About SAFLII
Databases
Search
Terms of Use
RSS Feeds
South Africa: Competition Appeal Court
SAFLII
>>
Databases
>>
South Africa: Competition Appeal Court
>>
2015
>>
[2015] ZACAC 5
|
|
Caxton and CTP Publishers and Printers v Media 24 Proprietary Limited and Others (136/CAC/March 2015) [2015] ZACAC 5; [2015] 2 CPLR 354 (CAC) (25 November 2015)
Links to summary
IN
THE COMPETITION APPEAL COURT OF SOUTH AFRICA
HELD
IN CAPE TOWN
Case
No: 136/CAC/March 2015
HEARING
DATE: 17 SEPTEMBER 2015
DELIVERY
DATE: 25 NOVEMBER 2015
In
the matter between:
CAXTON
AND CTP PUBLISHERS AND
PRINTERS
........................................................
Appellant
And
MEDIA
24 PROPRIETARY
LIMITED
.....................................................................
First
Respondent
NOVUS
HOLDING
LIMITED
...............................................................................
Second
Respondent
ADBAIT
PROPRIETARY
LIMITED
......................................................................
Third
Respondent
LAMBERT
PHILIPS
RETIEF
................................................................................
Fourth
Respondent
THE
COMPETITION
COMMISSION
.....................................................................
Fifth
Respondent
JUDGMENT
DELIVERED ON 25 NOVEMBER 2015
BOQWANA
AJA (DAVIS JP and ROGERS AJA concurring)
Introduction
[1]
On 10 March 2015, the appellant
(‘Caxton’) brought an urgent application before the
Competition Tribunal (‘the
Tribunal’) seeking an order
that the first to fourth respondents (‘the respondents’)
notify the competition authorities
of the acquisition, by the first
respondent (‘Media 24’), of sole control of the second
respondent (‘Novus’),
which would arise if a restated
management agreement (‘new agreement’) concluded between
the fourth respondent (‘Retief’),
Novus and Media 24 on
23 February 2015 was brought into effect or otherwise implemented.
The new agreement, which was in substitution
of a management
agreement dated 6 October 2008 (‘old agreement’), was to
be effective upon the listing of Novus on
the JSE Limited (‘JSE’)
which was scheduled to take place on 26 March 2015.
[2]
Caxton also sought an order
prohibiting the respondents from taking any further steps to
implement the acquisition of sole control
by Media 24 over Novus;
bringing into effect or otherwise implementing the new agreement; and
entering into any other transaction
or arrangement in which the
operational management control of Novus that was enjoyed by Retief
was relinquished or transferred
to any other party, until such time
as the Tribunal or this Court has approved the merger.
[3]
The application was heard by the
Tribunal on 20 March 2015 and dismissed on 23 March 2015 with no
order as to costs. Reasons for
the dismissal were provided on 17
April 2015.
[4]
Novus has listed on the JSE. As a
result the appellant seeks an order for the notification of the
merger and costs of the appeal.
The Tribunal’s
decision
[5]
The Tribunal adopted the approach
that the transaction set out in the new agreement did not constitute
a merger (as defined in the
Competition Act 89 of 1998 (‘the
Act’)). While it found that Media 24 and Retief held joint
control over Novus’
business affairs under the old agreement,
it concluded that Retief had not in fact exercised his power of
control under that agreement.
He and Media 24 simply paid lip service
to it. Accordingly, his powers of control were not materially
diminished by the 2015 new
agreement. It went on to hold that:
‘
Mr
Retief’s small economic interest in Novus, his status as a
non-executive director, and his imminent retirement, all point
it to
being unlikely for him to be able to constrain Media 24 in any
meaningful way. In the absence of facts in support of any
of the
potential indicators of Mr Retief exercising control powers as
discussed above, we are constrained to conclude that both
Media 24
and Mr Retief have been paying lip service to the Management
Agreement.
We find therefore
that the 2015 agreement does not limit Mr Retief’s powers any
more than the 2008 agreement. Whilst the change
in mechanisms in the
respective agreements dilutes Mr Retief’s influence to some
degree, this dilution is so insignificant
that it neither amounts to
a relinquishing of any type of joint control power that he previously
had or the acquisition of sole
control by Media 24.Since we cannot
conclude on the facts before us that the restated agreement
constitutes a merger, we find that
Caxton has not established a clear
right...’
[6]
Caxton contends that the Tribunal’s
decision was wrongly premised. It argues that the control that Retief
possessed under
the old agreement was of the kind described in s
12(2)(g) of the Act which merely requires a person to have the
ability to materially
influence the policy of the firm (as conferred
on him contractually). In its view whether he in fact exercised that
power (in practice)
did not matter.
Factual
background
Novus’
Group structure
[7]
Novus was formerly known as Paarl
Media Group (Pty) Ltd (‘PMG’). It is a member of the
Naspers group, the biggest publisher
in South Africa. Prior to the
implementation of the transaction now under consideration Media 24, a
subsidiary of Naspers Ltd,
held all the shares in PMG. Certain of the
businesses owned by PMG’s operating subsidiaries, including the
printing business,
were originally owned by Retief. Media 24 acquired
a majority shareholding in Retief’s PMG businesses and merged
its own
printing business with his. This made PMG and its
subsidiaries (‘the PMG Group’) the largest printing
business in the
country.
[8]
Since
October 2008, the heatset business
[1]
of the PMG Group was held in a subsidiary company called Paarl Media
Holdings (Pty) Ltd (‘PMH’) with its coldset
printing business
[2]
housed in
another subsidiary, Paarl Coldset (Pty) Ltd (‘PCS’).
Retief family entities (initially family trusts, later
a company
called Adbait (Pty) Ltd (‘Adbait’)) retained a small
shareholding in these two subsidiaries.
[9]
Caxton, as a publishing and printing
company, considers itself a competitor of both Media 24 and Novus.
