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[2008] ZACAC 1
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Netcare Hospital Group (Proprietary) Limited and Another v Manoim NO and Others (CAC 75/CAC/Apr08) [2008] ZACAC 1 (27 October 2008)
IN THE
COMPETITION APPEAL COURT OF SOUTH AFRICA
CASE
NO CAC 75/CAC/Apr08
In the matter
between :
NETCARE HOSPITAL
GROUP
(PROPRIETARY)
LIMITED
First
Applicant
C
OMMUNITY
HOSPITAL GROUP
(PROPRIETARY)
LIMITED
Second
Applicant
and
NORMAN
MANOI
M
NO
First
Respondent
URMILA
BHOOLA NO
Second
Respondent
YASMIN
CARRIM NO
Third
Respondent
THE
COMPETITION TRIBUNAL
Fourth
Respondent
THE
COMPETITION COMMISSION
Fifth
Respondent
Delivered
2008
LEVINSOHN
AJA :
[1] For
ease of reference I shall refer to the
first
and second applicants as “Netcare” and “CHG”
respectively. The fourth and fifth respondents will
be referred to
as the “Tribunal” and the “Commission”
respectively.
[2]
On
10
th
March 2008 the Tribunal issued a written decision in terms of which
it refused to approve a settlement agreement concluded between
Netcare and CHG on the one hand and the Commission on the other.
Both Netcare and CHG seek to review and appeal against this
decision.
[4]
Before
getting to grips with the essential issues that arise in these
proceedings it is necessary to set out in broad outline the
relevant
factual background which emerges from the affidavit in support of the
review application.
[5]
In
1999 the Macmed Group of hospitals was placed into liquidation.
This also precipitated the liquidation of the Malasela Hospital
Group
(“MHG”). The latter group was an empowerment consortium
which had acquired ownership of hospitals in the Macmed
Group. After
its formation MHG was funded by Macmed.
[7]
Following
the liquidation of MHG efforts were made to rescue the hospitals in
the group from liquidation. At that time Netcare
was in fact
looking for a black empowerment partner. It concluded an agreement
with the Malasela Hospital Group in terms of which
it was to provide
that group with various forms of financial assistance including
guarantees, loans, bridging finance and working
capital. In
consideration for this Netcare would become a 43,75% shareholder in a
new company, namely CHG. The shareholding
in question was
transferred to Netcare in September 2002. At present CHG consists
of five hospitals, namely Montana and Bougainville
in Pretoria, N17
in Springs, UCT and Kuils River in Cape Town.
[8] In
addition to the financial assistance Netcare also undertook to
install information technology equipment at CHG’s hospitals.
A certain financial institution had made the provision of this IT
equipment as a prerequisite to obtain additional funding.
[9]
Netcare
in its founding papers concedes that the funding and the provision of
various forms of assistance resulted in Netcare acquiring
de
facto
control
over
CHG
for
the purposes of section 12(2)(g) of the Competition Act and Netcare
has made the point throughout the proceedings that this
control was
acquired incrementally over a period and it was difficult to say with
any certainty precisely when the obligation to
notify the Competition
authorities arose.
[10] After
the formation of CHG there was a dramatic change in the manner in
which private hospitals negotiated tariffs with the
various medical
schemes. Whereas previously medical schemes negotiated with
industry associations which represented their members
– a type
of collective bargaining – the Commission determined that this
form of negotiations constituted price fixing
within the meaning of
the Competition Act. Thus this tariff negotiation in this manner
came to an end. It was now incumbent
on the various individual
private hospitals to negotiate tariffs with various medical schemes.
The larger groups negotiated tariffs
on behalf of all the hospitals
within their respective groups. This included CHG which was
regarded by Netcare as an associated
hospital. In fact in its
annual reports from 2002 onwards Netcare reflected its investment in
CHG as being an investment in an
“associated company.”
[11] Netcare
accepts that its acquisition of
de
facto
control
over CHG was not notified nor was it approved by the Commission as
required by sections 13A(1) and (3) of the Competition
Act. In the
premises the prior implementation without consent constituted a
contravention of section 13A(3) of the Competition
Act.
