the new Companies Act 71 of 2008 (“the 2008
Companies Act&rdquo
;).
[49]
Section 3 (1) (b) of the 2008
Companies Act has
re-enacted the
definition of a wholly-owned subsidiary, and it differs from the
previous definition in an important respect.
The previous
definition concerned itself with ownership of the shareholding.
The new definition does not; as will appear
below, it is now at least
equally concerned with
control
(emphasis supplied):
“
3 Subsidiary relationships
(1) A company is-
(a)
a subsidiary of another juristic person if that juristic person, one
or more other subsidiaries of that juristic person, or
one or more
nominees of that juristic person or any of its subsidiaries, alone or
in any combination-
(i) is or are directly or indirectly able to exercise,
or control the exercise of, a majority of the general voting rights
associated
with issued securities of that company, whether pursuant
to a shareholder agreement or otherwise; or
(ii) has or have the right to appoint or elect, or
control the appointment or election of, directors of that company who
control
a majority of the votes at a meeting of the board; or
(b)
a wholly-owned subsidiary
of another juristic person if
all
of the general voting rights
associated with issued securities of
the company are held or
controlled
,
alone
or
in any
combination, by persons contemplated in paragraph
(a).”
(Underlined for emphasis)
[50]
A company is now a wholly-owned subsidiary of another company
(call it the holding company) if the holding company holds or
controls
all of the general voting rights associated with the
shares in the wholly-owned subsidiary. That is a meaning
different from
the previous definition in a material respect.
[51]
The Interpretation Act impels us to read the 2008
Companies
Act definition
into
section 4
(5) (a), unless the contrary intention
appears. It states:
“
12. Effect of repeal of a law
(1) Where a law repeals and re-enacts with or without
modifications, any provision of a former law, references in any other
law
to the provision so repealed shall,
unless the contrary
intention appears
, be construed as references to the provision so
re-enacted.” (Own emphasis.)
[52]
Before turning to the facts, something must be said
about the word “
similar”
in
section 4
(5) (b).
Clearly, the postulated single economic entity cannot be identical to
the company law structure envisaged in section
3 of the 2008
Companies Act. If
it were identical, there would be no need for
a comparison. And of course, as pointed out, according to the
Act “
firms”
that are active in the economic milieu
may take many forms. The legislature must have envisaged
therefore that the similarity
envisaged can never be identical and
may take many forms, and it is suggested that the interpretative
function will bear this in
mind.
[53]
It is suggested, however, that the defining substance of the
company law structure, of holding company and wholly-owned subsidiary
– as defined in the 2008
Companies Act – must
be the
litmus test of the structure being measured up for compliance with
section 4
(5) (b). And, as pointed out, if the suggested
“holding company”
controls all the general voting
rights
associated with the “shares” in the postulated
“wholly-owned subsidiary”, that is sufficient.
[54]
Before moving any further, it seems convenient here to dispose
of the argument that A’Africa could be viewed as akin to a
holding company of Mosebetsi. Structurally, it can never hold
interest in another close corporation. Members of another
close
corporation cannot act as its “
nominees
” in
another. Unlike a company, it is run and administered by its
members. It has no share capital and therefore
no shareholders,
its members are its owners. I tend to agree with the
Commission’s view in this respect. Furthermore,
A’Africa
could neither give instructions, nor direct Mosebetsi’s conduct
in the market,
via
Labuschagne and Smith as its “
nominees
”.
That interpretation is at odds with the law and should not be
preferred.