The old agreement
[10]
The
2008 restructuring gave rise to a need for an entrenched continued
‘operational independence’ between the PMG Group’s
printing businesses and Media 24’s publishing businesses. On 6
October 2008 Retief, the Retief family entities
[3]
,
the PMG Group and Media 24 concluded a management agreement in terms
of which Retief was appointed as non-executive chairman of
the PMG
Group. His powers of control were set out in clause 3.4 of this
agreement.
[11]
It is common cause that Novus was
jointly controlled by Media 24 and Retief, for the purposes of s
12(2) of the Act. I deal with
these provisions later in the judgment.
[12]
Clause 3.4 of the agreement provided
the following:
‘
3.4
Notwithstanding the Shareholders Agreements insofar as it may be
applicable but subject to the fiduciary duties
of the members of the
Board and that Retief discharges his duties in compliance with the
Act [the Companies Act, No 61 of 1973]
and the laws in relation to
directors and chairmen of companies, it is hereby agreed that:
3.4.1
Retief shall,
in consultation with Exco,
have authority to appoint and dismiss the CEO as well as the Chief
Financial Officer of the Group
,
provided that Exco shall be entitled to request Retief to initiate a
dismissal process of the CEO on reasonable grounds and provided
further that where the matter concerns the CEO he/she shall be
excluded from the deliberations of Exco;
3.4.2
Retief
shall have primary authority and responsibility to oversee and
supervise the CEO
who shall in turn be responsible for the
overall day to day management of the Group (including the appointment
and dismissal by
the CEO of the Managing Directors of the respective
Business Units of the Group in consultation with Retief),
and the
CEO shall be primarily answerable and report to Retief subject to
ultimate accountability of the CEO to the Board
;
3.4.3
Retief shall procure that the CEO
formulate and prepare in consultation with Retief the consolidated
annual budget and consolidated
business plan
of the Group from time to time for submission to the Board for
approval;
3.4.4
Retief shall monitor the implementation
by the CEO of the above-mentioned approved budget and business plan
during each financial
year
of the Group
or part thereof falling within the period of his appointment
(which, for the avoidance of doubt, will include
the monitoring of
the financing policy of the Group and its capital expenditure
programme);
3.4.5
It is intended that Retief shall exercise his duties and
responsibilities in terms of this agreement and arrange
the
conducting of the business of the Group on the basis of
operational
independence in principle from the Board, Media 24 and the
Shareholders
,
provided
that it is exercised in consultation with the Board and further
subject to his ultimate responsibility to the Board
;
3.4.6
Retief
shall in consultation with the
Board, primarily be responsible for the planning and implementation
of the strategic direction
of the
Group;
3.4.7
Retief shall have the authority and responsibility to implement and
ensure compliance with sound and generally accepted
corporate
governance policies by the Group (which, for the avoidance of doubt,
will include the establishment of, and consulting
with, an audit
committee and such other committees the Board may deem necessary);
provided that it is understood that such policies
shall be
implemented as required by the Act and not serve as a motivation to
impair the operational independence in principle of
Retief as
contemplated in clause 3; and
3.4.8
if any of the terms and conditions of the printing agreements need to
be amended in any respect (including,
without limitation, the pricing
mechanisms), it shall be done in consultation with Retief despite not
being a contracting party
to the aforesaid printing agreements.’
[13]
As
can be seen from these clauses of the agreement, Retief had a wide
variety of powers conferred upon him. Some of the powers possessed
had to be exercised ‘
in
consultation with
’
the Board or its Executive team or the Chief Executive Officer
(‘CEO’). It is common cause that this meant that
these
powers had to be exercised with the concurrence of both parties.
[4]
This effectively gave each party a veto over any exercise of these
powers. An example of those powers is in clause 3.4.1
where
Retief had the power ‘in consultation’ with Exco to
appoint and dismiss the CEO and the Chief Financial Officer
(‘CFO’)
of the PMG Group. He however had primary authority and responsibility
to oversee and supervise the CEO in terms
of clause 3.4.2.
[14]
Clause 3.4.3 gave Retief powers to
prepare with the CEO the Group’s annual budget and consolidated
business plan for submission
to the Board for approval. He monitored
the implementation of the budget and business plan by the CEO in
terms of clause 3.4.4.
[15]
Clause 3.4.5 established, in
relation to the exercise of Retief’s duties and
responsibilities, the principle of operational
independence between
him on the one hand and the Board (i.e. PMG’s board of
directors), Media 24 and the Shareholders, on
the other. Clause 3.4.6
conferred on him primary responsibility for the planning and
implementation of the strategic direction
of the Group in
consultation with the Board. Lastly, in terms of clause 3.4.8 Retief
had a right to be consulted on any amendments
to the terms and
conditions of printing agreements despite not being a contracting
party to those contracts. In terms of clause
3.8, the parties could
refer any dispute concerning their duties to an expert whose decision
would be final and binding.
2014 Notification
[16]
In
October 2014, Retief expressed an intention to retire as
non-executive chairman of the PMG Group and thus exercise the ‘put
options’ contained in the shareholders’ agreements
against Media 24, thereby disposing of the Retief entities’
interests in the PMG Group. This would have made PMG the sole
shareholder of the operating subsidiaries and would have terminated
the management agreement.
[5]
[17]
The respondents allege that they
were not sure whether the retirement would involve a change from
joint to sole control of the PMG
Group in terms of s 12(2)(g) of the
Act. They accordingly filed a merger notification with the Commission
on 28 January 2014, purely
out of caution. The Commission
investigated the proposed merger over a period of five months.
[18]
On 24 June 2014 the Commission
recommended to the Tribunal that the proposed merger be approved
without conditions. On 1 August
2014, Caxton applied to the Tribunal
for leave to intervene in the merger proceedings and oppose the
merger. The merger parties
opposed the intervention but Caxton was
granted leave to intervene on 18 August 2014.
[19]
This led to the abandonment of the
proposed transaction. Retief said he regarded it as untenable that
PMG Group’s direct competitor,
Caxton, should have access to
its confidential information. The Tribunal had already ordered the
merger parties to furnish the
Commission with documents and details
regarding the Nasper’s control structure and Caxton had
proposed to the Commission
that a wide range of other documents also
be requested. The proposed merger was accordingly abandoned. The
Commission was notified
of the abandonment on 22 August 2014.
