COMPETITION TRIBUNAL
REPUBLIC OF SOUTH AFRICA
Case no: 41/AM/Jun02
In the matter between:
Digital Healthcare Solutions (Pty) Ltd Applicant
and
The Competition Commission 1st Respondent
Healthbridge (Pty) Ltd 2nd Respondent
(intervenor)
Reasons for decision
Introduction
1. This case concerns the consequences of a putative breach of
conditions imposed by the Competition Commission (“the
Commission”) in respect of a merger approved by the Commission in
2001, subject to those conditions, as a small merger.
2. At issue is the validity of a notice of apparent breach (“the notice” or
“the notice of apparent breach”) issued in regard to those conditions by
the Commission on 28 May 2002 under rules 39 and 40 of the Rules
for the Conduct of Proceedings in the Competition Commission (“the
rules of the Commission”).
3. The recipient of the notice was Digital Healthcare
Solutions (Pty) Ltd (“DHS”), which is the applicant in
these proceedings. There are two respondents. The first
is the Commission. The second is Healthbridge (Pty) Ltd
(“HB”), which was authorised by this Tribunal in an
earlier application to intervene as a respondent. 1
4. The background is briefly as follows.
Background events
5. The merger in question took place in terms of an agreement concluded
in November 2000 when a company then named Persetel Q Data
Trading (Pty) Ltd (“Persetel”) sold a part of its business, known as
QEDI and conducted through a company named QEDI (Pty) Ltd, to a
competitor, Mediswitch (Pty) Ltd (“Mediswitch”). Persetel has since
changed its name to Comparex Africa (“Comparex”).
6. The QEDI business was absorbed into that of Mediswitch, which has
changed its name and is now known as Digital Healthcare Switch (Pty)
Ltd (“DH Switch”). DH Switch is a wholly owned subsidiary of DHS.
Persetel received shares in DHS as the consideration for its sale of the
QEDI business.
7. At the time of the merger Mediswitch was a subsidiary of Bytes
Technology Group Ltd (“BTG”), a listed company once known as
USKO, which is in turn a subsidiary of Allied Electronics Corporation
Ltd (“Altron”). Altron is also a listed company.
8. Since the merger DHS has been owned by BTG and
Comparex. DHS is a holding company, which operates
DH Switch alongside another wholly owned subsidiary
named MedeMass (Pty) Ltd (“MM”). MM conducts the
business of developing, licensing and maintaining
software used by doctors and other medical service
providers and known as practice management software
or practice management applications (“PMAs"). PMAs
help doctors and other suppliers of medical services to
organise their business operations and to prepare
medical scheme claims for onward transmission. 2MM
was in existence and in operation at the time of the
merger.
9. The business of DH Switch is that of electronically transferring or
1 Case no 41/AM/Jun02.
1 Case no 41/AM/Jun02.
2 Practice management software includes diaries, billing systems, patient records, debt collection,
inventory management, financial accounting and reporting and creating interfaces with outside
systems.
2
“switching” information about patients’ claims between, on the one
hand, doctors and other providers of medical services and, on the other
hand, the administrators of medical schemes of which the patients are
members. In this way the claims can be quickly processed and settled
by the medical schemes, which are known in the industry as “funders”.
Switching of information in this manner is a phenomenon of the
computer age, supplanting the transmission of documents and the
consequent paperhandling.
10.To allow switching to take place between switch entities
such as DHS and the PMAs used by doctors, a socalled
interface, known in the industry as an application
programming interface (“API”), is necessary. The switch
entities design and install APIs, for which they require
access to the source code of the PMAs. 3In order to gain
access, a contract is entered into between the switch
entity requiring access and the entity owning the PMA
software. The contract covers, inter alia , the
development cost and cost per site.
11.Two forms of switching were debated in the case. The
first is known as batching, and refers to the habit of
some medical providers to wait till the end of a working
day and then switch all their claims in a batch. This is an
earlier form of technology. The second, a more recent
development, is realtime switching, by which medical
providers switch every claim at the time when it arises
rather than accumulating the claims for transmission in
batched fashion at the end of a day, and moreover
receive an almost immediate response from the medical
scheme’s administrator. The two forms of switching
require somewhat different versions of the relevant
technology. There are also hybrid versions of switching
technology.4
technology. There are also hybrid versions of switching
technology.4
12. Switching technology came about through the investment of relatively
large sums in past years. Mediswitch and Persetel were pioneers in
this technology in South Africa and they incurred relatively large
3 Accessing, for instance, MM’s PMA software without an API developed or authorised by MM would
constitute copyright infringement or software piratacy, also referred to in this industry as hacking.
4 A more detailed explanation of realtime and batched procedures is given in the affidavit of DHS;
chief executive offider, Mr Du Plessis, at pp 178179 of the record.
3
investment expenditures of this kind.
13.Before the merger between QEDI and Mediswitch, QEDI
controlled approximately 95% of the switching market
and Mediswitch 3%. 5This led to a post merger market
share of more than 95% in the switching market. At the
same time, Mediswitch had a dominant market share of
between 60% and 65% of the PMA market. 6The net effect
of the merger was that DHS became a dominant player in
the switching market through DH Switch as well as in
the PMA market through MM.
14. HB is another switch entity. Two of its three main shareholders, each
with a holding of some 29%, are large administrators of medical
schemes. They are known as Medscheme and Discovery Health. A
third shareholder with a similar holding is Dimension Data Ltd
(“Didata”), a supplier of information technology services. Medscheme
and Discovery Health are the two biggest administrators in the market.
15. HB does not supply PMA software.
16. It is a characteristic of certain contractual arrangements prevailing
between HB and its shareholders, or some of them, that Medscheme
and Discovery Health only permit HB, and not any other switch entity,
to transmit claims made in real time to them.
17. In summary therefore, we have a situation where post merger the
dominant PMA vendor and the dominant switch provider reside in DHS.
HB, its major rival in the switching market is not in the PMA market and
has to enter into access agreements, so called frontend access, with
PMA vendors to enter this market. On the other hand HB enjoys the
advantage of realtime access with the two dominant medical scheme
administrators, Medscheme and Discovery, who collectively hold
approximately 60% of the equity in HB. This socalled backend access
is only possible if the switch provider has an agreement with the
is only possible if the switch provider has an agreement with the
relevant medical scheme administrator.
18.The merger had not originally been notified by the
parties to the Commission, but after its implementation
the Commission required notification in terms of s. 13(3)
5 See page 291 of the record at par 5.
6 Magennis, in his 22 September report on page 14, estimates MM’s market share of the PMA market
at 60% while Genesis, on page 1055 of the record, estimates it to be 65%.
4
of the Competition Act (“the Act”). 7
The Commission’s conditions for the merger and reasons for its
decision
19.Attached to the Commission’s merger clearance
certificate, dated 9 April 2001, were the following
reasons and conditions: 8
“The proposed transaction raises significant competition problems. The
parties involved are in the business of conveying claims electronically
between medical practitioners and healthcare funders. The parties’
market shares, postmerger, for the electronic conveyance of claims
for medical practitioners will be high. Furthermore, the merger raises
vertical integration concerns, more fully discussed below.
In order for the Electronic Medical Claims Switching process to work,
private medical practitioners require specific Practice Management
Software (“PMS”) to be loaded on their computer systems as well as
certain functionality to be built into their systems, in the form of an
Application Program Interface (“API”). MedeMass (Pty) Ltd (“Mede
Mass”), a subsidiary of Mediswitch controls a significant portion of the
PMS market. Furthermore, Mediswitch is already vertically integrated
and Mediswitch has allowed QEDI to interface with its PMS.
All independent PMS systems are fully integrated with competitors in
the switching segment that require the transportation of claims from
private medical practitioners to the healthcare funders. The PMS
package controlled by Mediswitch group, (MedeMass), is only
allowed to integrate with Mediswitch and QEDI. The vertical integration
concern that the Commission has with this transaction is that there has
been foreclosure by Mediswitch even prior to the proposed merger. If
this is tied to the switching service rendered by QEDI, which will be
acquired as a result of the proposed transaction, it is believed that the
acquired as a result of the proposed transaction, it is believed that the
transaction will give rise to a substantial lessening of competition in the
electronic claims switching market for private medical practitioners.
This will have a negative effect on the choice that the end consumer,
which in this particular case is the private medical practitioner, will
have with regard to the type of electronic switch he/she is allowed to
interface.
7 In terms of the Competition Act a party to a small merger is not obliged to notify the Commission of
the merger unless the Commission requires it to do so.
8 See page 26 of the record.
5
However, the Commission is of the view that the conditions set out
below would significantly reduce those concerns. The merger is,
therefore, approved, subject to the following conditions:
1. The merged entity shall, on reasonable written request by any
healthcare switch entity, integrate the applicable latest
versions of PMS packages which it owns or controls, with an
API which enables an interface with the switching technology
of the healthcare switch entity requesting such integration, in
accordance with an agreement referred to in paragraph 2
below.
2. Pursuant to such a reasonable written request, the merged
entity shall use all reasonable endeavours to conclude a
written agreement with the requesting healthcare switch entity
concerned, within a period of 60 days after receiving such
request, containing commercially, financially and technically
reasonable terms.
3. The merged entity shall provide a quarterly report to the
Commission, for a period of 12 months after the date of
approval, detailing all requests by third party healthcare switch
entities to integrate their API and functionality with the PMS
packages owned or controlled by the merged entity, as well as
detailing the agreements and time frames concluded with such
third party healthcare switch entities in respect of the
integration process.”
20. The meaning and interpretation of these conditions (“the conditions”)
lay at the centre of the debate in this case.
Relief sought by DHS
21. The prayers in DHS’ notice of motion, as amended in the course of the
proceedings, are for orders as follows:
1. The Notice of Apparent Breach issued by the First Respondent
against the Applicant dated 28 May 2002 be set aside.