[55]
That leaves us with the question whether A’Africa and
Mosebetsi were analogous to “sister companies” or
“co-subsidiaries”
wholly owned by the same parent, being
Labuschagne and Smith. There is an interesting aspect of the
definition in
section 4
(5) (a) which was not the subject of pointed
argument before us. The definition refers to companies in a
vertical corporate
relationship: A holds all the shares in B which
holds all the shares in C – in the scenario A, B and C are a
single economic
entity. What about where A holds all the shares
in two companies, B and C - do all three companies belong to a single
economic
entity? According to a strict reading of the
definition, in this situation A and B would be a single economic
entity and
A and C would be a single economic entity; what about B
and C? The cases cited above suggest that A, B and C in this
example
do belong to a single economic entity. This might also be
justified on the provision in the Interpretation Act that, in the
absence
of a contrary intention, the singular includes the plural, so
that “wholly-owned subsidiary” should be read as
including
“wholly-owned subsidiaries” and reference to
“any combination of them” may also embrace
co-subsidiaries
owned by the same owner. Furthermore, section 3
(1) of the 2008
Companies Act does
envisage a pyramid-like structure
of A at the top with B and C at the next tier below it – and
thus the three of them belonging
to a single economic entity.
[56]
More of a difficulty though, is that in this case two owners
(Labuschagne and Smith) are posited as akin to a company wholly
owning
two subsidiaries. The question is whether the language
of the Act allows for that scenario. Is that scenario
comparable
to paragraph (a) in that, if company A and company B each
owns 50% of company C, C is not a “
wholly-owned
subsidiary” of either unless – by way of further
shareholding – 100% control of C can be traced back to a single
entity (as would be the case, for example, if A held all the shares
in B, or vice versa, or if
all
the shares in A and B were
wholly held by another company D)? Same can equally be said
regarding the notion of a person controlling
all
the general
voting rights associated with issued securities, alone, or in
combination with any of its subsidiaries as contemplated
in section 3
(1) (b) of the 2008
Companies Act. &nb
sp;“
It would therefore
also be a holding/subsidiary relationship if (1) JP [juristic person]
has the sole control of the majority of
the voting rights in S
[subsidiary] whether pursuant to an agreement with other members of S
or otherwise, or (2) S is a subsidiary
of a juristic person which is
a subsidiary of JP; or (3) subsidiaries of JP, or JP and its
subsidiaries together,
(a) hold the majority of the voting rights in S or
(b) have the right to appoint the directors holding a
majority of the voting rights at meetings of the board of directors
of S or
(c) have the sole control of the majority of the
general voting rights in S whether pursuant to an agreement with
other members
of S or otherwise.
A “nominee” is “…a person
that acts as the registered holder of securities or an interest in
securities
on behalf of other persons
””.
[19]
[57]
When one applies this thinking to close corporations owned by
individuals, A and B in this example above (Labuschagne and Smith in
this case) are individual persons who together own the close
corporations C1 and C2. Arguably, C1 cannot be viewed as
similar
to a “
wholly-owned
subsidiary”, because
the members’ interest is not traceable to a single “entity”
(i.e. one individual),
but to two individuals A and B. Neither
of those individuals – Labuschagne and Smith – “control”
each other as individuals. When Maleho left, Labuschagne and
Smith each would have control of 50% of the general voting rights
in
Mosebetsi. In other words they did not all devolve to either
Smith or Labuschagne.
[58]
On this approach, Labuschagne and Smith may be more akin to
two separate companies each holding shares in a third company. If
so, the third company is not akin to a “wholly-owned
subsidiary” in relation to them. And if one of the corporations
cannot be regarded as a “wholly-owned subsidiary” in
relation to Labuschagne and Smith, there can be no question of
the
two corporations being part of the same economic entity, because
neither of those corporations is akin to a “wholly-owned
subsidiary”, since each of the corporations has two separate
individuals as its members, neither of those individual members
controlling the other member. If that be the case, the
appellants are not exempt in terms of
section 4
(5) (b).
[59]
It may be argued that because at a factual level
Labuschagne and Smith control all the votes in both close
corporations [after
Maleho’s departure], the two of them
constitute a single parent, because they can always only act together
in Mosebetsi,
because no single one of them is a controlling member –
their membership holdings are equal. They are as two sole joint
owners in that close corporation. In A’Africa,
Labuschagne was the controlling member, and for present purposes, she
was the parent of that “subsidiary”. So there is
one holding company (Labuschagne) in A’Africa; and she
is one
of two individuals that form, with Smith, one undivided holding
company into Mosebetsi. Of course, the similarity would
be more
evident if Labuschagne was the controlling member into Mosebetsi; but
still, the comparison need only be similar. Indeed,
since a
firm includes also a partnership, if Labuschagne and Smith’s
relationship was
inter se
as such, then their partnership was
the parent, irrespective of whether they would always agree on
everything, and the two close
corporations their two subsidiaries.