The listing and
the new agreement
[20]
On 9 February 2015 PMG was converted
into a public company, known as Novus at which time its Memorandum of
Incorporation (‘the
MOI’) was registered. On 18 February
2015, it was announced on the Stock Exchange News Services (‘
SENS
’)
that Media 24 had applied for a JSE listing of Novus, its subsidiary.
The rationale for the listing was stated in the following
terms:
‘
...With
an ever growing percentage of Novus’s work now coming from
third parties, and Novus’s continued diversification
of its
revenue streams, it is appropriate to list Novus on the JSE. The
listing will be effected via a private placement of Novus
shares on
the JSE. Media 24 will remain the majority shareholder of Novus.
’
[21]
Subsequent to this and on 23
February 2015 Retief, Novus and Media 24 concluded the new agreement.
It is this new agreement which
Caxton contends diminishes Retief’s
joint control. Caxton submits that the new agreement subjects all of
Retief’s powers
and functions to the authority of Novus’
Board thus leaving Media 24 with sole control over Novus’
business. In terms
of a related contract, the so-called ‘flip-up
agreement’, the Retief family shareholdings in PCS and PMH
(held by Adbait)
were sold to Novus in return for shares in Novus, so
that PCS and PMH became wholly-owned subsidiaries of Novus and Adbait
acquired
a minority shareholding in Novus.
The new agreement
[22]
Clause 4.3 of the new agreement is
broadly the counterpart of clause 3.4 of the old agreement. It
provides as follows:
‘
4.3
Subject to the duties of the members of
the Board in terms of the Act [the
Companies Act, 71 of 2008
], the
MOI, the Listing Requirements and the Law
,
and that Mr Retief, as non-executive Chairman and director of the
Company, discharges his duties in compliance with the Act, the
MOI,
the Listing Requirements and the Law, it is agreed, on the same basis
as provided for in the prior agreement in that:
4.3.1 Mr Retief
shall in consultation with Exco, have the authority to appoint and
dismiss the CEO, the CFO
and the COO of the Group
, provided
that the Exco shall be entitled to request Mr Retief to initiate a
dismissal process of the CEO on reasonable grounds,
and provided
further that where the matter concerns the CEO he/shall be excluded
from the deliberations of Exco;
4.3.2 Mr Retief
shall have primary authority and responsibility to oversee and
supervise the CEO who shall in turn be responsible
for the overall
day to day management of the Group (including the appointment and
dismissal by the CEO of the Managing Directors
of the respective
Business Units of the Group in consultation with Mr Retief),
and
the CEO shall be answerable and report to Mr Retief subject to
accountability of the CEO to the Board
;
4.3.3
Mr Retief shall procure that the CEO formulate and prepares the
consolidated annual budget and consolidated business plan
of the
Group from time to time for submission to the Board for approval;
4.3.4 Mr Retief
shall monitor the implementation by the CEO of the above-mentioned
approved budget and business plan during each
financial year of the
Group or part thereof falling within the period of his appointment
(which, for the avoidance of doubt,
will include the monitoring of
the financing policy of the Group and its capital expenditure
programme);
4.3.5
Mr Retief shall exercise his duties and responsibilities in terms of
this agreement and arrange the conduct of the business
of the Group
on the basis of Operational Independence from Media 24 (the
controlling shareholder of NOVUS as at the restatement
date) provided
that it is exercised from time to time in consultation with the Board
and further subject to Mr Retief’s accountability
to the Board;
4.3.6
Mr Retief shall oversee the strategic direction of the Group and
monitor the implementation thereof by the CEO;
4.3.7 Mr Retief, as
non-executive Chairman shall have the authority and responsibility to
oversee the implementation and ensure
compliance with sound and
generally accepted corporate governance policies by the Group (which,
for the avoidance of doubt, will
include the establishment of, and
consulting with, an audit committee and such other committees the
Board may deem necessary or
as required in terms of the Act and the
King Report); provided that it is understood that such policies shall
be implemented as
required by the Act, the Listings Requirements and
the King Report and not serve as a motivation to impair the
Operational Independence;
and
4.3.8 if any of the
terms and conditions of the printing agreements need to be amended in
any respect (including, without limitation,
the pricing mechanisms),
it shall be done in consultation with Retief despite not being a
contracting party to the aforesaid printing
agreements.’
[23]
Clause 4.6 makes provision for the
Board, ‘in the interest of the Group to ensure that the conduct
of the business of the
Group takes place on the basis of Operational
Independence.’
Issue to be
determined
[24]
The issue to be determined is
whether the joint control that Retief shared with Media 24 under the
old agreement has been diminished
by the provisions of new agreement
to an extent resulting in Media 24’s acquisition of sole
control, which required notification
of a merger in terms of the Act.
[25]
Caxton contends that whilst Retief
retains certain of his former functions, he has been stripped of all
power-sharing and accordingly
no longer has
material
influence
over the strategic aspects of
Novus.
[26]
The significant change, it argues,
was brought about by the conversion of Novus to a public company on
the terms set out in the
MOI, which effectively rendered the old
agreement unlawful. In this connection, it submits that the regime of
joint control under
the old agreement was incompatible with s 66
(1) of the Companies Act 70 of 2008 (‘the new
Companies Act&rsquo
;);
paragraph 35.1 of the MOI, the Listing Requirements of the JSE and
King III. The change had to be made, it submits, in compliance
with
the law.
[27]
Section 66
(1) of the new
Companies
Act (which
came into force on 1 May 2011) provides that:
‘
The
business and affairs of a company must be managed by or under the
direction of its board, which has the authority to exercise
all of
the powers and perform any of the functions of the company, except to
the extent that this Act or the company’s Memorandum
of
Incorporation provides otherwise.’