[12] In
August 2006 Netcare did indeed notify the Commission in regard to its
assumption of
de
facto
control
over CHG and its subsequent acquisition of the remaining shares in
CHG. The Commission declined to support their merger
but the
Tribunal after a hearing which lasted 11 days approved the merger on
2
nd
August 2007 without conditions.
[13]
It
is common cause that in the period prior to the merger hearing before
the Tribunal Netcare and CHG were engaged in negotiations
with the
Commission. As indicated above Netcare and CHG accepted that there
had been prior implementation of a merger without
notification and
therefore it was liable to pay a penalty for this contravention.
[14] It
appears that in addition to this issue the parties debated whether
Netcare and CHG had engaged in price fixing in contravention
of
section 4(1)(b)(i) of the Competition Act. This arose as a result
of Netcare negotiating tariffs on behalf of CHG with the
various
medical aid schemes as mentioned above. The basic hypothesis
appears to have been that since the two entities had not
lawfully
merged they therefore theoretically stood in a horizontal competitive
relationship with each other and their actions in
negotiating tariffs
amounted to price fixing.
[15] Netcare
and CHG took the view that when the impugned conduct took place the
two entities
de
facto
were
no
longer in competition with each other and therefore could not have
engaged in price fixing.
[16]
Notwithstanding
that these disparate views could not be reconciled Netcare and CHG
reached a compromise with the Commission. A
written agreement was
entered into which provided that both Netcare and CHG would submit to
a consent order in terms of section
49D of the Act. The proposed
order recorded that both Netcare and CHG conceded contraventions of
sections 13A(3) and 4(1)(b)(i)
of the Act. They agreed to pay an
administrative penalty in the amount of R6 million rand to the
Commission.
[17]
The
proposed consent order was placed before the Tribunal and it deferred
its deliberations until the merger proceedings had been
finalised.
Accordingly the consent order hearing took place on 5
th
December 2007. Subsequently on 10
th
March 2008 the Tribunal delivered a written ruling. It refused to
make the consent agreement an order of the Tribunal.
[18] The
Tribunal furnished detailed reasons for this decision. It focused
principally on whether Netcare and CHG had given the
Commission a
satisfactory explanation for its failure to notify the merger. It
concluded that in fact a satisfactory explanation
had not been
forthcoming and that ought to have operated as an aggravating factor
as far as the assessment of the penalty was concerned.
The Tribunal
observes as follows : -
“No
explanation for the failure to notify is made in the papers nor was
one given to the Commission during negotiations in
respect of the
present consent agreement. We can only surmise from the record in
the merger hearings that due to the limping
manner in which the group
was reconstituted, no ‘crystalline moment’, to quote
Netcare’s counsel, emerged during
the period prior to the
conclusion of the shareholders agreement at which it appeared that
joint control had arrived and hence
animated the shareholders
attention sufficiently to consider notification. Even if one gives
the merging parties the benefit
of the doubt due to the murky nature
of legal relationships during this embryonic period, no explanation
is given to account for
the period after the conclusion of that
agreement, when clarity as to the parties’ legal relationship
must at last have crystallised.”
[19]
In
the course of its reasoning on this part of the case the Tribunal
referred to certain evidence that had been given by one Dempers
in
his capacity as the chief executive officer of CHG at an intervention
hearing concerning the Afrox Group. During the course
of
cross-examination Dempers made reference to the fact that Netcare
owned 43,75% of the shares in CHG. He went on to say “Netcare
has got no control over Community Hospital Group. It has got one
board representative out of six members.” He opined
that
because of its board representation it had much less influence than
its other co-shareholder, namely Community Health Care
Holdings, in
CHG.