The point is, their relationship was so commercially close,
that their control of the
two close corporations was joint, thereby
resulting in a configuration “similar” to the subsidiary
relationship provided
for in the 2008
Companies Act.
[60
]
On balance, I point to the following. I am
alive to the fact that other jurisdictions recognise common or
collective controllers.
The difficulty is that ours is built
into the statute and requires similarity to a structure in a company
and a
wholly
owned
subsidiary. Even if something required by paragraph (b) is less
than 100%, which the authors seem to suggest and which
I am not
averse to,
[20]
it seems that a single person or a combination of persons upon which
that first person has control (within the contemplation of
section 3
(1) of the 2008
Companies Act), is
postulated as a holder in our Act.
A possible reason is the “presumption” of an
identity of interest within these
entities and the ability to control
strategic directions by the holder, “
the
parent and subsidiary
always
have a ‘unity of purpose or a common design’
”.
[21]
Will Labuschagne and Smith
always
agree, if Smith were to be held to be in the position similar to a
“subsidiary” of Labuschagne (holding or controlling
the
appellants together with Labuschagne within the contemplation of
section 3 (1) of the 2008
Companies Act)? Maybe
at times, but
not “always”.
[61]
I am also mindful of the fact that common
ownership by individuals has been approved in other developed
competition law jurisdictions
as indicated in some cases mentioned
above, and in those jurisdictions the constitution of a single
economic entity has been developed
into law by judicial
interpretation.
[22]
In our case the legislature has given the concept statutory
recognition and has defined the structure that such a single
economic
entity should be comparable to (i.e.
section 4
(5) (a)). I am
however doubtful that in these circumstances that the appellants were
in a single economic entity within the
contemplation of
section 4
(5)
(b). Things might have been different if Labuschagne held or
controlled all, or the majority, of members’ interest
in
Mosebetsi.
[23]
It is so that the manner in which
section 4
(5) is crafted is not
without criticism, but that does not mean that its interpretation
cannot allow for close corporations to
be protected by
section 4
(5)
(b) in appropriate circumstances, as already outlined. After my
misgivings, I will thus assume on behalf of the Commission
that
section 4
(5) does not apply to this case and turn to deal with
whether the appellants committed restrictive horizontal practices as
stated
in
section 4
(1) (b).
Characterisation
[62]
The approach by the Tribunal on
characterisation seems not to be consonant with the observations
expressed in
ANSAC
[24]
(where the need to characterise the nature of
the conduct was explained at length) and this Court’s
jurisprudence in
SAB
[25]
and recently in
Dawn.
[26]
It has not been fully explained by the
Tribunal why the conduct was one of those that would, at face value,
be prohibited, except
that by its very nature collusive tendering is
inimical. This Court in
SAB
[27]
contemplated collusive tendering cases to be included in enquiries
aimed at placing the conduct within the scope of
section 4
(1) (b).
The approach followed by the Tribunal may have been too constrained
given the circumstances of this case.
[63]
It seems to me given the context in which the appellants
operated: the complete conflation of the running of their affairs,
staff
complement, equipment, management strategy, and businesses, and
most importantly, the person who decided on the prices contained
in
the tender forms and other identical information submitted there-in,
was one and the same, namely Labuschagne. Evidence
had to be
assessed before a conclusion could be arrived at.
[64]
The Tribunal’s finding was based on the submission of
two quotations which in its view exhibited dishonest behaviour geared
towards gaining a BEE advantage over others (even though prices were
the same). In its view, “
the appellants could not be
allowed to benefit from their dishonest actions and the illusions of
competing for the work
.”
[65]
Whilst I take a dim view of the appellant’s behaviour,
in not disclosing their relationship and in using Maleho’s
members’
interest in the form, without explaining his
departure, it begs the question whether such behaviour necessarily
fell foul of
section 4
(1) (b), or whether such breach could be
located elsewhere other than in competition law and particularly
section 4
(1) (b). In other words did the conduct amount to
either price fixing or collusive tendering for the purposes of
section 4
(1) (b).