[28]
The
‘except’ part of s 66(1) means that the usual
dispensation set out in the main part of the section may be altered
by the MOI. The old agreement, so Caxton contends, represented a
deviation from the main part of s 66(1). However, for as
long as
Novus (then called PMG) was a private company, the doctrine of
unanimous consent (furnished by its sole shareholder Media
24)
permitted this deviation even if the deviation was not recorded in
PMG’s constitutional documents.
[6]
But this changed, so Caxton argues, upon Novus’ conversion to a
public company on the terms set out in its new MOI, a change
furthermore on which the JSE insisted as a requirement for Novus’
listing, The MOI in this case simply echoes s 66 (1).
Article 35.1 of the MOI provides that
‘
The
business and affairs of the Company shall be managed by or under the
directions of the Board, which has authority to exercise
all of the
powers and perform any of the functions of the Company, except to the
extent that the Act or this Memorandum of Incorporation
provides
otherwise
.
’
Article
35.2 goes on to state that:
‘
The
general powers granted to the Board by this clause 35 shall not be
limited or reduced by any special authorisation or power
granted to
the Board by any other clause in the MOI.’ The MOI makes no
reference to the old or new management agreement and
does not contain
provisions derogating from s 66(1)’s primary dispensation
of board control.
[29]
Paragraphs 3.84 (b) and 7F(6)(b) of
the Listing Requirements require that
‘
there
must be a policy evidencing a clear balance of power and authority at
board of directors’ level, to ensure that no one
director has
unfettered powers of decision-making.’
[30]
The Listing Requirements further
prescribe compliance with principles 2.1.1 and 2.2.5 of King III
which require companies to be
headed by a board that directs, governs
and is in effective control of the company and the board to play a
prominent role in the
strategy-development process and not be the
mere recipients of strategy proposed by management.
[31]
Caxton’s case is accordingly
that the preamble clause (clause 4.3) of the new agreement subjects
all of Retief’s powers
and functions to a new general
qualification which is in conformity with the legal requirements set
out above.
[32]
The respondents on the other hand
contend that Retief remains a joint controller of the Novus group.
They submit that Media 24 acquired
no form of control of the Novus
Group as a consequence of the listing and the new agreement. The
listing gave rise to no change
of control and hence no merger existed
for purposes of the Act.
[33]
In this connection they submit that
under both the old and new agreements, Retief was and is still able
to exert material influence
over key aspects of Novus’ policy,
including the constitution of Novus’ senior executive team;
overseeing and supervising
the CEO’s conduct of Novus’
businesses, affairs and subsidiaries; what is contained in the annual
budget and business
plan and their implementation by the CEO; and the
extent to which Novus’ printing agreements can be varied.
[34]
Their argument is premised on the
interpretation of ‘material influence’ in s 12(2)(g)
of the Act which they argue
postulates a standard of influence that
is weaker than decisiveness which is the test that is applicable
under the European law.
[35]
Mr Unterhalter SC, who appeared
together with Mr Pearse, for the respondents, emphasized this
difference. He submitted that
the concept ‘
material
influence
’ denotes ‘
significant
’
but not necessarily decisive influence. He further submitted that a
person who may exercise material influence under s 12(2)(g)
must have
an ability to do so in a manner that is consistent and predictable
in contrast to a person who may do so on an
adhoc or on a contingent
basis. In his view the standard of influence contemplated in
s 12(2)(g) did not require that a person
should have the power
to determine the firm’s policy in preference to or even against
the wishes of other stakeholders and/or
to act independently of them;
there was no requirement that such person’s consensus or
approval was needed in taking strategic
and competitive decisions of
the firm before there could be ‘
material
influence’
.
[36]
In Mr Unterhalter’s view,
material influence by Retief over the strategic aspects of the
company could be found to be present
even if s 66(1) and the
preamble to clause 4.3 vested residual and overriding authority in
the board. Retief might have less
power than before but he still had
sufficiently material influence to constitute a continuation of joint
control.
[37]
In this regard, Mr Unterhalter went
on to argue that it would be incorrect to postulate that a mere
reduction of power would constitute
a merger. A person either has
control or does not; there are no degrees of control. In other words,
even if Retief was, despite
a reduction of powers, left with material
influence, he still had control.
[38]
The matter turns on the
interpretation of s 12(2)(g) of the Act. It is necessary to determine
its meaning and scope.
Applicable
provisions of the Act
[39]
Section 13A(1) of the Act makes it
mandatory for any party to an intermediate or large merger to notify
the Commission of the merger
in the prescribed manner and form.
Parties to an intermediate or large merger may not implement the
merger until it has been approved
with or without conditions by the
Commission, the Tribunal or by this Court in terms of section 13A(3)
the Act. It is common cause
that, should it be found that a merger
indeed took place, it constitutes a ‘large merger’, as
contemplated in s 13A(1).
[40]
Section 12(1) of the Act defines a
merger as follows:
‘
(a)
For purposes of this Act, a merger occurs when one or more firms
directly or indirectly
acquire or
establish direct or indirect control
over
the whole or part of the business of another firm.
(b)
A merger contemplated in paragraph (a) may be achieved in any manner,
including through –
(i)
purchase or lease of the shares, an interest or assets of the other
firm in question;
(ii)
amalgamation or other combination with the other firm in question.’
(Own emphasis)
[41]
Section 12(2) lists various forms of
control as follows:
‘
A
person controls
a firm
if that person –
(a)
beneficially owns more than one half of the
issued share capital of
the firm
;
(b)
is entitled to vote a majority of the votes
that maybe cast at a general meeting of
the
firm
, or has the ability to control the
voting of the majority of those vote either directly or through a
controlled entity of that
person;
(c)
is able to appoint or to veto the
appointment of the majority of the directors of
the
firm
;
(d)
is a holding company, and
the
firm
is a subsidiary of that company as
contemplated in section 1(3)(a) of the Companies Act, 1973 (Act No.61
of 1973);
(e)
in a case of a
firm
that is a trust, has the ability to control the majority of the votes
of the trustees, to appoint the majority of the trustees,
to appoint
or change the majority of the beneficiaries of the trust;
(f)
in the case of a close corporation, owns
the majority of members’ interest, or controls directly, or has
the right to control
the majority of the members’ votes in the
close corporation; or
(g)
has the ability to materially influence the
policy of the firm in a manner comparable to a person who, in
ordinary commerce practice,
can exercise an element of control
referred to in paragraphs a to f’
[42]
It
was held in
Distillers
Corporation (SA) Ltd v Bulmer (SA) (Pty) (Ltd)
[2001-2002]
CPLR 36
(CAC) that s 12 of the Act envisaged ‘
a
wide definition of control, so as to allow the relevant competition
authorities to examine a wide range of transactions which
could
result in an alteration of the market structure and in particular
reduces the level of competition in the relevant market
.’