2. It is declared that the Applicant and its subsidiaries have
2. It is declared that the Applicant and its subsidiaries have
complied, alternatively substantially complied, with the merger
conditions set out in the First Respondent’s merger clearance
certificate dated 4 April 2001.
6
3. It is declared that the Applicant and its subsidiaries are not
obliged to continue to negotiate and conclude an agreement
with the Second Respondent for the integration of the latest
versions of practice management software packages which
they own or control, with an application program interface
which enables an interface with the switching technology of the
Second Respondent.
4. As an alternative to prayer number 3, it is declared that the
merger conditions set out in the First Respondent’s merger
clearance certificate dated 4 April 2001 be amended to include
the following sentence at the end of the second condition:
‘including, without limitation, that such other healthcare switch
entity shall cancel any agreement which it may have with
healthcare funders or their administrators, relating to the
exclusive use by such funders or administrators of the
switching technology of such healthcare switch entity for the
electronic conveyance of claims, whether by batch or real
time.”
22. There was also a prayer for costs.
23. Prayer 4 was abandoned at a hearing on 21 November 2003 and no
more will be said about it.
24. The amended notice of motion stated that the application was brought
in terms of rule 39(2)(b) of the rules of the Commission, read with rule
42 of the Rules for the Conduct of Proceedings in the Competition
Tribunal (“the rules of the Tribunal”); alternatively the same rule 42 of
the rules of the Tribunal, read with s. 27(1)(c) of the Act.
25. Voluminous papers were filed on behalf of DHS and HB, and there
were also substantial affidavits and annexures on behalf of the
Commission. Relevant passages will be referred to below.
Preliminary observation on the issue of jurisdiction
26.In its papers DHS has raised two preliminary issues for
26.In its papers DHS has raised two preliminary issues for
consideration. These are that the notice of apparent
breach has been served on the wrong party and
secondly and alternatively that the Commission had
failed to apply its mind properly to the question of
7
whether there had been a breach of the conditions
before issuing the notice because the Commission
entirely misconceived the conditions. It was agreed
between all parties that these two issues could best be
disposed of by being argued as points in limine .
27. DHS had originally framed its application in terms of rule 39(2)(b) of the
rules of the Commission. That rule states:
Within 10 business days after receiving a Notice of Apparent
Breach, a firm referred to in subrule (1) may –
(a) submit to the Commission a plan to remedy the breach;
or
(b) request the Competition Tribunal to review the Notice of
Apparent Breach on the grounds that the firm has
substantially complied with its obligations with respect
to the approval or conditional approval of the merger.
28. The review contemplated by rule 39(2)(b) of the rules of the
Commission is however not an untrammeled review having its roots in
the common law but is confined to the enquiry whether there has been
compliance with the terms on which the merger was approved by the
Commission.
29. DHS seems to appreciate that Rule 39(2)(b) is too narrow to
encompass the points in limine that it seeks to raise. For this reason
DHS amended its notice of motion, as we indicated above, so that it
could rely on other procedural provisions to found this attack on the
Commission’s notice of breach. Indeed counsel for DHS stated in their
heads of argument, referring to the original notice of motion that had
relied on rule 39(2)(b), that it was:
“ technically too narrow to permit of a decision on the
two points in limine.” 9
30.Thus what DHS has sought to achieve through the
amendment is to found jurisdiction for the Tribunal to
entertain two points of law that relate to classic grounds
of review in addition to the power we enjoy under rule
of review in addition to the power we enjoy under rule
39(2)(b). We have some doubts about whether it has
9 See Applicant’s Heads of argument, dated 13 October 2003, paragraph 2.
8
been able to achieve that. Nevertheless our jurisdiction
to consider the points in limine has not been challenged
by the two respondents. 10
31. For the purposes of this case we have assumed in DHS’ favour that we
have adequate powers of review to hold the necessary enquiry and
issue such an order. This should not be regarded as a precedent for
other cases involving comparable claims for relief going beyond the
review contemplated in rule 39(2)(b) of the rules of the Commission.
The Commission’s notice of apparent breach
32.The notice, set out on form CC19 as specified in the
rules of the Commission, was addressed to Mr HW Du
Plessis, Digital Healthcare Solutions (Pty) Ltd (Mr Du
Plessis is the chief executive officer of DHS) and
contained a reference to case no. 2001Mar13, that of
Mediswitch (Pty) Ltd and QEDI (Pty) Ltd. 11The reasons
for the apparent breach were stated as follows:
“The Commission’s conditional approval of the merger specifically
provided that DHS should conclude an agreement with any party that
initiated negotiations with it within sixty days of receipt of a written
request by the aforesaid party. In the instant case, DHS received a
formal request from Healthbridge on 4 June 2001, erroneously dated 4
July 2001. In terms of the Commission’s conditions, DHS should have
concluded the agreement with Healthbridge on or before 3 August
2001.
DHS has been in breach of these conditions since 4
August 2001. The Commission had allowed DHS to
continue with its negotiations with Healthbridge in the
10 S. 27(1)(c) of the Act states that the Tribunal may “hear appeals from, or review any
decision of, the Competition Commission that may, in terms of this Act, be referred to it.” That is
the most general express reference in the Act to the Tribunal’s powers of review. e read s. 27(1)
(c) as requiring us to find a reference in the Act itself, or in regulations issued under the Act, to a
possible review by the Tribunal of any particular type of decision of the Commission before a
power to review a decision of that type can be said to exist as a matter of course. Such a power is
explicit under rule 39(2)(b) of the rules of the Commission in relation to a decision of the
Commission to issue a notice of apparent breach of a merger condition. We read rule 42 as
essentially procedural and not as conferring any independent power of review.
11 See page 29 of the record.
9
hope that DHS and Healthbridge would conclude an
agreement before the 23 rd of May 2002.
In light of DHS failing to conclude a contract by the 23 rd
of May 2002 and its shareholders insistence that
Healthbridge’s shareholders, Discovery and
Medscheme, give DHS back end access to their systems
in order to reach an agreement represents a breach in
the conditional approval and this has necessitated that
the Commission issue the CC19.“
DHS’ points in limine
33.The two points in limine which had been raised by DHS
were argued at a hearing on 20 August 2003.
34. In the first, DHS asserted in effect that the Commission had cited the
wrong party in the notice. DHS claimed that the error lay in the fact that
the notice had been addressed to DHS whereas the merged entity
comprised Mediswitch (Pty) Ltd, now DH Switch, which had absorbed
the business of QEDI (Pty) Ltd. DHS was not, it contended, the merged
entity.
35. Several factors were relied upon by DHS in support of this objection.
36.First, it was pointed out that the Commission’s notice
requiring notification of the merger was directed to
Mediswitch and QEDI (Pty) Ltd, not to DH Switch’s
holding company, DHS. The merger was notified by
Mediswitch and QEDI (Pty) Ltd, not by DHS. The
conditions for approval of the merger were moreover
directed at Mediswitch, not DHS. The notice was, in
DHS’s submission, correctly addressed to DHS as the
“spokesman” or “messenger” for DH Switch, and
correctly referred to the original parties to the merger,
but wrongly alleged a breach by DHS. DHS, Mr Burger
contended, was “never in a debate” with the
Commission. As a matter of company law, he
contended, there had been an error. He contended that
10
the case of Dadoo v. Krugersdorp Municipal
Council1920 AD 530 at 5501 was in point in ruling that a
company is a separate entity from its shareholders and
that property vested in the company cannot be regarded
as vested in the shareholders.
37. The evidence showed, said Mr Burger, that DH Switch and MM are
under the control of different chief executive officers and boards for
purposes of their daytoday operations. The Commission’s merger
clearance document had wrongly identified Mediswitch as the entity
which controlled the PMAs, whereas the correct entity was MM. The
Commission’s merger clearance document and notice of apparent
breach had been directed specifically to named companies and not to
an “acquiring firm” in terms of the definition of that term in the Act,
which would have covered a wider group than merely the companies
named in these documents.
38. The “merged entity” to which the Commission referred in its documents
could only be DH Switch and not DHS. He refuted the suggestion that,
since the evidence showed that the conditions for the merger had been
drawn up collaboratively by the Commission and the merging parties,
his argument about the noninvolvement of DHS in the activities
alleged by the Commission to amount to a breach had the implication
that the Commission might have been given incorrect information about
the circumstances of these entities by one or more of the relevant
companies at the time when the merger was approved, and this might
not have led to approval of the merger subject to the particular
conditions imposed. All that the conditions required, he contended, was
that DH Switch use its best endeavours or reasonable endeavours to
get its fellow subsidiary, MM, to comply with the conditions. That fact
that MM might be “difficult” was not to be blamed on the “sometimes
that MM might be “difficult” was not to be blamed on the “sometimes
competing” entity, DH Switch.
39.The Commission’s attitude to this point in limine ,
advanced by Mr Coetzee, was that it was irrelevant how
the acquiring and target entities of the merger organised
themselves internally, and the Commission was entitled
to address the complaint about an alleged breach to
DHS as the holding company of the entity which had
committed the alleged breach. DHS was the “controlling
mind” of the two entities, DH Switch and MM. The
Commission, he said, looked to the entity which could
give effect to the conditions. If it had expected MM to on
11
its own give effect to the conditions it would not have
issued the conditions in the wording in which they were
in fact issued.
40. HB’s approach, argued by Mr Unterhalter, was that DHS was on its
own evidence, as set out in a supplementary affidavit by Mr Du Plessis,
the entity which represented DH Switch and MM in matters of strategic
importance, such as in “dealing with lawyers” and “ensuring
compliance with regulatory authorities”. On this basis the regulatory
entity to be addressed by the Commission was DHS. If the objection to
the notice had been anything other than opportunistic, the correct entity
to have brought the review application would have been DH Switch, not
DHS, since DH Switch would have considered the obligations of the
conditions to rest on it, not on DHS.
