The Oceana Section 21 Challenge

The latest in this saga is that the State filed an answering affidavit on the 13th September 2010.

The first point of interest is that the affidavit is not deposed to by the Minister herself, but rather by the Acting Director of Legal Services at DAFF.  It may be that the Minister is “keeping her powder dry” at this stage due to the fact that the power to determine Section 21 applications along with many other powers in terms of the MLRA has been delegated to officials within the Department whereafter an applicant may appeal any such decision to the Minister herself.

This leads us to one of the main technical grounds upon which the State opposes the Oceana Challenge.  They allege that the challenge by Oceana on the policy is premature.  The relief sought by Oceana is to declare the transfer policy unlawful and invalid, alternatively a court order reviewing and setting aside the policy.  The State claims that these challenges have been brought prematurely and in the abstract.  This argument is based on the fact that the “Surmon” transfer which was declined by the Department is currently on appeal, and as such Oceana had not exhausted their internal remedy under the MLRA.  Accordingly, there is no evidence before the court as to how the Minister in fact has applied or will apply the transfer policy.

The further technical ground taken by the State is that the Promotion of Administrative Justice Act (“PAJA”) does not apply to the making of policy by the Minister.  The State claims that the making of the transfer policy was not administrative action and that the policy was made in the exercise of the Minister’s executive powers which are not administrative in nature and as such do not constitute a decision as defined in terms of PAJA.  The argument continues that the Minister in terms of the Constitution has the power to develop and implement national policy and the exercise of this power is excluded from the definition of administrative action under PAJA.

Of importance is that the State claims that the policy does not have direct, external legal effect.  The State concedes that although the MLRA allows the Minister to make regulations regarding transfers, the Minister has rather decided to adopt criteria for the transfer of rights in a policy document rather than by regulations.  The reason for this according to the State is that it allows the Department and the Minister the “necessary flexibility to deal on a case by case basis with the different types of considerations which may justify a transfer in a particular case”.  This concession by the State now raises the following confusion.  The definition of “regulation” under the MLRA includes “a notice issued under this Act”.  Furthermore, in the Pepper Bay Supreme Court of Appeal judgment, the court ruled that if a “general notice owes both its existence and authority to an empowering original law (the MRL Act) it should be regarded as subordinate or delegated legislation and interpreted accordingly”.  If the State’s argument is correct that the policy has “no external legal” effect and does not constitute a regulation or law by which a rights holder is bound, then with regard to the transfer of fishing rights one is left with only the provisions of Section 21(1) and (2) of the Act.  As these provisions do not deal with the transfer of shares within a rights holding entity, it may be difficult for the State to claim in future that a change in shareholder control of a rights holding entity without the Minister’s approval constitutes a breach of Section 21 and a ground for Section 28 rights revocation / reduction proceedings.

Other than the aforesaid technical grounds, the State also dealt with the main grounds of the Oceana attack being whether or not the State is bound to exclusively apply the B-BBEE Act in assessing transfers of fishing rights.  In its response the State reiterated the objectives and principals of Section 2 of the MLRA.  The State then focused on the need to restructure the fishing industry and the need to pay special attention to the transformation of the fishing industry.  The State claims that they are entitled to place special emphasis on these objectives due to the Bato Star Constitutional Court decision.  According to the State, the Constitutional Court finding in respect of the granting of rights should apply with even greater force to the transfer of commercial fishing rights.  The States reasons for this are as follows:

  • Rights are not allocated so that they may be traded freely in the market thereafter, thus a commercial fishing right is a statutory permission and it is the business of the Government to regulate the transfer of these permissions;
  • The transfer policy places the onus on the right holder to persuade the Department that a transfer will further the governmental objectives set out in the Act;
  • The impact of a transfer on transformation is the core criterion for a transfer of rights as issues such as job creation and investment are mostly neutral factors;
  • It would serve no purpose to promote transformation through a rights allocation process if the results could be undone thereafter through the transfer of rights.

Regarding the B-BEE Act argument, the State answers that the relevant codes and the Act can only be applied “as far as is reasonably possible” and that therefore due to the unique nature of the fishing industry the Minister is entitled to determine its own special criteria to be applied for the transfer of rights in addition to the B-BEE Act.  The State’s position is that it is not reasonably possible to measure transformation solely with reference to the codes for the purposes of the transfer of commercial fishing rights due to the following reasons:

  • Just as with the allocation of rights the fishing industry constitutes various and varying sectors and as such the codes cannot sensibly be applied in some sectors.  The diversity of the fishing industry therefore does not allow for the codes to be exclusively applied;
  • The exclusive application of the codes may result in the reversal of some of the progress achieved in respect of transformation.  Thus, the State wishes to protect the transformation achieved in the long term rights process;
  • The exclusive application of the codes is not appropriate in a competitive process such as the allocation of fishing rights;
  • The codes cannot sensibly be applied to the transfer of shares (as opposed to the transfer of the fishing right from one entity to another).