The wording of s 12(2) thus contemplates a situation where more
than one party simultaneously exercises control over
a company.
[7]
Interpretation
of s 12(2)(g)
[43]
Section 12(2)(g) proceeds from the
assumption that a person with control in one of the forms set out in
paras (a) to (f) of the
subsection (each of these forms being ‘an
element of control’) usually, that is, ‘in ordinary
commercial practice’,
has the ability to materially influence
the policy of a firm. The nature of the influence contemplated in
paras (a) to (f) is thus
relevant to the interpretation of para (g).
[44]
Sutherland
Competition
Law in South Africa
at 8-27 suggests
that (a) to (f) provide that a firm will control another firm if (i)
it directly or indirectly owns more than
50% of a firm, and further
that (e) lays a different basis for control of a trust ; (ii) it has
the ability, directly or indirectly,
to appoint or dismiss
controlling managers of a firm; (iii) it has the ability
to make management decisions of a firm
whether directly or through a
power of dismissal or replacement of managers.
[45]
Section 12(2)(g) permits for a
filling-in of potential lacunae in the manifestations of control as
provided for in (a) to (f) with
the touchstone being material
influence. Expressed differently, it may not be required by the
section that a person
must have a right
strictu
sensu
to steer a firm or to appoint
persons to do the necessary steering to constitute control in terms
of (g) but the person must have
a power to either steer or appoint
those who can do the necessary steering. The term power is derived
from Hohfeld,
Fundamental Legal
Conceptions as Applied in Judicial Reasoning
(1917). A power is the opposite of a disability in that if A can
exercise a power B is disabled from interfering with the consequence
of that exercise, which in turn depends on the scope of the power so
possessed.
[46]
In the case of (g) the term
‘ability’ can, in my opinion, be viewed as a power
sourced in an agreement or
similar legal instrument, just as the
powers in (a) to (d) are sourced in legal instruments such as the
company’s founding
documents, shareholder agreements and the
like. The influence which can be exercised pursuant to such a power
under (g) must, in
terms of the wording of the section, be an
influence over the ‘policy’ of the firm. Matters of
‘policy’
would be important or strategic decisions of the
company such as are typically decided by shareholders in general
meeting or at
board level (as reflected by (b) and (c)).
[47]
The most obvious way of exercising
influence, for
purposes
of s 12)2)(g), would be by way of a direct decision-making power
on matters of policy, in the same way as the majority shareholder
can
usually exercise a direct decision-making power on such matters. The
present case does not require us to decide whether, and
if so how,
indirect influence akin to that exercised by the person having the
power to appoint a majority of directors (para (c))
could arise in
the context of para (g).
[48]
The word ‘materially’ in
para (g) refers, in my opinion, not to the decisiveness of the power
but to the range of matters
over which it extends. The word ‘ability’
in para (g), viewed in the context of the preceding paragraphs of the
subsection,
points to the power to do something (which may be the
positive power to determine an outcome or the negative power to
prevent an
outcome). However, if the power applies only to one or two
matters, depending on the nature of those matters, it may not be
sufficiently
extensive to meet the threshold of materiality. The
range of influence need not be as extensive as that exercised
directly by shareholders
through the general meeting or indirectly
through the board by the person with the power to appoint the
directors but it must,
as in both those cases, be reasonably
extensive since otherwise it will not be comparable to the influence
exercised by a person
with control contemplated in paras (a) to (d).
Section
12(2)(g) and the old agreement
[49]
The Tribunal found that the parties
paid only lip service to the apparently wide powers conferred on
Retief by the old agreement
and that he did not in fact exercise
material influence. In approaching the case in that way the Tribunal
erred. Viewed through
the prism of (g) the question is what powers he
possessed rather than what he exercised in practice.
[50]
Both parties agree that the word
‘
ability
’
means that a person can influence the policy in the required manner,
without having to show that it in fact does so in practice.
The
respondents contended that the enquiry is not limited to contractual
entitlement but includes the manner in which Novus was
governed in
the years following the 2008 restructuring.
[51]
I disagree with the respondents’
proposition in this regard. It is not necessary, in this case, to
embark on a factual enquiry
beyond what is stated in the two
agreements. This is because Retief’s powers are clearly
stipulated and ascertainable from
the provisions of the contract. How
Novus was in fact governed in practice is irrelevant.
[52]
The parties before us were agreed
that by virtue of the old agreement Retief had control of PMG in
terms of para (g). At the same
time Media 24 had control of PMG in
terms of paras (a) to (d). Although the parties referred to this
situation as joint control
it might be more accurate to describe it
as dual control since joint control more typically refers to the case
where parties combine
rights of a similar kind so as to create
control, for example, where shareholders who individually lack a
majority combine their
rights so that together they can command a
majority of the general meeting and can control the appointment of a
majority of the
directors.
[53]
With a view to contrasting Retief’s
position under the old agreement with his position under the new
agreement, it is necessary
briefly to state why I agree with the
parties that under the old agreement Retief had control in terms of
para (g).
[54]
The authority to appoint and dismiss
the CEO and CFO, the two most senior executive positions in the
company, vested in Retief.
Because he had to exercise the appointment
power ‘in consultation with’ PMG’s Exco, the Exco
had a veto right
but the positive power nevertheless vested in
Retief. Furthermore, the Exco comprised Retief, the CEO and two board
members nominated
by Media 24, so that – at least following the
appointment of the first CEO – power on the Exco would be
evenly distributed
between Retief and his appointee on the one hand
and the two nominated directors on the other. The CEO was primarily
answerable
to, and reported, to Retief, not the board.
