IN THE COMPETITION TRIBUNAL
REPUBLIC OF SOUTH AFRICA
Case Number: 35/IR/May05
In the matter between:
Nyobo Moses Malefo First Applicant
Fullhouse Investments 119 (Pty) Ltd Second Applicant
and
Street Pole Ads (S.A.) (Pty) Ltd First Respondent
Brent Herbert Second Respondent
Grant Smith Third Respondent
Lucas Potgieter Fourth Respondent
REASONS AND ORDER
1
Background and Relief Sought
1. This is an application for interim relief. The application is denied and our
reasons follow.
2. The application has been brought by Mr. NM Malefo (‘Malefo’), who is the
first applicant, and Fullhouse Investments 119 (Pty) Ltd (‘Fullhouse’), the
second applicant. Malefo has a 30% shareholding in two companies, Pole
Add SA (Pty) Ltd, a Pretoriabased operation and Validtrade 63 (Pty) Ltd
(“Validtrade”) which trades as Zama Marketing (“Zama”) and is a Port
Elizabethbased operation. Fullhouse, which is controlled by Mr. Francois de
Villiers, owns a further 20% share of these two companies, which we shall
refer to collectively as ‘PoleAdd’ or simply as ‘the company’.
3. The remaining 50% of the shares of PoleAdd are owned by the first
respondent, Street Pole Ads (Pty) Ltd (‘SPA’). The other three respondents
cited are all directors and senior employees of the first respondent. SPA and
PoleAdd are active in the same product market – they both provide the
service of lamp pole advertising to their clients. PoleAdd provides this service
in the Pretoria region whilst Validtrade provides the same service in Port
Elizabeth. Both firms arrange for the advertising of a client’s product or
service through the design, production, erection and maintenance of signs on
lampposts in various metropolitan areas. The advertising on a local
authority’s street poles is thus sanctioned by means of a contract entered into
between the advertising agent – PoleAdd in the Pretoria case – and the
relevant local authority.
4. This application concerns the affairs of PoleAdd, in particular its relationship
to its largest shareholder, SPA. As we shall elaborate, it is effectively alleged
to its largest shareholder, SPA. As we shall elaborate, it is effectively alleged
that PoleAdd is simultaneously subjected to abuse within the meaning of
Section 8 of the Competition Act by SPA and that it (PoleAdd) is engaged
with SPA in a horizontal agreement in contravention of Section 4. However
the application could not be brought by PoleAdd because those aggrieved by
the alleged conduct of the respondents have no authority to bring the
application on behalf of PoleAdd nor could they obtain such authority – they
are but minority shareholders who collectively control 50% of the
shareholding and the board seats of PoleAdd with the remaining shares and
board seats controlled by SPA, whose alleged conduct forms the subject
matter of this application. With knowledge of these facts only, it is plain to
see that whatever competition issues may or may not be at stake, they are
clearly not the only issues – there is certainly a very serious dispute between
the shareholders of PoleAdd, a dispute which has, because of the particular
shareholding structure, created a deadlock in the control of the company. This
is clearly illustrated in the relief sought in both the complaint submitted to the
Commission as well as in this application for interim relief.
5. In the complaint submitted to the Commission which the Commission is yet
to investigate and decide whether or not to refer to the Tribunal the
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applicants seek the following relief:
7.1 “A declaration that the respondents are involved in a number of prohibited
practices in contravention of the Act;
7.2 An appropriate order in relation to a prohibited practice, including:
7.2.1 Interdicting any prohibited practice
7.2.2 Ordering a party to desist from any conduct which could be
considered a prohibited practice;
7.2.3 Ordering the following directors and/or employees who are involved,
to so desist and be interdicted from the conduct referred to in
paragraph 7.2.2:
7.2.3.1 Brent Herbert;
7.2.3.2 Lucas Potgieter and
7.2.3.3 Grant Smith.
7.2.4 imposing an administrative penalty, in terms of section 59, with or
without the addition of any other order in terms of this section;
7.2.5 ordering divestiture
7.2.6 declaring conduct of a firm to be a prohibited practice in terms of this
Act, for the purpose of section 65
7.3 Declaring the whole or any part of any sales of shares or shareholders’
agreement to be void;
7.4 Subject to sections 13(6) and 14(2), condoning, on good cause shown, any
noncompliance with –
7.4.1 The Competition Commission or Competition Tribunal rules; or
7.4.2 A time limit set out in this Act.
7.5 That the relevant offending clauses of the agreements concerned or the entire
agreement be set aside;
7.6 Further and/or alternative relief.”
6. Note that the applicants seek, at final relief, the setting aside of the sale of shares
and shareholders’ agreement.