[66]
In the first instance, it was accepted that BEE was not a
consideration for the awarding of the tender. Mosebetsi would
have
acquired the tender purely based on price, as the tender was
below R30 000.
[67]
Secondly, the submission of the two separate bids without more
cannot on its own bring the conduct within the ambit of
section 4
(1)
(b), something more is required. There must be an “agreement”
or “concerted practise” by competitors
to fix the price,
or of collusive tendering. That presupposes an involvement by
more than one firm, as we know behind “firms”
that are
corporations there are individuals.
[68]
On the issue of similar prices, Labuschagne put the same price
in the forms and the explanation was that the price strategy was
exactly the same, given that the two firms used the same staff,
equipment and the amount was calculated using the same number of
hours that would be spent doing the work. The only difference
was that Mosebetsi was not a VAT vendor and therefore VAT was
not
included in its pricing, that being the only reason its price was
slightly lower than that of A’Africa. That is
a
legitimate explanation, in my view. There seemed to be no
clandestine apparent purpose or one that could be inferred, in
the
submission of the same price.
[69]
Also, the fact that identical prices were submitted may be
counter to an argument of price-fixing in this case, as one would
have
expected one firm in this situation to tender with a highly
uncompetitive price so as to make way for the other who would have a
lower bid to be awarded the tender. So, how the submission of
similar prices would restrict competition in this case, is
unclear.
[70]
Furthermore, the reason for submitting two tenders, in my
view, is not without foundation: it was to give Mosebetsi a chance,
though
not operational in reality, to pay its debts.
[71]
As to collusive tendering, what is interesting about the
appellants’ conduct is the apparent uniformity in the forms.
It
does not appear to be covert, but rather overt in nature.
The forms were prepared in a manner that identified common
membership,
addresses, prices and contained a signature of the same
person. In this regard, Labuschagne did not pretend to be someone
else
in one of the forms in order to cover collusion.
[72]
Although on paper, by virtue of being separate entities, firms
may be capable of colluding, ultimately, the actual role players
behind those firms are natural persons. The question in this
case, is who was Labuschagne colluding with? Could she
collude
with herself, or engineer collusion between the two firms she
completed the forms on behalf of, and what would the effect
of that
be? In my view, those are the questions that the Tribunal ought
to have asked, because more and more they highlight
the reason why
the conduct ought to have been characterised. This on its own
lacks the hallmarks of collusion, which necessarily
would involve
individuals behind the firms conducting prohibited practices.
Labuschagne had no colluding partner, so I find
it hard to find
that she could collude with herself in submitting the two tenders on
behalf of the appellants. I need not
deal with horizontality,
in light of my findings above.
[73]
The Tribunal therefore erred by finding that the appellants’
conduct fell foul of section 4 (1) (b) of the Act. Its decision
accordingly falls to be set aside.
[74]
In the result, the following order is made:
1. The appeal is upheld with costs including costs of
two counsel.
2. The decision of the Tribunal is set aside and
replaced with an order in the following terms:
(i) The complaint is dismissed.
(ii) There is no order as to costs.
______________________
N
P BOQWANA
Judge
of Appeal
I
concur.
______________________
VICTOR
Judge
of Appeal
I
concur.
______________________
VAN
DER LINDE
Acting
Judge of Appeal
APPEARANCES
For
the appellants: Advocate MM LE ROUX with Advocate S QUINN
Instructed
by: Truter Jones Inc., Sandton, Johannesburg
For
the respondent: Advocate NH MAENETJE SC
Instructed
by: Ndzabandzaba Attorneys Inc., Sandton, Johannesburg
[1]
Copperweld v Independence Tube,
467
US 752
(1984) at page 769
[2]
Ibid fn 1, page 769
[3]
American Natural Soda Ash Corporation and
Another
v
Competition
Commission and Others
2005 (6) SA 158
(SCA)
(“
ANSAC
”).