[55]
The CEO was to formulate and prepare
the company’s consolidated annual budget and consolidated
business plan ‘in consultation
with’ Retief. This meant
that Retief had a veto power in respect of the budget and business
plan, so that they could not
go forward to the board for approval
unless they carried Retief’s approval.
[56]
Retief was primarily responsible for
the planning and implementation of the PMG Group’s strategic
direction. This power was
to be exercised ‘in consultation
with’ the board, meaning that the latter had a right of veto.
Again, though, the positive
power vested in Retief.
[57]
The printing agreements between PCS
and PMH on the one hand and Media 24 on the other could not be
amended by those parties except
in consultation with Retief, meaning
that he had the right to veto amendments.
[58]
Cumulatively
the matters summarised above covered a sufficiently wide range of
strategic matters to constitute material influence,
in some respects
positive and in some respects negative. They encompassed the
heartland of matters to which EU regulators conventionally
look when
assessing whether influence over, and thus control of, a firm exists:
budgets, business plans and the appointment of
senior managers.
[8]
The agreement emphasised the separate location of control in Retief
by recording that he was to exercise his duties and responsibilities
and arrange the conducting of the Group’s business on the basis
of ‘operational independence in principle’ from
PMG’s
board, from Media 24 and from the shareholders of PCS and PMH. The
principle was not merely one of the Group’s
independence from
Media 24 but of Retief’s independence from PMG’s board
and from the shareholders of PMG’s operating
subsidiaries. This
is important because the usual locus of strategic control of the
Group would have been these very entities.
[59]
In terms of the preamble the rights
conferred on Retief were subject to the fiduciary duties of the
members of PMG’s board.
This did not mean that the board could
override Retief whenever they preferred their view to his. Viewed
within the context of
the contract as a whole and the circumstances
in which it was concluded, the preamble could not have been intended
to allow the
board to intervene unless Retief in their view was not
acting bona fide in the best interests of the Group. In this and
other instances
where the board had a veto right, the board could not
ultimately have its way – unresolved disputes in that respect
were
to be referred to an expert for determination and his or her
determination was to be final and binding on both sides.
[60]
All of this must be viewed against
the backdrop of a legal environment in which a company’s board
was viewed as the recipient
of delegated authority from the
shareholders and where there was no objection in principle to an
arrangement by which certain powers,
which would usually vest in the
board, were instead conferred contractually on someone else, so that
there were three centres of
power: the general meeting, the board and
the third party. The arrangements contained in the old agreement were
approved, inter
alia, by Media 24, which was PMG’s sole
shareholder, and by all the shareholders of PCS and PMH (being Media
24 and the Retief
entities).
Section 12(2)(g)
and the new agreement
[61]
Leaving aside, for the moment, the
preamble to clause 4.3 of the new agreement, some apparently
important powers remain with Retief
while others have fallen away or
been diluted.
[62]
The important powers which remain
are the following. Retief still has the right, in consultation with
Exco, to appoint the CEO and
the CFO. His right of appointment has
been extended to include the COO. The Exco with the veto right is
arguably now weighted in
Retief’s favour because it comprises
himself and his three appointees (the CEO, the CFO and the COO) and
two directors nominated
by Novus. Retief still has the authority and
responsibility to oversee and supervise the CEO who is answerable and
must report
to Retief.
[63]
Retief also retains his right to
veto amendments to the printing agreements.
[64]
There has been a dilution of
Retief’s powers in relation to the Group’s consolidated
annual budget and consolidated
business plan. His role is now simply
to procure that the CEO prepares these documents. The CEO is not
required to do so in consultation
with Retief, so the latter has lost
his veto right in respect of these important strategic documents.
[65]
In regard to the strategic direction
of the Group, Retief is no longer responsible for its planning and
implementation. His responsibility
appears to be the more modest one
of ‘overseeing’ the strategic direction and the
monitoring of its implementation.
This dilution must be viewed in the
context of the fact that the strategic direction of the Group would
be set by its consolidated
business plan, over the content of which
Retief has lost his veto right.
[66]
The principle of operational
independence has also undergone an important change. The independence
is now independence between the
Group on the one hand and Media 24 on
the other. The principle governing the exercise by Retief of his
duties and responsibilities
is not one of operational independence
from PMG’s board. In this regard clause 4.3.5 must be read
together with the new definition
in clause 2.2 of the term
‘Operational Independence’, the opening part of which
refers to the conduct of the Group’s
business in a manner which
ensures its ability to secure and conduct business in its commercial
interests ‘as determined
from time to time and for the time
being by the Board’.
[67]
This takes one conveniently to the
preamble to clause 4.3. Everything is made subject to the duties of
the members of PMG’s
board in terms of the 2008 Companies Act,
the MOI, the Listing Requirements and ‘the Law’ (a term
very widely defined
in the agreement and including, so the parties
agree, King III).
[68]
In terms of the new Companies Act a
company’s board is the repository of original powers rather
than the recipient of powers
delegated to it by the shareholders
through the articles of association. Section 66(1) states in this
regard that the business
and affairs of the company must be managed
by or under the direction of its board, which has the authority to
exercise all the
powers and perform any of the functions of the
company, ‘except to the extent that this Act or the company’s
Memorandum
of Incorporation provides otherwise’. The ‘except’
part of section 66(1) permits a deviation from the usual dispensation
if the MOI makes provision for such deviation.
[69]
The appeal record does not tell us
whether PMG adopted a new MOI when the new Companies Act came into
force in May 2011. What can
be said is that until 9 February 2015 PMG
was a private company with Media 24 as its sole shareholder. The
parties appear to be
agreed that, even if PMG did not adopt a new MOI
which sanctioned the terms of the old management agreement, the
arrangements in
the old agreement were – notwithstanding any
deviation from s 66(1) – legitimised through the doctrine
of unanimous
assent.