41. However, said Mr Unterhalter, DHS had understood fully that
obligations contained in the conditions had rested on it since DHS had
substantively sought to answer for the merged entities in the review
application under Rule 39. In any case, DH Switch (then Mediswitch)
was never in a position to control, and did not own, the PMAs referred
to in the conditions, so other entities have obviously been implicated
from the start. DHS had at the relevant time been named MediSwitch
Holdings (Pty) Ltd, so the term “Mediswitch” in the Commission’s
merger clearance document and in the notice of apparent breach was
always “potentially an ambiguous term”, and what was clearly intended
in the notice was a group of companies aligned together for the
purpose of the deployment of the PMAs.
42.It was clear from the reference to “control” in the
conditions, said Mr Unterhalter, that what was being
referred to was a group of entities going wider than DH
Switch. In that group, DHS exerted control in the
Switch. In that group, DHS exerted control in the
classical sense of owning the shares in the operating
companies. All these companies were implied in the
term “the merged entity” as used in the Commission’s
merger clearance document and in the notice of
apparent breach. This was confirmed by the fact that
DHS had supplied the Commission with quarterly
reports on the process of integrating other switch
entities, and had used in relation to its reports the words
“in compliance with the third condition set out in the
merger clearance certificate.” 12This, it was contended,
12 See page 937 – 945 of the record.
12
was a clear admission that the merged entity included
DHS.
43. Mr Unterhalter further referred to the definition in the Act of “acquiring
firm”, which includes the upstream and downstream associates of the
parties to a merger, and submitted that the term “merging party” had to
be interpreted in the same context, wider than the identity of the
individual company which was a party to the merger agreement. The
key point in the conditions was the control of the software, and it would
have been inappropriate and illogical to impose the conditions only on
Mediswitch, which did not technically control the PMA software.
Consequently, it was artificial and wrong, HB contended, to interpret
the conditions and the notice in the manner argued for by DHS.
44. The Tribunal is satisfied that the stance of the Commission and of HB
on this issue is correct, and that the reasons advanced by them in their
arguments are essentially sound. We consider that the conditions
imposed by the Commission must be read as referring to and being
addressed to entities, which could give proper effect to the conditions.
45.The Commission, as noted, imposed the conditions in
its merger clearance decision on the “merged entity”.
The words “merged entity “ are not used in the Act,
which refers instead to a “party to a merger”. The Act
defines a “party to a merger” as an “acquiring firm” or
“a target firm”. These two concepts are further defined
but as these definitions are lengthy they need not be
reproduced here. It suffices to say that DHS would meet
the definition of an acquiring firm in the Act. It follows
that this would make DHS a “party to the merger” as
defined, and thus subject to the consequences in the
Act for firms of that status – inter alia , the duty to notify
a small merger when so required by the Commission
a small merger when so required by the Commission
under section 13(3) and the duty to comply with
conditions imposed on that merger (section 59(1)(d)(iii).
The question then is: when the Commission imposed
the condition on what it termed the “merged entity” did
it restrict itself only to the legal entity that absorbed the
target firm (DH Switch)? In our view both the legal
regime created by the Act for merger notification, which
contemplates a wide range of firms as parties to the
13
merger, as well as the logic of the condition, suggest
that DHS was contemplated within the notion of “merged
entity”.13(Would the Commission have intended to
impose a condition on a firm incapable of implementing
it?)
46.In the circumstances of the group structure of DHS, DH
Switch, and MM, and the changes in name and
shareholding which took place in these companies as a
result of, or after, the merger, this means that these
companies are included in the concept of the merged
entity affected by the conditions. It seems clear from the
evidence that this was understood by DHS in the same
way. In the postmerger activities of relevance in this
case those entities were represented by DHS in dealings
with the Commission and with HB. There is
uncontradicted evidence by Mr Van Zyl, the CEO of HB,
that at the very outset of HB’s negotiations to secure
integration for HB with the PMAs supplied by MM he
approached the CEO of DHS, Mr Du Plessis, who
insisted that the negotiations proceed with him rather
than with the managing director of MM, and that he (Du
Plessis) had the necessary authority to take the matter
further.14
47.It is also clear to the Tribunal that the point in limine is a
comparatively novel weapon in DHS’ armoury. In a letter
dated 28 August 2001 (p. 96 of the record) sent by Du
Plessis on behalf of DHS to HB – clearly a considered
13 It was argued by Mr Campbell for DHS in reply during the hearing that the notice to notify was
addressed only to Mediswitch (Pty) Ltd and QEDI (Pty) Ltd which, were hence the only parties obliged
to notify and which could be made the subject of merger conditions. This argument is not correct. The
Commission’s rules make it clear it is not obliged to serve its notice on every party to the merger: see
Rule 25(3) which states that notice to the primary acquiring firm (in this case Mediswitch) suffices.
However both the Act and the Commission’s rules are clear that once given notice by the Commission
“ the parties to the merger” must file a merger notification. (See section 13(5), Rule 25(1) read with
25(4)) Thus the choice of recipient of a form CC9 does not confine the Commission to consider only
the primary acquiring and target firms as parties to the merger. The fact that parties must still notify
after receiving a requirement to do so indicates that the Commission does not have all the information
it would require and hence the onus to notify is put on the parties. Indeed the Commission in all
likelihood, when issuing a CC9, may know no more than the identity of the contracting parties, which,
as we have seen, are only a subgroup of firms contemplated as parties to a merger.
14 See page 294, par 12.2 of the record.
14
and legalistic letter – Du Plessis stated unequivocally
that “DHS is acutely aware of its obligations in terms of
the ruling issued by the Competition Commission in
Notice 919 of 2001 and will comply with that ruling to the
letter.” Notice 919 contains the Commission’s reasons
for approving the merger and its conditions for the
approval.
48. It lies ill in the mouth of DHS and its counsel to argue at this stage that
DHS was somehow not affected by the conditions and was wrongly
addressed by the Commission when it issued the notice of breach.
49.Consequently, the first point in limine fails.
50.The second point in limine concerns the approach
adopted by the Commission when it considered whether
there had been compliance with the conditions. DHS
contended that the Commission had been inconsistent
in that, while the conditions stipulated that the merged
entity should use all reasonable endeavours to conclude
the agreement contemplated in the conditions, the
notice of apparent breach reflected a decision
postulating an absolute obligation on DHS to conclude
an agreement with any party initiating negotiations
within 60 days from receipt of the request to negotiate,
regardless whether such request was reasonable.
51. DHS argued that the Commission had been obliged to consider the
reasonableness of the parties at three separate stages. First, when a
written request was made to the merged entity, the request had to be
reasonable. If the request survived this test, the second stage required
the merged entity to use all reasonable endeavours to conclude an
agreement within 60 days of receiving the request. There was no rigid
requirement to conclude an agreement; merely to use such
endeavours to conclude an agreement. Finally, the reasonableness
endeavours to conclude an agreement. Finally, the reasonableness
was to apply only in regard to agreements containing commercially,
financially and technically reasonable terms. The obligation to conclude
the agreement would arise only if an offer were made to DHS that
contained terms that were commercially, financially and technically
reasonable.
52. The Commission, so DHS contended, had merely taken the fact that no
15
agreement had been signed by 23 May 2002 to be a breach of the
conditions, and did not consider the reasonableness of both parties at
each stage mentioned above. It therefore did not apply its mind to the
real issues.
53. The evidence shows that HB directed a request to DHS for an
integration agreement in a faxed letter of 4 June 2001 (erroneously
dated 4 July 2001), sent by Van Zyl to Du Plessis. This followed the
telephone call from Van Zyl to Du Plessis mentioned above in which
Van Zyl had broken the ice on the issue of the proposed integration
agreement and had established that Du Plessis, and not the CEO of
MM, was the person with whom HB was to negotiate.
54. Enclosed with HB’s letter of 4 June 2001 was a proposal for an
integration agreement, in the sense of an agreement to connect HB via
an API to the PMAs installed by MM with medical service providers,
and also a proposal for a socalled interswitch agreement, to which
reference will be made later. The proposal dealt at some length with
the technical issues, as well as others, and it is accepted by DHS that
the technical proposals were reasonable. There is a dispute about the
reasonableness of the financial and commercial aspects. DHS did not,
it seems, submit a detailed appraisal of HB’s proposals but instead, on
18 June 2001, sent HB a set of counterproposals for the integration
agreement. Significantly, they contained nothing related to the
interswitch issue. It is clear to the Tribunal that DHS did not at that
stage, and in fact in several rounds of negotiation that followed in the
ensuring three months or more, raise the issue of interswitch, or link its
proposals for an integration agreement to any form of interswitch
agreement. That came later.
55. There is a lengthy account in the papers of the negotiations that
55. There is a lengthy account in the papers of the negotiations that
followed. The negotiations became acrimonious and accusations of
unseemly conduct appear to have been exchanged. In about
September 2001 DHS came forward with the suggestion that DHS and
HB might merge, and for some five months the two groups concerned
engaged in a discussion about this possibility. It led nowhere since in
the end it was concluded that there were insuperable competition
objections to such a merger. Complaints were made on both sides
about allegedly unreasonable requirements which were being raised by
their counterparts. The negotiations were foundering.
56. HB approached the Commission and alerted it to the state of the
negotiations. DHS lodged a complaint with the Commission that there
was anticompetitive activity in the HB camp in that Medscheme and
Discovery Health would not allow DHS the access to their systems
which it needed to be able to switch claims in real time directly to those
16
administrators – socalled “backend access”. This is the interswitch
topic referred to above.
57. The negotiations were protracted, intense, and complex. Several
hundreds of pages of documents detailing the negotiations and what
they encompassed were filed. It is not easy for the Tribunal to
summarise them adequately.
58. A few conclusions have however been drawn by the Tribunal from this
welter of documents and the large amount of information they contain.