[20]
In
paragraph 13 of its reasons the Tribunal observed : -
“There
has been no change in the
de
jure
or
de
facto
relationship
between
Netcare and CHG, that is on record, that would reconcile the evidence
of Dempers in
Afrox
Healthcare
and the respondents’ version in the present proceedings. In
the absence of such an explanation it would appear that Netcare’s
role as a shareholder has been finessed to suit the legal exigencies
of the moment.”
[2
1] In
paragraphs 14 and 15 the Tribunal made what I conceive to be its most
crucial findings on this part of the case : -
“It
may well be that such an explanation is possible. But it is a
material issue in assessing the extent of the penalty
in
respect of non-notification as it is relevant to the consideration
of whether the parties
have
‘co-
operated
with the Commission and Tribunal”
(section
59(3)(f))
and an assessment of ‘the behaviour of the respondents’
(
59(3)(c)
.
In other words, even though the respondents may have come clean
when confronted at the time of the
Commission’s
non-notification investigation, the Commission is entitled and
indeed ought to have had regard to the history
of inconsistent
explanations on the same issues before the Competition Authorities
to assess properly the firms’ behaviour
and degree of
co-operation. If one or both of the respondent had been less than
frank on this issue with the competition authorities
this should be
taken into account as an aggravating factor in assessing an
appropriate quantum for the penalty.
In
our view, the Commission by failing to seek a satisfactory
explanation on this aspect has given no consideration or
insufficient
weight to this issue in considering an
appropriate penalty.
”
(My
emphasis).
[2
2] These
quoted passages in my view show clearly that the Tribunal was heavily
influenced by what it regarded as contradictory
and unsatisfactory
explanations given by both Netcare and CHG in regard to their
relationship. The evidence of Dempers played
a crucial rôle
in that reasoning. Manifestly the Tribunal viewed the conduct of
the two hospital groups with a measure
of suspicion.
[2
3] Apart
from the above aspect the Tribunal recorded further reasons for
refusing to approve the agreement and these were notably
the
Tribunal’s view that the penalty agreed was inappropriate. It
also criticised the Commission for entering into the
agreement before
it had concluded its investigation into the merger.
[2
4] Counsel
for Netcare and CHG has launched a wide-ranging attack on the
Tribunal’s findings and in support of their submissions
have
submitted comprehensive and detailed heads of argument.
[25] Before
considering these it is I think convenient to construe the provisions
of section 49D. At the outset in my view counsel
was perfectly
correct in drawing an analogy between the present section and plea
bargaining in the context of the criminal law.
They both have much
in common. The process is intended to bring about expeditious
conclusion of cases, avoid protracted hearings
and conserve
resources. The aims and objectives of public policy are adequately
served by the plea-bargaining procedure in both
fields of law.
[26]
However
in terms of section 49D it is obvious that the Tribunal enjoys a
discretion. It may indeed refuse to confirm the agreement.
Section 49D(i) envisages that the Tribunal “without hearing any
evidence” may confirm the agreement. To my mind
that appears
to envisage that the Tribunal will not embark on its own independent
inquiry, that is to say, it will not hear the
evidence of witnesses
to determine the suitability or otherwise of the agreement. In the
criminal law context, a presiding officer
would be entitled to call
evidence before approving of a bargain between the State and the
accused. (See section 105A(7) of Act
51 of 1977).
[28]
The
consent agreement between the Commission and the particular
respondent represents the culmination of detailed investigation
of
the complaint over a period of time. Armed with the information at
its disposal the Commission is well positioned to evaluate
the true
extent and seriousness of respondents’ misdemeanours. When it
concludes an agreement of this nature it does not
do so lightly but
considers its appropriateness against the background of all its
investigations. In my opinion counsel is perfectly
correct when he
submits that the Tribunal should accord due deference to the views of
the Commission.
[29]
What
then are the circumstances under which the Tribunal can interfere?