[70]
Things changed when on 9 February
2015 PMG, now called Novus, was converted to a public company and
adopted a new MOI. At least
upon listing and the diversification of
its shareholders, the doctrine of unanimous assent would cease to be
a practically relevant
consideration. More importantly, the new MOI
does not contain any provisions departing from the usual dispensation
ordained by
s 66(1). The MOI does not mention the management
agreement or derogate in any way from the board’s statutory
power and
duty to manage Novus’s business and affairs or its
authority to exercise all powers and perform all the functions of the
company.
[71]
The absence of derogation from the
board’s powers and duties is consistent with the Listing
Requirements and King III. The
former require that a listed company
must have a policy evidencing a clear balance of power and authority
at the level of the board
to ensure that no one director has
unfettered powers of decision-making. The latter requires inter alia
that a company must be
headed by a board that directs, governs and is
in effective control of the company and that the board must play a
prominent role
in the strategy-development process and not be a mere
recipient of strategy proposed by management.
[72]
The preamble to clause 4.3 of the
new agreement thus appears to have a far more limiting effect on what
follows than the preamble
to clause 3.4 of the old agreement. Indeed,
to the extent that the individual sub-clauses confer positive or veto
powers on Retief,
they would appear to be inconsistent with s 66(1)
as read with Novus’ MOI and thus, as Caxton argues,
unenforceable.
An alternative and perhaps preferable view is that,
although Retief may in the first instance perform the
responsibilities which
the agreement apparently confers on him, the
board has an unlimited right to intervene and override if it regards
a different course
of action as preferable. On the latter view,
Retief’s powers have been diluted to a level similar to those
of a managerial
employee who may from day to day appear to have
significant influence but who does not have control of the kind
contemplated in
s 12(2)(g) because he is subject to being
overridden at any time by his superiors.
[73]
One might ask why parties would
conclude an agreement which appears to take away with the one hand
what it gives with the other.
However, in the unusual circumstances
of the present case the answer is not hard to discern. The initial
plan was for Retief to
sell his family’s minority interest in
the Group and to retire, bringing the management agreement to an end.
This was thwarted
by Caxton’s intervention in the merger
proceedings initiated by the notification of January 2014. Although a
different course
of action was then resolved upon, there is no reason
to believe that Retief became intent on maintaining an influential
role in
Novus’ affairs. Novus’ listing, it may fairly be
assumed, was regarded by Retief as likely to enhance the value of his
family’s minority shareholding (which in terms of the 2015
transaction has been ‘flipped up’ from PCS and PMH
to
Novus). The JSE would not permit Novus to be listed unless its MOI
placed management control squarely in the board’s hands.
Retief
is unlikely to have had any opposition to such a dispensation. The
parties would have been aware, however, that the termination
of the
management agreement would present the same difficulties as the 2014
merger. After all, it was the proposed termination
of the management
agreement in 2014 which prompted the 2014 merger notification and
Caxton’s disruptive intervention.
[74]
Against that background, it is not
unreasonable to suppose that the parties intended, consistently with
the MOI, the Listing Requirements
and King III, to place final
management authority on all matters in the board’s hands while
retaining as much verbiage from
the old agreement as would get past
the JSE, thus providing a basis for arguing that there has not been a
transition from dual
(or joint) control to sole control. But for the
reasons I have endeavoured to explain, the argument cannot succeed.
[75]
There
was an argument that, even if Retief no longer has material influence
for purposes of s 12(2)(g), there has been no merger
because no
additional influence had been acquired by Media 24. The argument was
based on s 12(1)(a) which provides that a
merger occurs when one
or more firms directly or indirectly acquire or establish direct or
indirect control over the whole or part
of the business of another
firm. The view generally adopted, correctly in my view, is that if
there is a transition from joint
or dual control to sole control
there is a merger.
[9]
Both here
and abroad competition regulators have always regarded there as being
a sufficient distinction between the character
of sole control and
joint control to engage merger assessment. An enquiry into the change
in the remaining controller’s actual
influence more properly
belongs to assessment than notification. Bright lines are needed for
merger notification.
[76]
I would simply add that if X has
control of a company in terms of paras (a) to (d) and Y has control
in terms of para (g), it would
appear to follow as a matter of basic
logic that Y’s ability (i.e. power) to influence the company’s
policy must be
a derogation from X’s presumed ability to
influence such policy in terms of paras (a) to (d). With the
disappearance of Y’s
ability to influence, the derogation from
X’s presumed influence ceases and X’s presumed influence
can thus be taken,
for merger notification purposes, to have been
enhanced (ie restored), unless of course Y’s ability to
influence has been
transferred to Z, in which case Z’s
acquisition of joint or dual control will also be a notifiable
merger.
[77]
A further question arose as to what
would be the purpose of clause 4.8 which allows for an expert to make
a decision if parties
reached a deadlock, if Retief was not meant
have ‘joint’ control under the new agreement. Clause 4.8
stipulates:
‘
Should
any dispute arise between the Parties regarding the duties and
responsibilities of Mr Retief and/or the Board in terms of
this
clause 4 (which, for avoidance of doubt, will include a dispute as to
whether Operational Independence is materially or on
an on-going
basis impaired), which the Parties are unable to resolve, such
dispute shall be referred to the Expert for determination
in terms of
clause 9 below.’
[78]
Clause 9 sets out the dispute
resolution mechanism. In terms of clause 9.2 the expert shall
make his/her decision as an expert
and not as an arbitrator which
decision shall be final and binding on each of the parties.
[79]
Mr Trengrove submitted that clause
4.8 is
pro non scripto
in the light of the preamble and the new legislative parameters.
According to him, the expert must interpret the powers vested
on the
parties in light of the preamble. This effectively means that the
expert’s decision will not be able to trump the
decision of the
board.
[80]
The drafters of the new agreement
were possibly not alive to the consequences of s 66(1) of the new
Companies Act. In the final
analysis the question is not whether
Retief has retained some significant powers (although his powers have
been diminished under
the new agreement as indicated before) but
whether he can legally exercise ‘joint or dual control’
with the Board as
he did before. The preamble in clause 4.3 subjects
the provisions that follow to the structure of the new Companies Act.