These conclusions may be summarised as follows:
1) The Commission was told at numerous
stages during the negotiations of the
progress, or lack of progress, which had
been achieved. The Commission was in
touch with DHS and HB and received
reports independently from both of them. It
considered the details of the proposals,
which were exchanged at the time when
these reports were made. The
Commission’s investigator in charge of the
matter, Mr Chetty, was in touch with both
sides by telephone and in other ways and
actively followed the development of the
negotiations. It is clear that he was applying
his mind to the issues under discussion
between DHS and HB.
2) It was not inattentiveness or indifference
which governed the Commission in allowing
the 60day time limit stated in the conditions
to be overtaken, but rather the belief that
there was a prospect that the negotiations
would succeed and would result in an
agreement which would make further action
by the Commission unnecessary.
3) The Commission was aware of the
restrictions imposed by Medscheme and
Discovery Health on backend access and
examined these restrictions through the
lens of anticompetitiveness, but was not
perturbed by them. In any case the
perturbed by them. In any case the
Commission regarded this issue as
extraneous and irrelevant to the question of
17
integration of the HB switching technology
with the PMAs supplied by MM.
4) The proposal for a merger between DHS
and HB, or parts of their businesses, took
up an inordinate amount of time and was ill
considered in the light of the pressing time
constraint on the merged entity in practice
on DHS to conclude an integration
agreement.
5) While the Commission was content to allow
the negotiations to continue far beyond the
stipulated 60day deadline, it was clear to
all concerned that the Commission was not
abandoning the conditions. The day of
reckoning for noncompliance with the
conditions, if no integration agreement
emerged from the negotiations, was merely
being delayed, in DHS’ favour.
6) Another switch entity, MediKredit,
applied to DHS for an integration
agreement and concluded such an
agreement. It did so on terms,
which it regarded as highly
unfavourable to itself, which it had
been forced to accept as it had no
alternative.15The Commission was
aware of MediKredit’s position and
took account of it in its
consideration of the status of the
negotiations between HB and DHS.
59.In the light of its conclusions on these matters the
Tribunal is not persuaded that the Commission failed to
apply its mind to the reasonableness of the negotiations
in any significant way, and certainly not in the three
stages posited by DHS. It is correct that some passages
in the notice of apparent breach suggest that the
Commission was somewhat abrupt about its
15 See page 287 of the record.
18
consideration of the issues and its decision finally to
issue the notice. The notice must however be read as a
whole. The second paragraph of the notice refers
explicitly to the fact that it is the failure to conclude the
contract and the insistence on backend access in order
to reach an agreement that represents a breach of the
conditional approval. Thus the Commission does not
confine itself to the failure to reach an agreement as
constituting the breach, but couples this failure with the
insistence on backend access. Furthermore there are
other passages in other documents from which it is
clear that the issues were weighed in a careful and even
handed manner. In their references to individual
passages from the papers DHS’ counsel were selective
rather than systematic. 16
60. For example, DHS’ counsel made much of a statement in paragraph 41
of the affidavit of Mr Chetty, who testified on behalf of the Commission,
that:
“The proof of reasonableness in these negotiations was the fact
that no agreement was concluded between a willing seller and a
willing buyer.”
Mr Burger’s comment was that:
“ That’s obviously reviewable. They haven’t applied their minds
to it.”
However, Chetty’s statement, which read in isolation, certainly tends to
suggest that the Commission concerned itself more with the outcome
than the nature of the negotiations, is immediately preceded by the
statement that:
“It has always been the Commission’s position that the end
result of these endeavours and negotiations should be a
reasonable and mutually acceptable agreement.”
It is clear from this passage that the Commission’s stance at the end of
the day was that the nature of the negotiation process and the content
of any agreement, which might have been reached were important, not
of any agreement, which might have been reached were important, not
that the only factor it need take into account was the nonconclusion of
an agreement.
16 See Record page 167, second paragraph and page 841 paragraphs 1819.
19
61. In paragraph 42 of the same affidavit, Chetty moreover makes the
statement that:
“It is submitted that what is at issue is the manner in which the
negotiations were being conducted.”
Mr Burger’s view on this statement was that it did not explain what the
Commission had considered, and from this he proceeded to the conclusion
that the underlying issues had not been addressed at all by the Commission.
In replying argument, Mr Campbell dismissed this statement as “a throwaway
line”.
62. The abovequoted statements of Chetty are of course ex post hoc statements. We did
not hear from DHS’s counsel any discussion of paragraphs 39 to 55 of Du Plessis’
founding affidavit and the annexures to it relevant to those paragraphs. In these
paragraphs (at pages 1318 of the record) Du Plessis describes various stages in the
negotiations with HB.
63. Du Plessis mentions in paragraph 43 that Chetty telephoned him on the 6 th of March
2002 and revealed that HB had lodged a complaint with the Commission about the
lack of an integration agreement. Du Plessis testifies about a number of other topics
discussed in that conversation, all being at that time recent developments in the
negotiations. Chetty clearly played an active role in this conversation. He was taking
an interest in the status of the negotiations and was receiving and conveying
information about them. He was obviously giving consideration to the progress being
made towards an agreement, and taking account of various submissions of the
parties to the negotiation process.
64. In paragraph 45 an account is given of a meeting, which Du Plessis
and DHS’ attorney had with three representatives of the Commission,
Chetty being one of them. It was clearly a detailed reportback meeting
at which DHS’ presentation of the facts did not satisfy the
Commission’s team.
Commission’s team.
65. Further telephone conversations, which Du Plessis had with the
Commission about various features of the negotiation process are
explained in paragraphs 47 and 55 of Du Plessis’ affidavit. In
paragraph 48 Du Plessis describes the receipt of a letter from the
Commission dated 9 May 2002 in which the Commission sternly warns
DHS of its concern that DHS’ insistence on backend access to
Medscheme and Discovery Health was regarded by the Commission
as a failure to comply with the terms of the merger approval.
66. These passages from the papers received no attention in DHS’s
submissions at the hearing. They clearly undermine entirely DHS’
protestations that the Commission did not apply its mind to the issues.
In any event, the issues as explained in DHS’ submissions were
20
clouded by DHS’ analysis and interpretation of the conditions, which
are dealt with more fully in a later part of this decision and which are
rejected by the Tribunal.
67. The Commission conceded at the hearing that it might have phrased
some of its documents more satisfactorily, but the lapses of which we
are aware are minor and are selfevident and do not, in our view,
outweigh the overall impression that the matter was approached in a
fair and attentive manner by the Commission.
68.It is also artificial to approach the Commission’s
discretion in this case in a static manner, as if it heard
all the facts on a once off basis and then made a
decision. The record shows that the Commission
continuously monitored the implementation of the
conditions; it received quarterly reports from DHS and
had interaction with other players including HB. Its
decision is thus formed on the basis of what it was
experiencing over a long period of time. Had it issued its
notice of apparent breach on the 61 stday after HB had
formally requested the conclusion of an integration
agreement, DHS’ arguments might have had more force.
The fact that it allowed the parties further time to
negotiate shows that the Commission was at all times
alive to the more nuanced interpretation of the
conditions for which DHS contends.
69.It is also worth noting that in terms of the rules of the
Commission, the explanation accompanying the notice
of apparent breach is intended to be a succinct
explanation of the errant conduct rather than a carefully
reasoned judgment. 17
70.HB’s approach to this point in limine was that issuance
by the Commission of the notice of apparent breach was
merely an interim step in a decisionmaking process and
was not the kind of action which was reviewable on the
was not the kind of action which was reviewable on the
grounds that the Commission had failed to apply its
17 The form states, “It appears to the Commission that you have breached an obligation that was part
of the approval of your merger as noted on the attached sheet.”
21
mind to the question whether there had been
compliance with the conditions. (This approach is
consistent with the Tribunal’s own jurisdictional
reservations as set out earlier in this decision.)
71.Second, HB contended that it was plain that the
Commission issued the notice of apparent breach after
fully considering the relevant factors. It could not
therefore be accused of not applying its mind to them.
Alternatively, HB suggested that the issues raised in this
point in limine went to the heart of the case and should
be dealt with only after evidence on it had been led.
72.The Tribunal has, as was stated above, assumed in DHS’
favour, for the purposes for this decision, that it has the
review powers contended for by DHS. It considers
however that the second point in limine is without merit.
Far from the Commission not applying its mind to the
issues, it appears to the Tribunal that there is a good
showing on the papers that the Commission repeatedly
applied its mind to those issues and to ancillary issues
pressed upon it by DHS, and perhaps also by HB, and
was at all relevant times mindful of the state of the
negotiations and reasons for their status at various time.
In saying that it considered that there had been a breach
of the condition because no agreement had been
concluded by 23 May 2002 between a willing buyer and a
willing seller, the Commission was merely expressing in
a somewhat roundabout way its conclusion that the
failure of the negotiations was attributable to lack of
reasonableness on the part of DHS.
73.Accordingly, the second point in limine also fails.
74.The Tribunal issued an order on 22 October 2003
dismissing the points in limine and reserving the costs in
regard to them. As had been arranged, argument on the
regard to them. As had been arranged, argument on the
remainder of the case was heard on 21 November 2003.
22
75. An application was filed by the Commission on 5 November 2002 for
leave to introduce the opinions on its behalf of an expert, Ms Lori
Baker, and for consent that she be granted access to DHS’ expert
reports, for which DHS has claimed confidentiality. The Commission
withdrew this application at the hearing on 21 November 2003 after
DHS had given notice that it intended to oppose the application. A
decision on the issue of the costs of the withdrawn application, which
were claimed by DHS, was reserved.
76. The matter proceeded on 21 November 2003, with Mr Burger
presenting DHS’s case on the merits of its application.