7. In the original Notice of Motion in the Interim Relief application before the
Tribunal – the application which we are now deciding the applicants seek the
following relief:
1. “That the Applicants’ failure to comply with the time periods and
formalities referred to in the Rules for the conduct of proceedings in the
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Competition Tribunal be condoned in terms of rule 28(3).
2. That, pending the conclusion of a hearing into the prohibited practices
referred to in sections 4(1)(a), 4(1)(b)(I,)(ii) and (iii), 8(c ) and 8(d)(i) of
the Competition Act 89 of 1998, which are referred to in the complaint
filed on 28 April 2005 under case number 2005APR1560 or a date six
months after the date of issue of this interim order, whichever is the
earlier:
2.1 The respondents be interdicted from directly or indirectly withdrawing
or causing the withdrawal of PoleAdd SA’s appeal/objection to the
tender process pending before the Cape Town Municipality.
2.2 Be interdicted from further implementing the provisions of clause 10 of the
sale of shares agreement dated 24 September 2003 relating to the exercise
of an option to purchase a further 50% ordinary “A” shares in PoleAdd
SA and Valitrade 63
2.3 Be interdicted from implementing the provisions of clause 3.1 of the
shareholders agreement by appointing a further director to the Board of
Directors of PoleAdd SA and Valitrade 63.
2.4 Be interdicted from in any way communicating to customers in the
advertising on street poles business in South Africa that PoleAdd SA or
Valitrade 63 are in any manner whatsoever prohibited from conducting
business with such customer
2.5 Be interdicted from directly or indirectly charging any customers to whom
services are rendered in terms of a contract between the City Council of
Pretoria and PoleAdd SA any amount which causes the total
remuneration and commission payable by the customer to exceed R379,84
2.6 The Chairperson of the South African Public Accounts and Auditors
Board be requested to urgently appoint a suitable independent auditor of
not less than 15 years standing as chairman of the boards of directors of
PoleAdd SA and Valitrade 63 with the power to vote as a director. This is
PoleAdd SA and Valitrade 63 with the power to vote as a director. This is
to break any Board deadlock with a casting vote.
3. That PoleAdd SA and Valitrade be jointly liable for the remuneration of the
independent auditor.
4. Costs
5. Further and/or alternative relief.”
8. During the course of the hearing held on 25 July 2005, the applicants abandoned
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some of their original prayers for relief, namely prayer 2.6 and prayer 3. 1 Note
however, that we are still asked to interdict the implementation of those aspects
of the sale of shares agreement that would lead to the assumption of sole control
of PoleAdd by SPA, these being the exercise of an option that SPA has on a
further portion of Fullhouse’s shares in PoleAdd and the right of SPA to
appoint another director to the board of PoleAdd.
The Merger of SPA and PoleAdd
9. This application has its origins in a merger structured to take place in two
interconnected stages, involving a total of three separate share transfers. The
first transfer occurred, and the first stage was concluded, when, in September
2003, the first respondent, Streetpole Ads SA (Pty) Ltd, acquired from Mr
Francois de Villiers 50% of the shareholding of the second applicant,
Fullhouse Investments, in two companies, one a Pretoriabased operation,
PoleAdd SA (Pty)Ltd and the other a Port Elizabeth based operation, trading
as Zama Marketing.
10. The ‘Sale of Shares and Loan Accounts’ agreement, 2 in addition to specifying
the terms of the first stage referred to in the preceding paragraph, also
provided that, upon the seller, de Villiers, disposing of 60% of Fullhouse’s
remaining equity in PoleAdd to a historically disadvantaged person, the
buyer, SPA, is entitled to exercise an option whereby it would acquire 50% of
what remained of Fullhouse’s interest in PoleAdd. These share transfers
constitute the second leg of the transaction.
11. The condition in question was met. The BEE purchaser was Mr. NM (“Pasty”)
Malefo, the first applicant in this matter, who, on the purchase of 60% of
Fullhouse’s remaining shareholding in PoleAdd, became a 30% shareholder
in that company. At the time of the purchase of shares, Malefo was described
in that company. At the time of the purchase of shares, Malefo was described
as a ‘director and executive office bearer of PoleAdd and Zama Marketing’.