Oceana is due to file its response to the States reply very shortly and as at the date of  writing this article, the date set down for the hearing of this interesting application is the 15th November 2010.

The Foodcorp Section 21 Challenge

As if the Oceana Section 21 challenge was not enough to get one’s mind around, on the 3rd September 2010 Foodcorp launched its own challenge against the Section 21 policy.

Although similar issues are dealt with in their challenge, the focus of the challenge is different.  Foodcorp wish paragraph 6.2 and 6.3 of the policy to be declared unconstitutional, unlawful and invalid and for such paragraphs to be set aside.  Paragraph 6.2 and 6.3 of the policy deal with the situation where shares or members interest within a rights holding entity are transferred.  This is an age old issue for rights holders which have received mixed legal opinion over the years.

The further relief requested by Foodcorp is a declaration that Foodcorp is not required to obtain authorisation from the Minister for a share transaction on the 10th March 2010 in terms of which Foodcorp’s shareholding and corporate structure was rearranged.

Foodcorp concede that the share transfer and rearrangement transaction has lead to the change of control of the shareholders behind Foodcorp and secondly that the effective black ownership of Foodcorp has been reduced.

In terms of the transfer policy, in theory, Foodcorp require an approval for such a transaction from the Minister.  Although Foodcorp have submitted a Section 21 application on the 5th May 2010, in the court papers they claim that they cannot await an outcome of such application before launching proceedings to challenge the lawfulness of the requirements of paragraphs 6.2 and 6.3 of the policy.

The challenge of Foodcorp is in essence  a technical legal challenge.  Foodcorp’s first technical ground is that Section 21(2) only applies to the transfer of the right from one legal entity to another and does not apply to a share sale transaction.  They state that “properly construed Section 21(1) and (2) of the MLRA do not grant the Minister or the Department any power to approve bona fide share shale transactions in rights holders”.

The second point raised by Foodcorp is that the Minister is unlawfully laying down rules for the transfer of rights in a non-binding policy.  The argument is that the transfer policy does not amount to regulatory provisions and is at best a non-binding guiding policy which cannot extend the powers of the Minister and the Department or introduce inflexible requirements.  In summary Foodcorp argue that the introduction of “inflexible and peremptory approval processes in the transfer policy [relating to the transfer of shares within a rights holding entity] is thus plainly beyond the scope of such a policy document”.  Foodcorp consolidate this argument by stating that the long term rights letter sets out the terms of the long term rights allocation as well as the relevant permit conditions.  According to Foodcorp paragraph 6.2 and 6.3 of the transfer policy contradict the terms of the long term rights letter and permit conditions.

The third ground of attack is that the factors to be considered by the Minister for the approval of a share sale transaction are too vague.

The fourth ground of attack is based on the allegation that the transfer policy is irrational.  The policy does not set out what the consequences are if the Minister or the Department refuse to allow the transfer of shares.  In particular it does not give the Minister any power to prevent the sale of shares in circumstances where she refuses to give authorisation.

Another interesting argument under the irrationality heading is that the consequences of paragraph 6.3 of the policy would effectively lead to previously disadvantaged shareholders facing the obstacle of only being able to freely sell shares to other black shareholders or with the approval of the Department and the Minister, while white shareholders would not face the same obstacles.  This consequence would contradict the provisions of the General Policy which highlighted as an important factor “the beneficial ownership by black people in the form of unrestricted voting rights and economic interest associated with equity ownership”.  Foodcorp state that the transfer policy “ironically achieves the opposite of that which it set out to achieve”.  Although attempting to encourage the transformation of the fishing industry, the transfer policy in fact “undermines the value of beneficial black ownership of rights holding entities”.

Whether the State will apply for the Foodcorp application to be consolidated into one hearing with the Oceana application is yet to be seen.  If this does occur, then it is unlikely that the hearing will be on 15 November 2010.

These Section 21 battles are inevitable, but which need to be fought and resolved so that industry including small, medium and large rights holders of differing empowerment profiles may with certainty conduct their affairs going forward.