77. Immediately after the midmorning break Mr Burger announced that
DHS was applying for the recusal of Mr Phatudi Maponya from the
panel of the Tribunal which had heard the matter up to then. The
grounds for this application were stated to be that DHS’s attorney had
during the break become aware for the first time that Mr Maponya had
some relationship with the Pretoria law firm, Maponya Inc., which
practises in a form of association with the law firm Webber Wentzel
Bowens, which has acted throughout the matter for HB. Mr Burger
stated that this had led to a perception on the part of DHS that Mr
Maponya might be subject to a conflict of interest. He stressed that
there was no allegation that DHS had been prejudiced by Mr
Maponya’s participation in the panel thus far. Mr Burger undertook on
behalf of DHS that it would not attempt to invalidate any of the
preceding proceedings or decisions of the Tribunal in the matter on the
ground that Mr Maponya had participated in them.
78. Mr Maponya explained that he was no longer a partner in the law firm
78. Mr Maponya explained that he was no longer a partner in the law firm
Maponya & Partners and was merely a consultant to it on various
matters. However, in view of the fact that the issue had been formally
raised, he recused himself from the panel with immediate effect.
79. Another member of the panel, Mr Lawrence Reyburn, pointed out that
he had at one time been a partner in Webber Wentzel Bowens and
later a consultant to it, but had resigned and no longer had a formal
connection with that firm. Mr Burger announced that there was no
objection by DHS to Mr Reyburn’s continued participation in the panel.
80. A direction from the chairperson of the Tribunal was then sought under
s. 31(3)(a) of the Act as to whether the matter should proceed to finality
before the presiding member, Mr Norman Manoim, and Mr Reyburn, as
a twoman panel. The direction was duly given and the hearing
continued on that basis.
81.Mr Burger contended that the review application in
23
respect of prayers 1 and 2, on the alternative basis set
out in the amended notice of motion (that is, under s. 27
of the Act read with rule 47 of the rules of the Tribunal),
was still to be decided despite the Tribunal’s earlier
decision on the second point in limine .
82.The Tribunal does not accept this contention. It
considers that its decision on the second point in
liminedisposed of all the review issues except those
dealt with in the remaining part of this decision.
L Reyburn
Concurring: N Manoim
Did the applicant substantially comply with the conditions?
83. In this section of the decision, we ask whether DHS has substantially complied with
the conditions for the approval of the merger: If the answer to that question is yes,
then the Rule 39 notice must be set aside. If the answer is no, then the Commission
is entitled to proceed with the further procedural steps that its rules contemplate,
consequent on a determination that there has been a breach of merger conditions. 18
84. It is common cause in this application that –
• HB is a healthcare switch entity as contemplated in paragraph 1
of the conditions;
• HB made a proposal for its switch technology to be integrated
with a PMA package controlled by DHS, and this proposal was
refused;
• DHS made a counteroffer to HB which the latter refused;
• the parties had protracted but unsuccessful negotiations
concerning access;
• at the time of the issuing of the notice of apparent breach, and
indeed to date, no agreement has been reached between DHS
and HB to grant it access to the former’s PMA software.
85. On all other issues the consensus breaks down. First there is disagreement on how
the conditions should be interpreted. This essentially boils down to a dispute over the
18 The Commission’s rules provide for an elaborate procedure for postbreach enforcement. See Rules
3940
24
extent to which HB was under an obligation to make a reasonable proposal for
access with DHS seeking to elevate the extent of this obligation, and the
Commission and HB seeking to diminish it. Secondly, and more fundamentally, the
parties disagree over what an agreement containing “reasonable terms” means. 19
This second disagreement can be distilled again into whether “reasonable terms” are
to be assessed from their effect on the commercial interests of DHS i.e. would a
reasonable, prudent business person in the same position as DHS have entered into
such an agreement? If this is what “reasonable terms” means, then DHS’ offer of
June 2002 to HB, which the latter refused because it alleged that it exceeded what
the market would consider “reasonable”’, may nevertheless from this subjective
vantagepoint, viz. the protection of the commercial interests of the firm granting
access, be reasonable. So too would DHS’ insistence that an access agreement must
be predicated on reciprocal backend access.
86. On the other hand, if HB and the Commission are correct, the
conditions must not be approached from the perspective of DHS’
commercial interest, but from what are reasonable terms for a rival to
be granted access, and for reasonable terms read in “marketrelated”
terms. They further argue that the insistence on backend access is an
extraneous issue and that it evidences, if anything, DHS’
unreasonableness.
87. In its replying heads, DHS contends that it is common cause that the
Commission’s conditions are unambiguous. This is a remarkable
statement given the length of the record on this point. At best it can be
said that each side has shown confidence in its own reading the fact
that these readings yield such different results suggests that the
that these readings yield such different results suggests that the
interpretation of the order is no simple matter.
88. The source of the dispute created by the language of the conditions is the frequent
use in the first two paragraphs of the word “reasonable”’ to qualify various obligations.
The first two paragraphs are replete with the word, which the drafters seem to think
needed to be inserted in every crevice where it could sensibly fit, limited only by the
constraints of syntactical coherence. Its usage has largely led to the dispute we have
today. It was not however the Commission’s initial choice of language. Indeed the first
draft proposed by the Commission that appears in the record omits the word. 20 It
was only when the lawyers representing the merging firms responded to that
proposed draft that this word was inserted with such abandon, at their suggestion. 21
89. As we indicated earlier, the first dispute arising from the interpretation
of the conditions is what the extent was of the obligation on the party
making what the order terms “a reasonable written request”. DHS
argues for a conjunctive reading of the two paragraphs, so that the
reasonable request is also one subject to terms that are reasonable
commercially, financially and technically. (Mercifully in this case it is
also common cause that both offers were technically reasonable, so
19 We will refer to “reasonable terms” as shorthand for the more extended language of reasonableness
contained in paragraphs 1 and 2 of the Commission’s conditions, cited earlier.
20 See record page 843.
21 See record page 836.
25
this issue is off the table.) The request need not contain the terms of a
fullblown agreement, but it seems what DHS has in mind are the core
terms, perhaps sans the “boiler plate” clauses that are standard fare in
most written contracts of this nature. Until a request of this nature has
been made, so DHS argues, it is under no obligation to respond. Put
another way, it is a necessary precondition before it incurs any
obligation in terms of clause 2. On this approach it argues that since
the HB offer contained terms that were not commercially reasonable its
request failed to trigger any concomitant obligation from DHS.
90. In contrast HB argues that the two paragraphs must be read
disjunctively. All that is required is that the request be reasonable. In
argument Mr Unterhalter suggested that this meant no more than:
“… that a party with clear commercial intent, wanting to enter into a contract, sends a
request for the kind of interconnection that is contemplated in the condition, then the
obligation is triggered”
and that the phrase “commercially, financially and technically” does not qualify the
request.22 Indeed this is why this language is not found in the first paragraph, which
is the one that deals with the request, but only in the second paragraph, which is the
one that deals with the merged firm’s obligations.
91. Interesting though this debate has been, we need not decide it. Even if
we accept DHS’ contention, although we have doubts about it, we find,
for reasons that we explore more fully below, that HB’s offer contained
commercially, financially and technically reasonable terms. Given that
finding, the debate over what obligation HB had in terms of the
conditions is rendered academic.
92. What we must decide is the second part of the debate and that is the
content to be given to the word “reasonable”. Again this debate can be
content to be given to the word “reasonable”. Again this debate can be
distilled further into the meaning to be attributed to the term
“commercially reasonable”.
93. Mr Burger made much of this term for reasons that become clear later.
Several aspects of his argument are in our view uncontentious. One is
that since the term “commercially reasonable” is used in the condition,
as something distinct from “financially reasonable”, it must be given a
distinct meaning, which would suggest it refers to terms other than
purely financial ones such as price.
94. The next is that when the conditions refer to a “reasonable agreement”
it must contemplate a range of possible agreements that could be
described as reasonable. It is perfectly clear that agreements of this
kind are subject to variation and complexity and that more than a single
22 See page 102 of the transcript dated 21 November 2003.
26
form would meet the test. Thus within the realm of reasonable
agreements that meet the test, there may be one preferred by DHS,
but not by HB, and vice versa. Provided DHS can prove it offered one
that was in the range of what may be termed reasonable, albeit HB
may have rejected the offer, it has substantially complied with the
conditions. DHS might even be compliant if it rejected a reasonable
offer from HB provided of course it responded with a reasonable offer
from its own side.
95. However it is the next leg of Mr Burger’s argument, which is the real source of
contention in this application. He builds on the term “‘commercially reasonable” to
found a case for rejecting HB’s offer, defending DHS’ offer of June 2001, which HB
rejected, and asserting the demand for backend access. Essentially what he argues
is that DHS is not obliged by the conditions to enter into an agreement that is
commercially harmful to it. In this respect he argues that harm means harm to the
DHS entity as a whole, not just Medemass, the entity that would grant access. 2323
96. What DHS argues is that it would never in the ordinary course give
access to a competitor in the position of HB, as opposed to any other
competitor which is less threatening to it, unless it got something
substantial back. Thus if it can prove it would never enter into a
particular transaction in the ordinary course of business because it did
not benefit the group to do such a deal, then it would, it follows, be an
unreasonable deal – unreasonable being judged from the perspective
of what would a rational firm, similarly circumstanced, do. If this proxy
firm would not enter into an agreement on those terms because they
would be irrational then such an agreement is commercially irrational
and it would not be reasonable to expect DHS to enter into such an
agreement.
and it would not be reasonable to expect DHS to enter into such an
agreement.
97. For this DHS relies on the testimony of its expert, Mr Magennis. We go
on to consider, in the next section, the reports of both Mr Magennis and
the experts for HB.
The expert reports
98. We received expert reports from both DHS and HB. As was mentioned
above, although the Commission applied to tender its own expert
report, it abandoned this application in the face of opposition from
DHS.
23 We observe in passing that it suited DHS to have the point in limine decided in advance, so that it
could advance arguments in respect of the merits wholly at odds with its in limine contentions. The
argument that the merger is only binding on DH Switch, which could not tell its sister or parent what to
do, as a matter of strict company law is wholly inconsistent with the evidence of the applicant’s expert
who urges us to interpret the commercial viability of the order by reference not to MedeMass alone,
as a separate company in the group, but DHS as whole.