Subsequent to purchasing the shares from De Villiers, Malefo could add to his
web of connections with PoleAdd that of shareholder, but neither he nor De
Villiers have ever held any office or direct interest in SPA.
12. In summary, then, the sequence of the transfer of control of PoleAdd was,
first, from sole control by Fullhouse to joint control by Fullhouse and SPA. In
the second leg, Malefo was introduced to the transaction. On the sale of 60%
of Fullhouse’s remaining shareholding in PoleAdd, SPA emerged as the
single largest shareholder in PoleAdd, but it did not hold a majority of the
shares. On the face of it, control of PoleAdd was now jointly held by SPA
with 50% and Fullhouse and Malefo with 20% and 30% respectively. At this
1 See page 6, 70 of Transcript
2 Note that this is the agreement governing SPA’s purchase of 50% of De Villiers’ shares in Fullhouse
Investments. When we refer to the ‘sale agreement’ it is to this agreement that we refer. There is a
second ‘Sale of Shares’ agreement which governs the sale of shares by De Villiers to Mr. Malefo, the
BEE partner. Should we need to refer to this agreement we will specifically refer to this as the ‘De
Villiers/Malefo sale agreement’.
5
stage SPA was entitled to appoint two directors and Malefo and Fullhouse
were jointly entitled to appoint two directors. Upon exercise of the option,
SPA would have acquired a further 10% interest in PoleAdd. Sole control of
the two companies would then vest with SPA (60%), with Malefo (30%) and
Fullhouse (10%) collectively retaining only a minority stake. The sale
agreement provides that at this point, SPA would be entitled to appoint an
additional director thus controlling the board of PoleAdd. 3
13. On 19 April 2004, SPA exercised its option to purchase further shares from
Fullhouse. However, in a letter from its attorneys dated 4 May 2005,
Fullhouse alleged that SPA was in breach of the sales of shares agreement and
the shareholders’ agreement and accordingly purported to cancel both
agreements. It then follows (and is specifically recorded in this
correspondence) that Fullhouse similarly refused to honour SPA’s option on
its remaining shares in PoleAdd. The option is contained in a clause of the
sale of shares agreement which de Villiers purported to cancel and is parasitic
on the initial sale of de Villiers’ shares to SPA.
14. De Villiers has accordingly declined to transfer the shares. Instead, on 28
April 2005, Fullhouse and Malefo filed a complaint with the Competition
Commission in which it is alleged that SPA’s relationship with PoleAdd
contravenes Section 4 and Section 8 of the Competition Act. Among the
remedies sought, is the setting aside of the sale agreement. The Commission is
yet to decide whether or not to refer this complaint to the Tribunal. Malefo and
Fullhouse have now also filed an application for interim relief. Among the
remedies sought at this stage of the proceedings is the interdiction of the
exercise of the option on de Villiers’ remaining equity. This is the application
presently before us.
15. Confronted by de Villiers’ refusal to honour the option, SPA brought an
application before the High Court in which it sought an order of specific
performance arising from what it believed to be its legitimate exercise of its
option. However, the court was persuaded that because the legal basis claimed
for de Villiers’ refusal to honour SPA’s option on Fullhouse’s shares lay in
SPA’s alleged contravention of the Competition Act, that it constituted matter
falling within the exclusive jurisdiction of this Tribunal. In terms then of
Section 65 of the Competition Act, the High Court referred the allegations of
anticompetitive conduct to the Competition Tribunal and postponed sine die
the application for specific performance. 4
The Complaint
16. The applicants effectively allege that SPA has engaged in conduct in
3 Note that in terms of the sale agreement even if de Villiers had been unsuccessful in finding a BEE
partner, SPA would still have had an option to purchase half of Fullhouse’s interest in PoleAdd further
bolstering the argument (elaborated below) that it had always been intended that control of PoleAdd
would, sooner or later, and at the sole election of SPA, vest in SPA.
4 Street PoleAds (Pty) Ltd and PoleAdd S.A. (Pty) Ltd, and Others 19631/05 TPD
6
contravention of the Competition Act, in particular, Section 4, which prohibits
certain ‘restrictive horizontal practices’ and Section 8, which proscribes a
dominant firm from abusing that dominance. As already mentioned, a
decidedly peculiar aspect of this matter is that the firm that SPA is alleged to
be conspiring with, is the same firm that it is alleged to be abusing!