It follows
therefore that at the interpretative level, s 66 must
prevail.
[81]
It follows that the Tribunal erred
in finding that a notifiable merger had not occurred. The merger,
although it has now been implemented,
will thus need to be notified
and assessed in terms of s 12A. This is not, after all, such a
dramatic conclusion. It does
not seem to be in dispute that sooner or
later there will need to be a merger notification. If not now, merger
notification will
be required when the new agreement comes to an end,
which will occur at the latest when Retief turns 65 in November 2017.
Have the
requirements for the granting a final interdict been satisfied?
[82]
Mr Unterhalter argued that Caxton
did not show that it had a clear right worthy of protection but
merely contended that it had an
interest in the 2015 listing given
that it was the respondents’ competitor and that it was granted
leave to intervene in
the abandoned merger 2014 proceedings.
[83]
Caxton has a real interest in
ensuring that the merger is subjected to scrutiny by the relevant
competition authorities. As was
stated in
American
Soda Ash v the Competition Commission
[2005] 1 CPLR 18 (CAC) at para [4]‘
there
is no need for a participant at any hearing to show that he or she
has suffered damages or that they may be exposed to them.
’
A party need not show that any specific right has been infringed or
that they require protection against any serious or
irreparable
damage entitling them to an order. This position was confirmed by the
SCA in
American Soda Ash v the
Competition Commission
[2005] 1 CPLR
1 (SCA) para [34] where it held the following:
‘
We
agree with the CAC’s conclusion. Ansac’s argument seeks
to conclude from the limited express rights the Act confers
on a
participant in a hearing that the Act requires an intervenor to
comply with the strict common-law requisites for interdictory
relief;
but this is to overlook the significance of the fact that a broad
ambit of participatory rights is created in the first
place.’
[84]
There is no need for Caxton itself
to show that it would suffer damage if the interdict was not granted.
An unnotified merger would
undermine the objects of the Act which
prohibits implementation of a merger without the approval of the
Commission. Mr Unterhalter
submitted that parties should be
discouraged from directly approaching this Court when it was open to
them to approach the Commission
to investigate and report on
transactions. Direct access to the Tribunal, he argued, should be
preserved for those parties whose
rights are so imperilled so as to
warrant the immediate attention of the Tribunal.
[85]
Mr Trengrove argued that for these
matters to be taken up by the Commission they must be reported. There
is no mechanism available
to pursue the Commission to act on
unreported mergers.
[86]
When an urgent application was
brought to the Tribunal, the listing had not yet taken place. Even if
ordinarily a third party should
report an anticipated unlawful
implementation of a merger to the Commission and leave it to the
Commission in the first instance
to take action, time did not allow
for this in the present case. Caxton was thus entitled to approach
the Tribunal as a matter
of urgency. The horse has now bolted, so to
speak, as the implementation of the transaction has taken place.
Caxton became confined
to an order seeking notification post the
listing. Listing took place after the matter was considered and
adjudicated upon by the
Tribunal. It seems permissible for Caxton to
approach this Court with the view to setting aside the Tribunal’s
order. By
granting the relief sought this Court would not be
encouraging parties to approach it directly as the context in other
cases might
differ. Indeed, the policy of the Act regarding
notification to the Commission remains and parties are still required
by the Act
to adhere to the provisions of the Act regarding
notification of mergers.
[87]
For the reasons above, the new
agreement falls within the meaning of s 12(1) of the Act and a merger
ought to have been notified
in terms of s 13A(1) of the Act.
[88]
Although the points of law involved
in this matter are not free from complexity, the matter was not so
voluminous and extensive
as to justify the use of three counsel.
[89]
In the result the following order is
made:
1.
The appeal is upheld with costs including
the costs of two counsel;
2.
The first to fourth respondents are ordered
to notify the fifth respondent of the change of control of the second
respondent brought
about by the implementation of the restated
management agreement dated 23 February 2015.
N
P BOQWANA AJA
DAVIS
JP and ROGERS AJA concurring
APPEARANCES
For
the appellant: Adv W Trengrove SC with Advocates J Wilson and G
Marriot
Instructed
by: Nortons Incorporated, Sandton, Johannesburg
For
the first to fourth respondents: Adv D N Unterhalter SC with Adv R
Pearse
Instructed
by: Werksmans Attorneys, Johannesburg
[1]
Process
employed in producing publication such as magazines.
[2]
Process
employed in producing publication such as newspapers.
[3]
Retief
family trusts and other businesses
[4]
See
Van
Rooyen and Others v The State
2001
(4) SA396 (T) at 453 D-E. The authorities on this point state that a
decision ‘in consultation with’ another
functionary
requires the concurrence of that functionary while a decision
‘after consultation with’ requires
no more than that the
decision must be taken in good faith, after consulting and
giving serious consideration to the views
of the other functionary.’
See
Unlawful
Occupiers, School Site v City of Johannesburg
2005 (4) SA 199
(SCA) at 206 D – F and
Premier
Western Cape v President of the RSA
[1999] ZACC 2
;
1999 (3) SA 657
(CC) at para
[85]
footnote 94.
[5]
See
clause 5.1 of the old agreement.
[6]
Whether
the ‘deviation’ was so recorded is not known because
PMG’s constitutional documents predating the MOI
of February
2015 are not part of the record.
[7]
Distillers
Corporation (SA) Ltd v Bulmer (SA) (Pty) Ltd
supra
[8]
Faull
and
Nikpay
The
EC Law of Competition
2
nd
Ed at 808; Commission Consolidated Jurisdictional Notice under
Council Regulation (EC) No 139/2004 on the control of concentrations
between undertakings (2008/C95/01) para 67.
[9]
Ethos
Private Equity Fund IV / Tsebo Outsourcing Group (Pty) Ltd
[2003]
2 CPLR 371
(CT) at paras 24 and 25 and
Iscor
Ltd and Saldahna Steel (Pty) Ltd (67/LM/Dec01
)