27
99. Initially at the prehearing on 15 August 2003 we were advised by counsel for both
HB and DHS that each side would call one or more experts to deliver oral testimony.
When we heard argument on the points in limine on 20 October 2003, counsel
advised us that the parties had agreed that there was no need to call the experts for
oral testimony and that, provided each side’s expert could have an opportunity to file
a report in response to the other, this would suffice. This procedure was followed.
Although we also received a report from Deloitte and Touche on behalf of DHS and
on behalf of HB a report from Louis van Deventer of HAS Software Pty Ltd, these
reports have not been considered separately except to the extent that they have been
relied on by what we will refer to as the principal experts. 24
100.The principal expert for DHS was Mr Reg Magennis from Elixir Health
Consulting, and for HB it was G:enesis. Both filed an initial report and
subsequent to that a second report responding to the other’s initial
report.
Magennis’ initial report
101.In his initial report Magennis concludes that:
“DHS will lose its switching business over time if Healthbridge is granted (or is
allowed to retain) “frontend” access without granting DHS “backend” access to
Discovery and Medscheme systems to facilitate real time electronic trading.” 25
102.Based on this assumption, he concludes that if DHS were to develop a charge for
frontend access, under circumstances where it is not granted backend access, it
would be appropriate to compute such a charge based on the losses incurred by DHS
Switch, and thus the DHS Group, if its switching business is partly lost to HB. 26 He
works through what he assumes these costs to be and then concludes, going further
and assuming DHS’ switch business is lost entirely, that:
“..therefore a case can be made for charging HB up to R436,50 per Mede
“..therefore a case can be made for charging HB up to R436,50 per Mede
Mass serviced site in a scenario where DHS is forced to compete in an
environment where the playing fields between DHS and HB are not level.”
27
(This charge of R436,50 is made up of R117,50 to compensate
for MedeMass’s costs plus an amount of R319 to compensate
for the loss of business to DH Switch).
103.He thus concludes:
24 DHS’s counsel, in their heads of argument, placed little reliance on the Deloitte and Touche Report.
There is a reference to it in par 22.2.1, page 58 of their Heads, but this aspect is also referred to in the
Magennis report.
25 See Record, page 1033. (Page 32 of his first report)
26 See Record, page 1033.
27 See Record, page1035.
28
“ in the author’s opinion the proposed monthly charge of R130
per site for MedeMass integration is sufficient to place Mede
Mass in a position to sustain its profitability without the revenue
and costs benefits that are derived from its linkage with DH
Switch. In fact R117,50 would be adequate for this purpose.
However a further amount of up to R319 per site would be
required to compensate DHS if its DHSwitch business is lost.
The DHSwitch business is likely to be lost if it does not enjoy the
same ‘backend privileges’ at Medscheme and Discovery that
are enjoyed by HB.
Therefore the price of R130 (with a minimum annual charge of R100 000) for
all sites) proposed by the DHS subsidiary MedeMass for integrated access
to its front end software is not unreasonable.” 28
G:enesis initial report
104.G:enesis commences by defining what it understands reasonable to mean. It
observes that the word ‘reasonable’ is not a term of art in economics or in competition
analysis but that since the language is used in the context of competition policy and
more specifically merger approval, this is the context to “shade and inform its
practical meaning”. Given this, G:enesis proposes an interpretation formulated as
follows:
”DHS is obliged to accept an offer from a switch that would reasonably reward it for
costs incurred in providing access (i.e. be “financially and commercially reasonable’)
and that would be technologically feasible and stable (“ technically reasonable”). 29
105.With this interpretation as its point of departure G:enesis then
conducted two exercises to test the reasonableness of the HB offer to
DHS. The first exercise tested whether the HB offer was reasonable in
that it accorded with market norms in the sector for granting of access.
The second exercise was to test whether the HB offer conformed to
The second exercise was to test whether the HB offer conformed to
“reasonableness” by providing a reasonable reward to DHS for the
costs of access. The distinction between the two is that in the latter
exercise the costs of the firm granting access may be unreasonable,
because of its own possible inefficiencies, and hence the need to test
these costs to see if they accord with market norms.
106.As part of the first exercise (the accordance with market norms test) G:enesis
examined 32 contracts between various switches and PMA’s. 30 After reviewing the
figures which are set out in its report, G:enesis comes to the conclusion that not only
28 See Record, page 1036
29 See Record, page 1052
30 The switching companies were HB, Qedi, MediSwitch and MediKredit. See Record, page 1057
29
did the HB offer fall comfortably within market practice but that the transaction fees it
offered are at high end of the market. 31
107.G:enesis then goes on to assess the impact of the offer on MedeMass. 32
Significantly, as this is the major point of departure between it and Magennis,
G:enesis states that it does not take into account the impact of the offer on DHS’
switching business as this:
“.. would defeat the purpose of the exercise if HB had to fairly compensate DHS for
loss of business,” 33
108.G:enesis then concludes that the HB offer was lucrative for DHS, even using
conservative estimates. MedeMass, it says, would have profited significantly from
the offer. 34
109.After having completed its two exercises and finding that the HB offer
was reasonable on both tests, G:enesis then went on to test whether
the DHS offer was reasonable, of course based on the same
assumption of what “reasonable” meant as we referred to earlier.
G:enesis examines the terms of the DHS offer. It identifies four main
characteristics of this offer:
1. HB has to pay DHS a R120 per month as minimum value per
site. This fee would escalate by 10% each year;
2. The fee referred to above was subject to a minimum monthly
fee of R120 000 (escalating by 10% per year) even if the roll
out of sites did not reach 1000.
3. In terms of the proposed contract, however, DHS was only
obliged to rollout 420 sites within seven months. In addition
HB could not select the sites at which the installation would
occur. HB would only discover after installation at which sites
installation occurred.
4. HB pays an integration fee of R380 per hour and an installation
fee of R300 per hour.
110.G:enesis then analyses the implications of each of these terms and concludes that
not only was the DHS offer not in line with market norms, but that it was in fact even
not only was the DHS offer not in line with market norms, but that it was in fact even
more unfavourable than those contained in the agreement with MediKredit, an
agreement which Genesis says is not a marketrelated agreement, but contains terms
that exemplify DHS’s ability to exercise postmerger market power over MediKredit.
(Recall that the MediKredit agreement is the only one that had been concluded by
DHS with another switch as part of compliance with the terms of the Commission’s
order. In a letter to the Commission MediKredit complains about these terms but
31 See Record, page 1064.
32 See Record, page 1064.
33 See Record, page 1065.
34 See Record, page 1071
30
states that it had no choice but to accept them.) 35
111.Genesis concludes that the DHS offer was not in line with market norms nor indeed
was the MediKredit agreement, and would result in a massive increase in the price
charged for access. Genesis concludes that this amounted to an attempt by DHS to
raise its rival’s costs and hence prevent effective competition in the switching
market.36
112.G:enesis goes into an analysis of this aspect in greater detail later,
when responding to Magennis ‘s report, as we discuss below.
Response to G:enesis by Magennis
• In response to G:enesis, Magennis first
deals with the analysis of the HB offer to
DHS. He does not contest G:enesis’
thesis of the reasonableness of the offer
vis a vis MedeMass. Rather his point of
departure is that any request for
integration needs to be assessed from
the perspective of the DHS group as a
whole. He states in his response:
“ it would be inconceivable that the group shareholders would
permit a subsidiary to take decisions that benefit that subsidiary in
the short term but that threaten the long term viability of the group
as whole.” 37
113.Thus Magennis appears to concede that the HB offer is
beneficial at least to MedeMass. He goes on to argue
that frontend access would create an asymmetry in the
market that would lead to foreclosure effects, unless
DHS gets fair and unfettered backend access. 38 He
then details how HB could successfully implement a
foreclosure strategy against DHS.
114.Magennis then examines the G:enesis critique of the
reasonableness of the DHS offer. Magennis observes
that G:enesis attacks the DHS offer on three bases: 1)
35 See Record, page 287 of the record
36 See Record. pages 10724
37 See Record, page 1163 .
38 See Record, page1166.
31
that the MediKredit agreement is out of line with market
norms 2) that the offer to HB is even worse than
contained in the agreement with Medikredit, and 3 ) that
the fixed R120 monthly fee proposed by DHS to HB
translates into 45% of switch revenues per site and is
thus three times the premerger market norm of 15%. 39
115.Magennis does not deny that the MediKredit agreement is more
favourable than the offer to HB and hence is discriminatory. However
he defends the discrimination saying that as Medikredit has no back
end connectivity:
“..the agreement has fewer business implications
for DHS than a contract with HB would have”. 40
116.He then proceeds to defend the fact that the MediKredit
agreement is not in line with what G:enesis contends is
the market norm. His basis for doing so is that
MediKcredit is already a switch and accordingly should
pay more for access than a company which is not a
switch such as HAS. 41 He argues further that DHS cross
subsidises MedeMass. The risk of accommodating HB
is even greater than that of MediKredit because of HB’s
ability to foreclose once it gains frontend access
without granting backend access. 42
117.He argues that MedeMass should charge a premium to HB that
equates in its price to the risk such a contract would represent to the
DHS group as a whole:
“In our opinion it would only be logical to reduce
this price premium if and once the risk premium
associated with the back end access is
convincingly and comparably reduced.” 43
39 See Record, page 1174.
40 See Record, page 1174.
41 HAS was one of the firms whose contracts were relied upon by G:enesis in its analysis of the
market norm for access agreements and hence the reference to it.