17. Section 4 provides:
1) An agreement between, or concerted practice by, firms, or a decision by
an association of firms, is prohibited if it is between parties in a horizontal
relationship and if
(a) it has the effect of substantially preventing, or lessening,
competition in a market, unless a party to the agreement,
concerted practice, or decision can prove that any technological,
efficiency or procompetitive gain resulting from it outweighs that
effect; or
(b) it involves any of the following restrictive horizontal
practices :
i) directly or indirectly fixing a purchase or selling price
or any other trading condition;
(ii) dividing markets by allocating customers, suppliers,
territories, or
specific types of goods or services; or
(iii) collusive tendering.
18. Section 8 provides:
It is prohibited for a dominant firm to
(a) charge an excessive price to the detriment of consumers;
(b) refuse to give a competitor access to an essential facility when it is
economically feasible to do so;
(c) engage in an exclusionary act, other than an act listed in paragraph
(d), if the anticompetitive effect of that act outweighs its
technological, efficiency or other procompetitive gain; or
(d) engage in any of the following exclusionary acts, unless the firm
concerned can show technological, efficiency or other procompetitive
gains which outweigh the anticompetitive effects of its act –
i.requiring or inducing a supplier or customer to not deal with a
competitor;
i.requiring or inducing a supplier or customer to not deal with a
competitor;
ii.refusing to supply scarce goods to a competitor when
supplying those goods is economically feasible;
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iii.selling goods or services on condition that the buyer purchases
separate goods or services unrelated to the object of a
contract, or forcing a buyer to accept a condition unrelated to
the object of a contract;
iv.selling goods or services below their marginal cost or average
variable cost; or
v.buyingup a scarce supply of intermediate goods or resources
required by a competitor.
19. Section 7 provides:
A firm is dominant in a market if –
a) it has at least 45% of that market;
(b) it has at least 35%, but less than 45%, of that market, unless it can
show that it 10
does not have market power; or
(c) it has less than 35% of that market, but has market power.
20. The horizontal agreement – that is the agreement between competitors which
is alleged to fall foul of Section 4(1)(b) is contained in the shareholders
agreement to which SPA, Fullhouse Investments, de Villiers, PoleAdd and
Zama are party. The de Villiers/Malefo sale agreement provides that Malefo,
upon purchase of a portion of de Villiers’ shareholding in PoleAdd, is bound
by the terms of this shareholders agreement. In particular, Clause 16 of this
agreement, which is titled ‘ability to compete’, is alleged to contravene the Act
because it specifies areas in which PoleAdd and SPA will not compete and it
also provides for areas in which they may compete.
21. Curiously (but, as we shall outline, revealingly) we are not asked to interdict
the implementation of Clause 16 of the shareholders agreement, the market
allocation clause that is alleged to contravene Section 4. Instead we are asked
to interdict the exercise of the option that is provided for in the sale agreement
and which contains no mention of market allocation. In similar vein, we are
asked to interdict the implementation of Clause 3.1 of the shareholders’
agreement, which provides for SPA to appoint an additional director, thus
agreement, which provides for SPA to appoint an additional director, thus
giving its appointees a majority of board seats. A mere glance, therefore, at
the notice of motion and the relief claimed therein already suggests that this is
a battle about the control of PoleAdd, rather than about the allegedly anti
competitive conduct of SPA.
22. In addition, we are asked to interdict certain conduct allegedly perpetrated by
SPA in apparent contravention of aspects of Clause 16 of the shareholders’
agreement. This conduct relates to an allegation that SPA had sought to
prevent PoleAdd (in apparent violation of Clause 16.2.1 of the shareholders
8
agreement) from competing in Cape Town. 5 We are also asked to interdict
SPA from holding out to customers and prospective customers of PoleAdd
that PoleAdd is not entitled to compete for their business. The net effect of
granting the relief claimed, would leave only those elements of clause 16
intact which prohibit SPA from competing with PoleAdd – notably in
Pretoria and Port Elizabeth.