As indicated above it is not a mere rubberstamp. It
is not a court
of appeal in the sense that it can embark on a re-hearing of the
matter and substitute its own views for that of
the Commission. The
Tribunal of course plays a most important rôle in the
Competition hierarchy. In exercising its discretion
whether to
approve a consent order it must obviously be satisfied that the
objectives of the Competition Act, together with the
public interest,
are served by the agreement. An agreement which imposes an
inordinately low penalty for a serious contravention
will obviously
bring the objects of the Competition Act into disrepute and will be
against public policy. It seems to me that
the true inquiry before
the Tribunal in this context is whether the agreement is a rational
one, whether it meets the objectives
set out above and is not so
shockingly inappropriate that it will bring the Competition
authorities into disrepute. As indicated
the Tribunal cannot hear
any evidence but it can surely make such inquiries at the hearing as
it deems fit in order to satisfy
itself that the abovementioned
objectives are properly met. If thereafter the Tribunal forms the
view that it ought not to approve
the agreement for various reasons,
particularly those not canvassed during the consent hearing, in my
opinion, the dictates of
natural justice require that it apprise the
parties of its difficulties and afford them an opportunity to deal
with same.
[30] The
above is a fairly trite principle of procedural fairness and natural
justice. Corbett J (as he then was) in
Kannenberg
v Gird
1966
(4) SA 173
(C) approved of a
dictum
in an English case
Société
Franco-Tunisienne D’Armement – Tunis v Government of
Ceylon
[1959] EWCA Civ 4
;
(1959)
3 All ER 25
and
said the following : -
“In
the
Société
Franco-Tunisienne
case,
supra
,
the Court of Appeal stressed that the point which occurred to the
umpire and upon which he based his award was a new one and one
that
brought about a 'dramatic development' of the case. The Court held
that, in the circumstances, before making his award,
the umpire ought
to have communicated its import to the parties to enable them, and
more particularly the shipowners, to make submissions
to him in
regard thereto. The umpire's failure to do so created an
'unsatisfactory' position and a 'grave risk of injustice'.
The
Court accordingly ordered the matter to be remitted to the
umpire
to enable him
,
inter
alia
,
to reconsider the question of demurrage.
To
my mind, similar considerations arise in the present case. The
interpretation of clause 12 which the umpire made the basis
of his
award also constituted a 'dramatic development' in the case. It was
an interpretation which had occurred to neither of
the parties or
their arbitrators. It made a very substantial practical difference
to respondent's position : in fact it rendered
him liable to
applicant in a sum over R4,700 in excess of what the applicant
originally claimed. That this should have occurred
without
respondent having been previously apprised of what the umpire had in
mind and been given an opportunity to lead evidence
or make
representations in regard thereto is, in my view, an unsatisfactory
position and one which carries with it the risk of
injustice. Had
the opportunity been given, I have no doubt that respondent or his
arbitrator would have sought to persuade the
umpire that his
interpretation was incorrect.”
[3
1] In
the present case the application of this principle comes pertinently
to the fore. As indicated above the Tribunal laid
great stress on
the unsatisfactory nature of the explanations which were tendered by
both Netcare and CHG. The evidence given
by Dempers at another, and
unrelated, hearing featured prominently in its reasoning. It ought
to have afforded the parties affected
by this evidence an opportunity
to deal with same. Presumably they would have submitted that the
Tribunal was not entitled having
regard to the provisions of section
49D to introduce extraneous evidence in support of its reasoning.
Nor would it have been
entitled to take account of evidence given in
unrelated proceedings. Secondly, even assuming that it was entitled
to do so, both
Netcare and CHG would have been in a position to
explain Dempers’s evidence and put it into a proper context.
The deponent
to the founding affidavit dealt with this issue as
follows : -
“68. The
answer that would have been provided, had an opportunity been offered
to the applicants, is a simple one :
Dempers’
statement regarding the absence of control exercised by Netcare
over CHG was made in the specific context of
the relative pre
sence
of Netcare members, as compared to Community Healthcare Holdings
((“CHH”) members, on the board of directors
of CHG.
Notwithstanding the parity of
their respective shareholdings, Netcare had only one board member
as compared to CHH’s five
board members.
It was in the context of that
comparison that Dempers contended that Netcare did not exercise
control over CHG.