There, the Supreme Court of Appeal (“SCA”) held that an
enquiry ought to be adopted “
whether
the character of the conduct complained of coincides with the
character of the prohibited conduct: and this process necessarily
embodies two elements. One is the scope of the prohibition: a
matter of statutory construction. The other is the
nature of
the conduct complain of: this is a factual enquiry. In
ordinary language this can be termed ‘characterising’
the conduct – the term used in the United States, which Ansac
has adopted…”
[at para 47]…“
But
while pricing-fixing inevitably involves collusive or consensual
price determination by competitors, it does not follow that
pricing-fixing has necessarily occurred whenever there is an
arrangement between competitors that results in their goods reaching
the market at a uniform price.”
[at
para 49]
[4]
Competition Commission v South African
Breweries Ltd and Others
2015 (3) SA 329
(CAC)
[5]
Ibid fn 1, at page 771
[6]
Century Oil Tool, Inc. and Jerry Raggio,
Plaintiffs-appellants, v. Production Specialties, Inc., Gerald
Hebert and Gas Liftsupply,
Inc., Defendants-appellees,
737 F.2d 1316
(5th Cir. 1984)
[7]
Viho Europe BV v Commission of the European
Communities
1996 ECR 1
, Case C-73/95, I-
5482
[8]
Ibid fn 7, at 5487 -5490
[9]
Official Journal of the European Union
:
Guidelines on the applicability of Article
101 of the Treaty on the Functioning of the European Union to
horizontal co-operation
agreements
(2011/ C
11/01)
[10]
Ibid fn 9, at para 11
[11]
Sutherland & Kemp,
Competition Law of
South Africa
, November 2017, Issue 18 at
5-47
[12]
Fasken Martineau, Mackenzie et al,
The Single
Economic Entity Doctrine in South Africa and its implications for
Competition Policy
at pages 1 & 8. The
authors observe that it is doubtful that firms within a single
economic entity could ever be competitors.
[13]
Natal Joint Municipal Pension Fund v Endumeni
Municipality
2012 (4)
SA 593
(SCA) at para 18;
Cool Ideas 1186 CC v
Hubbard and anothe
r
2014 (4) SA 474
(CC) at
para 28.
[14]
Section 3(1)
[15]
Standard Bank Investment Corporation Ltd v
Competition Commission and Others; Liberty Life Association of
Africa Ltd v Competition
Commission and Others
[2000] ZASCA 20
;
2000 (2) SA 797
(SCA) at para 9
[16]
Loungefoam
(Pty)
Ltd and others v Competition Commission and others: in re: Feltex
Holdings (Pty) Ltd v Competition Commission and others
and two related review applications
[2011]
1 CPLR 19
(CAC); 2011 JDR 0451 (CAC); [2011] JOL 27570 (CAC)
[17]
Ibid fn 1, at page 771
[18]
See also L C Steyn,
Die Uitleg van Wette
,
5
th
Edition at
page 17; Sutherland & Kemp at 5 -42 also suggest that: “
The
Act apparently sets two requirements. There must be a single
economic entity and the entity must be similar in structure
to one
that exists between a company and its wholly owned subsidiary or
between wholly owned subsidiaries
.”
[19]
Henochsberg on the
Companies Act 71 of 2008
,
Vol 1, Issue 18, at 32(7).
[20]
Sutherland
& Kemp at page 5 – 43: “
Section
4
(5) (b) should not only apply merely or exclusively where 100%
control is exerted; the requirement that firms must form a single
economic entity ought to be as important as in the case of
companies
”.
[21]
Ibid fn 1
[22]
Ibid fn 12, page 1
[23]
This view is endorsed by Sutherland & Kemp at 5-43 who say
section 4
(5) (b) “
may apply to a close
corporation and a firm run by a
controlling
member as a sole proprietorship
”.
[24]
Ibid fn 3
[25]
Ibid fn 4
[26]
Dawn Consolidated Holdings (Pty) Ltd &
Others v The Competition Commission
(155/CAC/Oct2017)
[2018] ZACAC 2
(4 May 2018)
[27]
Ibid fn 4, at para 37