23. The respondents are also alleged to have contravened Section 8 of the Act,
which proscribes dominant firms from abusing their dominance. It is
extremely difficult to identify the conduct which is alleged to contravene
Section 8. This claim appears to relate to SPA onselling advertising space in
Pretoria which it had purchased from PoleAdd at a price higher than that
specified in the latter’s contract with the Pretoria City Council. Accordingly
Clause 2.7 of the Notice of Motion asks us to interdict SPA from charging its
customers more than R379,84 for advertising space in Pretoria that it had
purchased from PoleAdd. We hesitate in identifying this as the abuse of
dominance complained of because the same conduct also appears to be
identified by PoleAdd as an instance of a price fixing agreement and, as such,
in contravention not of Section 8 of the Act but of Section 4. 6 However this
cannot be a Section 4 violation because the key element of Section 4 is the
existence of an agreement between competing parties. The R400,00 allegedly
charged by SPA is not, of course, pursuant to an agreement between PoleAdd
and SPA. In fact, PoleAdd insists that SPA should be charging R379,84 while
SPA, for its part, insists on its right to charge R400,00 thus reflecting a
disagreement on price rather than an agreement. The relationship of this
pricing conduct to the abuse of dominance provisions of the Act is never
specified. The high watermark of the applicants’ argument is that this pricing
conduct is somehow designed to permit the Pretoria City Council to terminate
its agreement with PoleAdd which may then, in a new tendering process,
allow SPA to replace PoleAdd as Pretoria’s contracting partner.
24. We should add that there is also substantial disagreement between the
applicants and the respondents in respect of the market in which this abuse is
alleged to take place. On the face of it, both parties have presented a
5 In 2002 PoleAdd together with an empowerment partner, participated in a tender relating to outdoor
advertising in Cape Town. In March 2005, shortlisted applicants were invited by the City Council to
submit tenders. SPA, bidding as part of a consortium, was one of the short listed applicants. However
PoleAdd wished to have the tender process set aside on the grounds that the information on which the
tender was based was now dated. It accordingly lodged an appeal against the procedure adopted by the
council in this regard. SPA subsequently advised the body responsible for adjudicating the tender that
Pole Add had no authority to submit an appeal as this had not, and given the position of SPA
appointees on the Pole Add board, would not be authorised by the board. It appears that, for the
purposes of this application, the applicants allege that this is evidence of the market allocation
agreement in practice insofar as SPA is preventing PoleAdd from competing in Cape Town. SPA, for
its part, argues that Pole Add is manifestly incapable of bidding for this contract insofar as a R10
million deposit is required in order to submit a tender. The applicants also allege that SPA’s
membership of the consortium constitutes collusive tendering. The respondents argue that, to the
extent that the Cape Town tender raises any legal issues, these concern the authority of PoleAdd to file
an appeal to the tender process, authority issues similar to those referred to in Paragraph 3, above.
6 See Complainant’s Heads of Argument paragraph 28.2, at page 22.
9
plausible version of the relevant market, with the applicants predictably opting
for a narrow market that is confined to street pole advertising while the
respondents insist that this activity is part of a much larger market for all
outdoor advertising. These disputed versions of the relevant market can only
be resolved by further investigation – they cannot be resolved on the papers
submitted for the purposes of interim relief and so the opaque allegations
concerning abuse of dominance cannot be taken any further in these
proceedings.
25. Let us return then to the allegation that the market sharing arrangement
contained in the shareholders’ agreement contravenes Section 4 of the Act.
We have already noted that the relief sought does not end this contravention, if
contravention it be. On the contrary, it seeks to confirm those sections of the
market sharing agreement which both allow PoleAdd to compete with SPA
(eg in Cape Town) and which prevent SPA from competing with PoleAdd (eg
in Pretoria and Port Elizabeth). It would, of course, have been a simple matter
to ask for the implementation of clause 16 of the Shareholders’ Agreement to
be interdicted. However this has not been asked for presumably because
certain of the ‘noncompete’ clauses manifestly favour the applicants.
26. Nor, of course, does the relief that is sought in the interim relief application,
resolve the dispute over control of the company. On the contrary, were we to
grant those aspects of the relief sought that clearly relate to the control of Pole
Add – namely the exercise by SPA of its option on a portion of De Villiers’
remaining equity interest in PoleAdd and the appointment by SPA of an
additional member of PoleAdd’s board – we would be confirming joint
additional member of PoleAdd’s board – we would be confirming joint
ownership and, with it, the effective deadlock over control of the company.
27. On the other hand, were SPA able to implement its option, this would end the
impasse over control – it would take the matter outside of the grey area of
joint control into the realm of sole control. And on the wellestablished
principle that holds that a firm cannot conspire with or abuse its own
subsidiary, it would also remove any appearance of competition contravention.