It was therefore, in the light
of the comparison between respective board members, that the
Dempers’ statement was made
and must, appropriately, be
construed.”
The
result of
all
this would have been to negate the inference that the Tribunal sought
to draw in regard to the issue of contradictory explanations.
[3
2] I
must perforce hold that reviewable irregularities occurred in the
proceedings before the Tribunal in two fundamental respects.
Firstly, it introduced both the evidence of Dempers and that given in
the merger proceedings in its deliberations. On a proper
construction of section 49D it was not entitled to do so. Secondly,
and on the assumption that it could introduce Dempers’s
evidence and consider same, it ought to have apprised the parties of
this. I am satisfied that on this ground alone the review
ought to
succeed and the decision of the Tribunal falls to be set aside. I
therefore find it unnecessary to traverse the other
grounds of review
and appeal which were canvassed in counsel’s heads of argument
[33] . The
question now arises as to whether this Court, as the reviewing Court,
ought to substitute its own decision for that of
the Tribunal. In
Commissioner,
Competition
Commission v General Council of the Bar of South Africa
and
Others
2002
(6) SCA 606, para [14] Hefer AP set forth the principle applicable to
that inquiry : -
“[14]
It is not necessary to deal at length with a reviewing Court's power
to substitute its own decision for that of an administrative
authority. Suffice it to say that the remark in
Johannesburg
City Council v Administrator, Transvaal, and Another
that 'the Court is slow to assume a discretion which has by statute
been entrusted to another tribunal or functionary' does not
tell the
whole story. For, in order to give full effect to the right which
everyone has to lawful, reasonable and procedurally
fair
administrative action, considerations of fairness also enter the
picture. There will accordingly be no remittal to the
administrative authority in cases where such a step will operate
procedurally unfairly to both parties. As Holmes AJA observed
in
Livestock
and Meat Industries Control Board v Garda
'. . . the
Court has a discretion, to be exercised judicially upon a
consideration of the facts of each case, and . . . although
the
matter will be sent back if there is no reason for not doing so, in
essence it is a question of fairness to both sides'.”
[34]
In
my opinion this Court is in as good a position as the Tribunal to
approve the consent order. Applying the principles set out
earlier
in this judgment there is more than enough material in the papers
before us to decide the fate of the application. In
the first
place, this Court accords great weight to the views of the Commission
which engaged in a detailed investigation of the
issues. In its
opposing affidavit its deponent states the following : -
“In
its assessment of the facts, the Commission was satisfied that the
agreed penalty was appropriate, taking into account
the factors in
section 59(3) and :
- the Tribunal’s previous
decisions on penalties imposed against parties for prior
implementation of mergers;
- the application of the concept
of ‘affected line of commerce’ in determining appropriate
penalties in terms of section
59 of the act; and
- the admission of liability,
which would, in the Commission’s view, entitle medical schemes
that suffered harm, or their
administrators, to pursue claims for
damages without having to first obtain a declaratory order that the
conduct complained of
contravened the Act.”
[3
5]
As
indicated above the Tribunal ought to defer to the views of the
Commission. It has obviously made investigations and pursued
detailed inquiries and has concluded that the agreement is an
appropriate one. Looking at the matter from the vantage point of
the Tribunal I would have been very hesitant to conclude that the
agreed penalty is a glaringly inappropriate one. The concession
by
Netcare and CHG that they were guilty of a contravention of section
4(1)(b)(i) of the Act is a very significant one. As pointed
out by
the Commission it would entitle competing medical schemes to sue for
damages if they could show that they suffered harm
as a result of
this conduct.
[36] A
further important feature which I think the Commission in the present
proceedings has misconstrued, is Netcare and CHG’s
contention
that it could not indeed have committed at the same time the offences
of prior implementation and price fixing. The
Tribunal expressed
what I regard as a strong
prima
facie
view
that these contraventions could be penalised separately. For
purposes of this judgment it is unnecessary for me to express
any
views on the issue save only to indicate that Netcare and CHG’s
views are not without substance. Counsel in their heads
of argument
have put up very compelling submissions on this part of the case.