42 See Record, page 1176.
43 See Record pages 11767.
32
118.He goes on to refer to his initial report and points out that his
computations were based on actual cost and revenues pertaining to
DHS. As he put it :
“ they do not rely on a comparison with ‘ market
norms’ as presented in the G:enesis report.” 44
119.Magennis does not dispute the 45% contention about
the integration fee but again relies on the fact that if HB
achieves greater rollout the fee as a percentage of site
transactions would reduce. 45
120.He goes on to criticise G:enesis’s methodology for not including in its
calculations the fees that HB is likely to charge DHS for backend
access. He says:
“The value of these (unknown) fees should be set
against the fees charged by MedeMass for front
end access.” 46
121.On the R120 000, he says that if it is true that HB will
effectively secure 100% of the switching market once it
gains unfettered frontend access (in the absence of a
symmetrical switching agreement), then the R120 000
minimum fee will have no economic relevance. He then
engages in some ad hoc defence of the R120 000, by
saying that the proposal allows for a management
committee, which would oversee the performance of the
agreement. He says that both parties would have an
interest in rolling out at least 1000 sites over the 7
month period designated in the agreement, including
MedeMass, because it would spread costs of additional
staff needed for the rollout. He says that it is his
understanding that it is the responsibility of HB to
approach doctors to convert to realtime connectivity.
44 See Record page 1177.
45 See Record, page1178
46 See Record, page 1179.
33
122.Magennis at first appears to justify the minimum R120
000 and R120 per site fee as MedeMass’ way of
protecting itself against the cost of rollout. He argues
that rollout is risky and hence MedeMass is entitled to
protect itself against this risk and pass it on to HB. He
says that given that MedeMass has to retain a national
footprint, it is reasonable for it to engage in strategy that
ensures that there is a fixed price if it cannot be sure
how quickly rollout will take place. 47 Yet even here the
cost issue is always linked to backend access. After
referring to the fact that the R120 is similar to
MediKredit’s R117,50 he states:
“ This calculation is relevant in a scenario where
HB is placed in a position to eliminate DHSwitch.”
48
123.Having said all this, however, he comes back with a devastating
conclusion that if matters relating to backend could be resolved:
“it is reasonable to assume that the DHS group
would be under less financial and commercial risk
and therefore could afford to be more flexible in its
pricing structure.” 49
G:enesis in reply
124.G:enesis commences its response by looking at the issue of backend
access since this is a central plank of DHS’s case. It points out that
although Magennis relies heavily on this as part of his critique of HB’s
approach he does not consider the various offers that HB and
Discovery made to DHS in respect of backend access.
“This omission undermines the authority and persuasiveness of
the Elixir report” 50
47 See Record, page1181.
48 See Record, page 1181.
49 See Record, page 1181.
50 See G:enesis response to the Elixir report dated 30 October 2003, page 6.
34
125.G:enesis then goes on to argue that realtime backend access, the
supposed competitive advantage that DHS asserts HB has over it, is
not all that its made out to be. After considering the history of
successive claimlodging technologies, of which real time is only the
latest, G:enesis argues that real time has not proven particularly
advantageous to many doctors and is not a prerequisite to competing
in the market. Thus although the realtime advantage is premised on
the fact that the doctor is accessing the network as and when patients
come in (i.e. many times a day) and secondly that it aids cash flow
since the doctor is paid within 9 days (Discovery offers payment within
24 hours if a realtime enduser is prepared to pay an additional 0.9%
of the value of the claim for the expedited payment) and not 10 days
later, as is the case with batch switches like DHS, G:enesis’ research
of Medscheme’s records shows that 95% of end users claim once a
day or less. On payment frequency it argues that for smaller practices
the alleged 9day advantage is negligible (For a practice with a R 60
000 per month income this would amount to R 54 per month.) 51
126.G:enesis then goes into much greater detail in arguing why the DHS offer was not
reasonable. It argues 1) that the DHS offer contained a large postmerger increase in
price, 2) that when compared to market norm it would foreclose a significant part of
the market to HB and 3) that it would render the strategy of HB of universal rollout as
‘not achievable’ .
127.Some prefatory remarks are needed to understand this rollout
argument and the statistics G:enesis seeks to rely on. It is common
cause that not all practices are lucrative for switches. This is because
certain practices generate such a low level of claims per month that
they fail to cover the switches’ fixed costs for the site. Thus the
they fail to cover the switches’ fixed costs for the site. Thus the
switches compete not for the whole market, but for the lucrative end of
the market i.e. those practices that will generate the most claims and
hence the most revenue for the switches, as their revenue is based on
the number of claims made on their networks.
128.From the perspective of a PMA supplier or at least based on the
model in the offer of DHS to HB, the quality of revenue of the practice
is irrelevant and as its cost is a fixed one, it will get the same fee
irrespective of how many claims a practice lodges. Thus MedeMass
on the DHS offer is protected in the rollout from the ‘claims quality’ of
the practice.
129.From the perspective of HB’s two shareholders, Medscheme and
Discovery, rollout even to poorquality practices is in their interests as
the more practices that are online the less the administrators have to
51 See G:enesis report dated 30 October 2003 page 15.
35
have their own staff and an infrastructure geared to dealing with the
more expensive system of manual claims.
130.HB and DH Switch operate on different revenue models for their
switching businesses. The essence of the difference is that HB
receives payment, partly from Medscheme or Discovery for each claim
it sends to them, whilst the balance comes from the practice that
generated the claim. DHS derives its full fee from the practice, which
has put it at a slight price disadvantage when compared to HB. (This
has fuelled DHS’ notion that HB is subsidised by its two medical
administrator shareholders.) Thus for switches the issue is not merely
about rollout, it is, to quote G:enesis, the difference between ‘cherry
picking’ and ‘lemon picking’.
131.G:enesis then goes on to perform an analysis of the implications of the DHS offer on
HB’s potential for rollout, by applying the fees set out in the DHS offer to a sample of
Medscheme practices to demonstrate how this would affect HB’s costs. Its
calculations show that if the rollout was just to the top 50% of the Medscheme
practices (i.e. those that are the most profitable in terms of claims generated) HB’s
costs would increase by 39%. If the rollout were extended to all the Medscheme
practices, HB would operate at loss. 52
132.G:enesis then argues that the cost implications of the DHS offer would
be a possible increase in price by HB. G:enesis then does an exercise
that compares the market norm for access (that it had referred to in its
initial report) with the DHS offer. Under the market norm offer, 3400
sites of Medscheme (52%) would be profitable, whilst under DHS’ offer
only 1400 (21%) would be profitable. HB has acknowledged to
G:enesis that it does rollout to sites that are not profitable for it on a
G:enesis that it does rollout to sites that are not profitable for it on a
fixed cost basis. Approximately 23% are negative in this respect.
Although out of this 23%, 16% lose up to R20 per month, none have a
prefixed cost loss of more than R20. Conversely, it argues that on the
DHS scenario, 4900 sites would have a prefixed cost loss of more
than R20, as opposed to none presently.
133.G:enesis also maintains that the DHS offer is an insuperable barrier to entry to
switches that want to roll out to smaller practices. It argues that if rollout started from
the biggest sites it would be profitable up to 1400 th site, but thereafter becomes less
profitable until it runs at a loss for HB from the 4600 th site onwards, assuming a total
rollout would be up to 6500 sites. Servicing the entire market would mean that HB
would lose R230 000 per month. Applying the market norm, however, rolling out to all
6500 sites would mean that HB could still generate a profit, albeit lower than
otherwise.53
134.G:enesis goes on to analyse the fixed payment model vs. its own and suggests that it
52 See G:enesis report of 30October 2003 page 20.
53 Genesis calculates that it would generate R 407 000 which say is only 30 000 less than its
maximum profit. See Magennis Report of 30 October 2003 page 27.
36
offers no incentive for MedeMass to rollout to high value sites. 54 It points out that
since DHS owns its own switch DHS is incentivised to roll out to lower as opposed to
high revenue sites. Thus over a 36month period HB could be left with only loss
making sites.
135.Figure 5 of the report illustrates the “long tail” of unprofitable sites.
G:enesis goes so far as to suggest that DHS was “astute” in its offer as
a nolose situation for DHS. If the offer were rejected then HB would be
denied access to the front end; if the offer were accepted it would raise
HB’s costs relative to those of its rivals. 55
136.G:enesis also deals with who will give effect to the rollout: the PMA
supplier or the switch. Recall that Magennis had said that it was for HB
to persuade practices of the advantages of real time. G:enesis says
that it may be that HB has to persuade doctors to ask for conversion,
but DHS is still responsible for its implementation. G:enesis points out
that in terms of the contract DHS undertakes to rollout 420 sites within
7 months.
137.The upshot of this analysis is that Genesis concludes that the DHS
offer raises HB’s costs and for this reason is unreasonable.
138.G:enesis also goes on to defend the reasonableness of HB’s and
Discovery’s backend offer to DHS. As will appear later in this decision
this is not an issue that we have to consider.
Analysis of the expert testimony
139.There is no serious dispute of fact among the experts. What the
experts disagree upon is how the concept of reasonableness should be
analysed.
140.Magennis assesses the notion of reasonableness, as we have seen,
from the affect it has on the business of DHS as a whole in the market
in relation to HB and concludes that if DHS gives up frontend access
without securing backend access, the business of DHS will be
adversely affected as it will lose all or part of its switching business to
adversely affected as it will lose all or part of its switching business to
HB, because of the latter’s realtime advantage.
141.Let us assume for the moment that we accept the evidence of Mr
Magennis in this respect. Could this be what the Commission’s order
means when it refers to a reasonable access agreement and in
particular commercially reasonable terms?
54 Note that in its offer, HB offered DHS a rollout incentive for all sites that would generate more
than R350 per month. See Record page 1062.
55 See Magennis Report of 30 October 2003 page 26.
37
142.Against this we have the interpretation advanced by HB and the
Commission. According to them DHS enjoys, post merger, market
power over the switching segment of the market. It has achieved this
through the vertical integration of the dominant PMA firm with a
significant switch player, which postmerger would allow it to foreclose
its rivals in the switching market. On the evidence before us the only
competitor of significance is HB. For HB and the Commission the real
but unstated basis of the Magennis argument is that it is unreasonable
for DHS to contract on terms with its rival that do not compensate it for
loss of its market power (euphemistically referred to as its competitive
advantage). Thus they argue that what DHS wants to be compensated
for under the mantle of reasonableness is really compensation for loss
of its market power. This, they argue, cannot be a proper interpretation
of the conditions.