28. It is, in our view, precisely this clear resolution that the applicants seek to
avoid – they wish to prevent control from passing to SPA, not least because it
clearly removes the dispute between the shareholders from even the
appearance of a competition contravention.
The requirements for interim relief
29. This then brings us to the requirements that have to be met if the Tribunal is to
grant an application for interim relief.
30. Section 49C(2)(b) provides that the Competition Tribunal may grant an
interim order if it is reasonable and just to do so, having regard to the
following factors:
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i) the evidence relating to the alleged prohibited practice;
ii) the need to prevent serious or irreparable damage to the applicant; and
iii) the balance of convenience.
31. As we have already shown, the evidence relating to the alleged prohibited
practice is, at best, highly opaque. The content of the conduct that is alleged
to contravene Section 8 is well nigh unintelligible. In any event, the market in
which the contravention is alleged to have taken place, is in dispute.
32. As for the Section 4 violation, we are confronted with the unusual situation of
one set of parties to an allegedly anticompetitive horizontal agreement filing a
complaint against their coconspirators – indeed Counsel for the applicants
acknowledges his clients complicity in the alleged conspiracy. 7 This partly
accounts for the difficulty in identifying the harm that arises from the
agreement – the ‘serious or irreparable damage’ that the interdict must, if it is
to be granted, seek to prevent. The market sharing agreement was presumably
entered into because it was thought to be to the mutual benefit of the parties.
And the selective and opportunistic identification of conduct related to the
operation of that agreement that we are asked to interdict establishes that there
have been predictable tradeoffs in arriving at this agreement and that the
applicants wish to maintain intact those parts of the agreement that are to their
advantage. Hence they are, despite their new found respect for the principles
of competition, content to ask us to confirm that SPA will not compete with
them in Port Elizabeth and Pretoria, while simultaneously confirming that the
parties may compete in Cape Town.
33. There is certainly no evidence that PoleAdd is a party in danger of incurring
‘serious or irreparable damage’. Indeed Malefo in his affidavit is at pains to
‘serious or irreparable damage’. Indeed Malefo in his affidavit is at pains to
emphasise the extent to which PoleAdd has prospered in the recent past. 8
This is an assessment shared by the respondents. And nor, if the market
sharing agreement is effective, should we be surprised by this. After all
market sharing agreements are entered into precisely to enable the conspirators
to extract monopoly rents and to thrive albeit at the expense of the consumers.
Alternatively, multibranch enterprises coordinate the marketing activities of
their branches in order to exploit efficiencies that benefit the firm.
34. This is, of course, why we would expect a consumer, and not a coconspirator,
to petition for relief when confronted by a horizontal agreement. There is
certainly no evidence of consumer harm suffered. 9 There appears to be some
suggestion that the consumers who are allegedly paying in excess of the
advertising rate stipulated by the Pretoria city council – R400,00 as opposed to
R379,84 – are consumers harmed by the arrangement. However, as we have
pointed, out this is not a price which the alleged conspirators have fixed –
indeed it represents a point of some considerable disagreement.
7 See page 15, transcript
8 See Complainant’s reply to Respondent’s supplementary affidavit, page 938 at paragraph 9.
9 while ordinarily Section 4(1)(b) does not require a showing of harm, this showing is required if we
are to grant an application for interim relief
11
35. The only harm that that is seriously contended for is harm to two of Pole
Add’s shareholders, namely Malefo and De Villiers, who are, separately,
minority shareholders but who collectively control half of PoleAdd’s equity
and half of its board. The record is replete with references to the harm
allegedly suffered by these two shareholders and Malefo in particular. 10
“3.3.27 The direct result of the conduct displayed by SPA’s directors and
stakeholders is:
3.3.27.1 The curtailment of the Company’s ability to grow and
generate more revenue than currently being generated.
3.3.27.2 The impairment of my potential dividend income and erosion of
my shareholder’s interest.”