In the context of the consent order it boils down
to this. Had
there not been the concession and the compromise the Tribunal would
have been faced with a possibly lengthy, complex
and protracted
hearing.
[3
7] Insofar
as the quantum of the penalty is concerned I am satisfied having
regard to all the circumstances, that the Commission’s
approach
was the correct one. During the consent order hearing Ms
Mkhwanazi
,
on behalf of the Commission, made the following important statement :
-
“This
consent agreement Chair is the result of protracted negotiation an
agreement between the Commission and the respondents.
The
respondents move from a position where they tendered a sum less than
two million Rand without an admission of liability to
figures and
other terms agreed to in the consent agreement that’s before
you. In arriving at this penalty the Commission
took into account
the Tribunal’s practice in previous cases that of taking into
account the affected line of business
and
in this case this was the CHG turnover which is where benefit of the
price fixing was derived and the annual turnover of CHG
in the
preceding final year
that is to say the year ended March 2006 wasn’t the year of …
in the sum of sorry two hundred and ninety six million,
two hundred
and eighty six thousand and three hundred and thirty seven Rand.
That figures appear from the financial statements
which are annexed
to these papers.
The
Commission was of the view that the Netcare turnover should not be
taken into account bearing in mind firstly that the CHG
hospitals did
not lightly add to Netcare’s ability to set prices at the
levels that it did and secondly that to take into
account that
turnover would result in punishing Netcare twice firstly as a
shareholder in the Community Hospital Group and secondly
its own
revenues which are independent of its arrangements with CHG. The
penalty that was finally agreed to amounted to 2.01%
of CHG’s
turnover for the year ended March 2006.
The
Commission further took into account the parties’ cooperation
with the Commission, the fact that they had entered into
settlement
agreement with the complainant, the parties’ submission as to
the extent of the benefit derived from the agreement
and the
admission of liability. I wish to point out that at the time the
Commission had adopted a policy that it is important
for firms when
concluding a settlement agreement that there be admissions of
liability.
It
was the Commission’s view at the time that this penalty is
appropriate in relation to both the contraventions which in
essence
flowed from the same conduct the non-notified acquisition of control
in Community Hospital Group
.”
(My
own emphasis)
.
[38] I agree with
these views. It would be incorrect and indeed would result in an
injustice if Netcare’s turnover was
taken into account. As
counsel for Netcare points out if this exercise is performed
Netcare’s revenues in areas where there
are no CHG hospitals
would be implicated. I also take into account the important
observation made by the Commission’s representative
that this
method of calculation was in line with the Tribunal’s previous
practice of taking into account the “affected
line of
business.”
[39] It
follows therefore that I am of the opinion
that the consent order is a rational one, it does not offend against
any of the objectives of the Competition Act inasmuch as the
penalty
imposed and the unequivocal admission of liability adequately serves
the interests of public policy. I conclude therefore
that this
Court ought to approve the consent agreement and an appropriate order
should issue.
[40] In the result
the following order is made : -
The
order of the Tribunal issued on 10
th
March 2008 is hereby reviewed and set aside and there is substituted
therefor the following order : -
The
agreement concluded between the first and second applicants on the
one hand and the fi
fth
respondent on the other is hereby confirmed as a consent order in
terms of section 49A(1) read with
section 58(1)(b)
of the
Competition
Act, No 89 of 1998
.
LEVINSOHN AJA :
DAVIS
JP
:
PATEL JA :
DATE OF J
UDGMENT
:
DATE OF HEARING :
27
OCTOBER 2008
COUNSEL FOR THE
APPLICANTS:
MR D.
UNTERHALTER SC with him
MR
J. WILSON
INSTRUCTED BY :
WEBBER
WENTZEL, JOHANNESBURG
COUNSEL FOR THE FIFTH
RESPONDENT :
MS
N. H. MAENETJE
INSTRUCTED BY :
COMPETITION
COMMISION