143.We are persuaded by this analysis of the Commission and HB. The
purpose of the access remedy, as the Commission explains in its
merger decision, is to ensure that the switching market remains
competitive after the merger. In other words, in return for approving a
merger, which would lessen competition, the Commission seeks to
retain premerger levels of competition by ensuring access to the
PMAs of DHS. Implicit in this formulation is the assumption that by
permitting access, DHS will be forced to face competition and
accordingly be unable to exercise postmerger market power over the
switching market.
144.It follows, once one appreciates the economic consequences of what access means
(when posited, as the Commission explains in its report, as the antidote to the
exercise of market power) that the firm that acquired market power and was now to
exercise of market power) that the firm that acquired market power and was now to
be inhibited from exercising it by granting access, would be worse off – at least to the
extent that its market power premium would be forgone. It makes no sense for the
Commission to impose a condition that would allow access only on condition that the
merged firm is compensated for its loss of market power. Yet that is precisely the
implication of the case that DHS has made. Whilst such an interpretation of the
conditions may have been plausible were this an arbitration assessing damages
arising from a breach of a commercial contract, it is nonsensical in the context that we
are dealing with here – an order by a body charged with protecting competition, which
as part of this function can regulate the approval of mergers inter alia to prevent the
exercise post merger of market power by the merged firm.
145.When the peculiar language of the conditions is assessed in this
statutory context, and when they are read with the Commission’s
reasons for its approval of the merger, the concept of reasonableness
contended for by DHS becomes untenable.
146.In adopting this approach to the interpretation of the conditions we are following an
approach that is well settled in case law and which has been followed by us
previously. That is one set out in decisions such as Administrator, Cape, and Another
38
v Ntswaqela and Others (1) 1990 (SA) 705 at 715 EI, and Firestone South Africa
(Pty) Ltd v Genticuro 1977 (4) SA 298 (A) and The ANC v The UDM and Others
Constitutional Court of South Africa, Case No: CCT 43/02 .56
147.If we interpret the conditions in a manner consistent with the
Commission’s reasons for its decision then it is perfectly clear what it
intended. Firstly the sentence that serves as a preamble to the
conditions states:
“However, the Commission is of the view that the conditions set out below would
significantly reduce those concerns. The merger is, therefore, approved, subject to the
following conditions…”
148.Thus the Commission makes it clear that the conditions serve to
remedy the anticompetitive effects that it finds will come about as result
of the merger. Given this intent, it seems that the Commission saw the
grant of access as vital to remedy this problem. It is unlikely that the
Commission would easily have contemplated a situation where access
did not occur, since access was the cure or partial cure to the ill it saw.
If access did not occur, the merger would proceed as if approved
unconditionally.
149.However, the Commission could also foresee that a firm required to
give access is not obliged to do so without some compensation. The
Commission seemed to recognise one could cure the competition
concern without on the other hand making the merged firm vulnerable
to some competitor who required access at say submarket terms. This
would go beyond the Commission’s intention of ensuring competition in
the switching market and lead to the opportunity for exploitation of the
merged firm.
150.In this regard we agree with HB that this is the meaning to be given to
the reasonableness terms i.e. the merged firm was not obliged to enter
into an agreement for access that was not in accordance with market
into an agreement for access that was not in accordance with market
norms for such access or did not adequately compensate an efficient
firm for the costs of granting such access. It does not follow that this
allowed the merged firm to seek compensation at a supramarket price
or to impose terms that are unrelated to the access agreement and
which may render it less likely to lose its market power. The
exploitation of the merged firm that the Commission sought to protect
by the caveat of reasonableness in its order did not extend to
compensation for losses in the switching market that access by a
competitor might occasion. This would amount to interpreting the
condition as if the Commission desired only the appearance of
56 Also see Tribunal case, Astral Foods Ltd v Competition Commission and others, Case No: 69/AM/
Dec01.
39
competition, but not its reality.
151.The experts for HB are correct when they state that the entire purpose of the remedy
was to create a competitive situation in the switching market. It is consistent with
these conditions, and indeed access conditions in general, that in consequence the
firm granting access may find its market position eroded that is unless it reacts by
competing more vigorously. What DHS regards as a perverse outcome of the reading
of the order by HB is in fact the situation that the order contemplates. This is the
raison d’ être for the condition.
152.We find that DHS’ interpretation of the conditions is incorrect, and
accept the version of the Commission and HB, namely that
‘reasonableness’ meant that the access terms should not be
exploitative of the merged firm, in the sense we have explained above.
Indeed, there is an equally plausible third reading of ‘reasonableness’
which is not inconsistent with this one above, and that is that if the
merged firm gave access on terms that perpetuated its market power
the suggestion made by MediKredit in relation to its agreement with
DHS those terms would be unreasonable. In other words,
reasonableness, which every one has contended had to be read to
benefit the merged firm, might have been meant to protect the
competitive process from abuse. Nevertheless, we need not find that
this latter interpretation is the correct one or the only correct one. It
suffices for us to reject the interpretation of DHS and to accept that of
the Commission and HB as the more plausible.
153.Having come to this conclusion on the interpretation, we find on the
facts that HB has established that its original offer was reasonable.
Firstly, in terms of its consistency with market norms, even being
Firstly, in terms of its consistency with market norms, even being
conservative in this regard. Secondly, and this appears to be
uncontested, it was reasonable in the sense that it adequately
compensated MedeMass for the costs of access. It was not
necessary for the offer to compensate DHS for its loss of its switching
business, assuming, accepting Magennis, that this might have been a
consequence of the agreement.
154.It is of course not sufficient for us to find that HB’s offer was
reasonable. We must also find DHS’ responding offer unreasonable. In
this respect we find that HB’s experts have made out a case for this
offer not only being less favourable to HB than the market norm, but
also likely to raise its costs of doing business. Again, this evidence is
not seriously contradicted, and DHS‘ riposte, that compensation for the
loss of market power justifies these terms, has already been rejected
by us as a proper approach to interpreting the conditions. Since that
was the only basis on which DHS sought to defend the reasonableness
of its offer, it too must fail, and the offer is considered unreasonable.
155.It follows then that DHS’ insistence on backend access was an issue
40
extraneous to the proper interpretation of the order and a device for
DHS to compensate itself not for the reasonable costs of granting
access to the PMA market, but a loss of market power or the potential
to exercise that power in the switching market.
The nonconclusion of an agreement
156.DHS says in par 12.8 of its heads of argument, dated 13 September 2003, that it is
clear from the Commission’s notice that the nonconclusion of the agreement
triggered the CC19 notice and not whether there was substantial compliance with the
merger obligations. This failure by the Commission to apply its mind should by itself
lead to a review in terms of rule 39(2)(b), as well as in terms of s 6(2)(e)(ii) and s 6(2)
(f)(ii) of the Promotion of Administration Justice Act 3 of 2000. 57
157.However, we need not address this issue since this argument was addressed in great
detail as an in limine point in the first part of our decision where we found it to be
without merit. 58
Hacking
158.DHS argued as an independent and selfstanding reason for the
denial of access, that HB had allegedly sought to achieve access to its
PMA software by hacking.
159.Again we do not need to go into the record on this issue, which is
lengthy, acrimonious and disputed by HB. Indeed, in fairness to HB, we
must record that it denies the allegations strenuously and points out
that a High Court application for an interdict was withdrawn after HB
filed its answering affidavit. To add another twist to the tale it appears
that the proceeding is to be renewed by DHS in another form.
160.We are certainly in no position to determine if hacking occurred. What we must ask is,
if DHS bona fide believed that hacking took place, did this justify it not entering into
an agreement with HB? In our view it did not. Mr Burger correctly conceded in
argument that the hacking issue did not relate to whether HB was a flawed person
argument that the hacking issue did not relate to whether HB was a flawed person
and thus an undesirable party to contract with. Rather he pinned his colours to
hacking being a reason for not reaching a timely agreement. This argument does not
make sense on the record. It is quite clear from the correspondence that after the
allegations of hacking were first aired in August 2001 t he parties continued to
negotiate.59 Indeed, the existence of DHS’ April 2002 offer premised on backend
access indicates that it was this issue, not hacking, that was foremost in DHS’
consideration about negotiating access. Hacking appears to have become a post hoc
rationale to justify DHS’ failure to grant access and to serve as another arrow in its
quiver of defences should the others fail.
57 This aspect is also addressed as an in limine point in the first part of our decision .
58 See page 11 of this decision.
59 See page 82 of the record.
41
Conclusion
161.In our view the applicant has failed to establish that it has substantially
complied with the obligations contained in the conditional approval of
the merger.
162.In the first place it refused to enter into an agreement proposed by HB
on reasonable terms.
163.Secondly, the terms on which it was prepared to grant access were
unreasonable both in relation to its offer of June 2001 and its
subsequent demand to make access conditional on backend access.
Thirdly, the linking of the refusal to the alleged hacking was on the
facts before us an extraneous issue that did not reasonably constitute a
ground for not agreeing to access.
164.The application therefore fails.
Costs
165.HB is awarded the costs of the application on a party and party basis including the
costs of three legal representatives. No costs are awarded to the Commission as we
have not yet heard any argument to persuade us against our present understanding
of our powers which is that we can neither award costs for or against the
Commission.60 Had the situation been otherwise the Commission would have been
entitled to costs.
166.For the same reason no costs are awarded against the Competition
Commission in respect of the withdrawal of the application to file a late
expert report.
4 February 2004
N. Manoim Date
Concurring: L Reyburn
60 See our decision in Commission v SAA, Case No: 18/CR/Mar01
42