“ ADV PREIS : And we obviously will at the end of the day … we’ve also
referred you to the provisions of Section 2, which will be contravened under
these kinds of circumstances, as you’ve indicated. One has the obvious
detrimental effect on historically disadvantaged individuals. Section 2 says
you must protect those individuals.” 11
“…Should I be disempowered, there is no turning back and I will be reduced
to ‘just another failed BEE statistic.” 12
36. The potential for conflict that is inherent in the relationship between SPA, on
the one hand, and de Villiers and Malefo, on the other hand, is plain to see, as
is the potential threat to the commercial interests of the applicants. At the risk
of stating the obvious, because of the existence of minorities in the branch
structure of SPA (that is, in what are effectively the Pretoria – PoleAdd – and
Port Elizabeth – Zama branches) the separate corporate identities of SPA and
PoleAdd had to be retained. However it did not take long for the tensions
embedded in this structure to rear their head. SPA’s interests were in crediting
as much business as possible to branches other than Pretoria because in the
as much business as possible to branches other than Pretoria because in the
nonPretoria branches, it did not have to share its profits with the Pretoria
minorities. SPA denies that it was attempting to undermine its partners in
PoleAdd – it insists that it was simply attempting to rationalise its group
marketing activities. This may well be so, but it is not difficult to see why the
shareholders of the Pretoria operation came to view key elements of this
rationalisation as hostile to their commercial interests. 13
37. Viewed from this perspective, the interests of the minority shareholders in
PoleAdd, effectively the Pretoria branch of SPA, were, of course,
diametrically opposed to those of its majority shareholders – the conflict was
10 See record page 28 Founding Affidavit. Also paragraph 12.12 at 536, paragraph 12.3.2 at page 537,
paragraph 13.3. at page 538. See also page 539.
11 See transcript page 34.
12 Replying affidavit paragraph 12.8.4 at page 534
13 See Founding Affidavit at page 28.
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compounded by assigning to the key representatives of the minority
shareholders the task of managing the daily operations of the Pretoria branch
while SPA naturally enjoyed managerial responsibility for the group operation
which inevitably impacted on the Pretoria operation. The minority
shareholders in PoleAdd were interested in crediting as much business as
possible to PoleAdd, in which they enjoyed a share of the profits. These
interests flew directly in the face of SPA’s apparent attempts to limit the
amount of business credited to Pretoria (that is, to PoleAdd) by insisting, so it
is alleged, that all business that emanated from outside of Pretoria, even that
which eventuated in the display of advertisements on poles in Pretoria, was to
be credited to SPA and not to Pole Add. Hence SPA insisted that the location
of the national head quarters of the client, including advertising agents,
determine whether or not business was credited to SPA or to PoleAdd. It is
then not difficult to see why the tension between the shareholders also infected
the operational staff who, it appears, work on a commission basis. It also
portended conflict in new markets, markets in which neither company enjoyed
a presence, and hence the disagreement over entry into the Cape Town market.
38. It is clear that SPA’s interest in PoleAdd lay overwhelmingly in the latter’s
contract with the Pretoria city authority and with further contracts that its BEE
partner in Pole Add could extract from other city authorities – Nelspruit is
explicitly mentioned. However SPA effectively saw itself as being in charge
of the onsale to advertisers of the council controlled street poles. Whether
this represented a rational division of labour or a devious attempt to cut the
minorities out of a legitimate share of their profits is not clear. What is clear is
minorities out of a legitimate share of their profits is not clear. What is clear is
that it created massive, if predictable, tension between the partners as well as
potential harm to the commercial interests of Malefo and De Villiers.
However, in order for us to grant interim relief we must be satisfied that the
prospective harm, if any, that is implicit in this relationship is cognisable
competition harm that arises from a contravention of the Competition Act.
39. Our finding is that the applicants have not shown serious or irreparable
damage to PoleAdd that is reasonably apprehended to derive from the alleged
restrictive practice, namely, the marketing arrangement contained in the
shareholders’ agreement. If any interests do suffer harm, then those are the
interests of the minority shareholders of PoleAdd, and this harm derives not
from the marketing arrangement in the shareholders’ agreement but rather
because of their position within the control structure of SPA and PoleAdd. If
there is no harm suffered, then the balance of convenience must lie with the
respondents.
40. The applicants have then not satisfied any of the factors which the Act
mandates us to consider when faced with an application for interim relief.
The evidence relating to the alleged prohibited practice is at best questionable
and in any event challenged by the respondent, serious or irreparable harm has
not been established and the balance of convenience cannot be said to favour
the applicants. Although each of these elements does not have to be
established – they are to be considered and weighed up in our decision – we
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would be hard pressed to grant interim relief when there is no evidence of
harm arising from a contravention of the Act. As we have elaborated, the
competition contravention alleged is not a cause of harm to the applicant.
We accordingly deny the application for interim relief.
Merger regulation
41. For the sake of completeness we underline that this is a dispute about the
control of a company. Chapter 2 of the Act – ‘prohibited practices’ – has little
reference to the question of control. Moreover, the Tribunal is not, even in the
case of the most egregious anticompetitive conduct, ordinarily empowered to
effect a change in the control of a company or an asset. The Tribunal is, in
terms of Section 60(2), able to order divestiture in response to a prohibited
practice only in the event of a repeat offence that cannot otherwise be
remedied and even then the divestiture remedy has to be confirmed by the
Competition Appeal Court.
42. It is only in Chapter 3 of the Act – the chapter of the Act dealing with the
regulation of mergers that structural remedies are ordinarily contemplated
and imposed. Hence the Tribunal or, in the case of intermediate mergers, the
Commission may, by prohibiting a merger, preemptively act against attempts
to alter the structure of a market. In the case of a small merger – which the
merging parties are not compelled to notify to the Commission – the
Commission may nevertheless require notification and, should it find that
competition in the market has been substantially compromised by the
transaction, require divestiture.
43. We raise this because the applicants are clearly seeking a structural remedy,
that is, for the large part, beyond the powers of the Tribunal certainly at the
interim relief stage of a complaint hearing. What is clear in this instance is
interim relief stage of a complaint hearing. What is clear in this instance is
that De Villiers had come to regret his decision to sell PoleAdd to SPA.
Moreover, he and Malefo appear to have concluded that their commercial
interests are seriously compromised by a shareholding arrangement which
effectively has them holding minority stakes in two branches of the SPA
group.
44. Their only remedy would be to ask the Commission to investigate the small
merger and to find that it will lead to a substantial lessening of competition
and, hence, that it should be prohibited. The applicants are, by no means,
assured of success – indeed it is not even certain that the time periods for this
sort of intervention have not lapsed. However it is clear that the conflict
between the parties to this dispute concerns the assumption by SPA of control
over PoleAdd. If the scrutiny of the competition authorities is required, then
it is that fact – the change in control – that should be investigated and Chapter
3 of the Competition Act empowers the competition authorities to do so.
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Order
The application for interim relief is dismissed.
Costs
45. In their Notice of Motion, the applicants requested that the matter be set down,
on an urgent basis, on 24 May 2005. The respondents filed their answering
affidavit on 23 May 2005. The respondents allege that the applicants should
have contacted the Tribunal and ascertained that a panel was convened for the
24th. They were therefore, according to the respondents, remiss in not acting
more diligently to secure the hearing date, as a result of which the respondents
incurred costs in ensuring the attendance of their counsel on the day. However,
we note that respondents were also not very diligent in ensuring that the
hearing would proceed. The respondents filed a Notice of Intention to defend
but indicated that they would not be in a position to file their answer by the
appointed dates, and would do so “in due course”. They then filed their own
answering affidavit a day before the scheduled hearing date, surely
anticipating that the applicant would want to file a reply and therefore could
not seriously themselves have expected the matter to proceed on the 24 th.
46. The matter was then formally set down to proceed on 22 June 2005. However,
on the 21 st June, and after the close of pleadings, the respondents filed a
supplementary affidavit. This occasioned a further delay in proceedings,
insofar as the Tribunal granted the applicant a postponement on application, in
order to provide it the opportunity to reply to the respondent’s supplementary
affidavit.
We accordingly award costs as follows:
47. Each party to bear its own costs for the wasted hearing day of 24 May 2005.
This is because both parties shared in the creation of the confusion relating to
whether the hearing would proceed or not, therefore blame can be equally
apportioned.
apportioned.
48. In respect of the postponement of the hearing on 22 June 2005, costs of two
legal representatives are awarded to the applicants. Pleadings had already
closed yet the respondents elected, of their own accord, to file a supplementary
affidavit.
49. In respect of the main matter, the costs of two legal representatives are
awarded to the respondents.
________________ 1 September 2005
15
D. Lewis Date
Concurring: Y. Carrim, Adv. M. Madlanga
For the Applicant : Adv. D. Preis SC, instructed by der Merwe and Ferreira
Attorneys
For the respondents : Adv. A. Redding SC, instructed by Bowman Gilfillan
Attorneys
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