THE FOODCORP JUDGMENT UNPACKED


Welcome to 2011.  All of us here at Dawsons wish our clients, colleagues and service providers a fulfilling year.

This is the first of the Dawsons e-mail newsletter / newsflash for the year, and through this medium we intend to keep clients fully informed of developments and matters of interests that occur throughout the year.  Any comments or feedback would be most welcome.

Background

On the 15th November 2010, the Western Cape High Court heard the matter between Foodcorp and the Minister of Agriculture, Forestry and Fisheries.  The matter related to Foodcorp’s application to declare certain parts of the Minister’s Transfer of Fishing Rights Policy unlawful.  The policy in question was published by Government Gazette Notice on the 31st July 2009.

Foodcorp required the court to declare paragraph 6.2 and 6.3 of such policy as unlawful.  These paragraphs effectively provided that the Minister’s approval for the transfer of a right in terms of Section 21 was required where there was a sale of shares / members interest which resulted in a change of control of such company / close corporation or resulted in such company / close corporation not being as transformed as at date of allocation of the long term right.

What gave rise to Foodcorp’s challenge is that in or about March 2010 and as a result of what was labeled a “composite transaction” the shareholding of Foodcorp was materially altered which lead to the change of control of Foodcorp and the makeup of its shareholders.

Foodcorp’s main challenge to the aforesaid paragraphs of the transfer policy was based on the argument that such paragraphs were ultra vires (outside of the powers) the Minister’s powers in terms of Section 21(2) of the Marine Living Resources Act (“MLRA”).

Court Ruling

Judgment in this matter was handed down on the 6th December 2010 by the Honourable Judge Griesel.  After setting out the historical background and statutory framework, Judge Griesel started his consideration of the ultra vires (outside of the Minister’s powers) argument by referring to the Supreme Court of Appeal case of Akani Garden Route (Pty) Ltd v Pinnacle Point Casino (Pty) Ltd, 2001 (4) SA 501 SCA which confirmed that “policy determinations cannot override, amend or be in conflict with laws (including subordinate legislation)”.  Judge Griesel summarised that in the present case, sub-section 21(2) of the MLRA granted the Minister the power to approve the transfer of a commercial fishing right or a part thereof.  Foodcorp was contending that properly construed sub-sections 21(1) and 21(2) do not grant the Minister or the Department any power to approve a bona fide share sale transaction within a rights holding entity.  “In other words, the transfer of shares in a company does not equate to the transfer of commercial fishing rights”.  Judge Griesel stated that “reduced to its essentials, the Applicant’s argument relies on the trite principal that a company enjoys a separate legal existence from its shareholders”, and as such “the rights are thus held by a company and not its shareholders”.  Therefore, “a change in the shareholders of Foodcorp does not affect its status or the status of its rights”.

Judge Griesel found that “on a narrow company law approach, the Applicant’s argument appears to be unassailable”.  Notwithstanding, Judge Griesel found that this strict company law approach would be the incorrect approach to follow in the “present scenario”.

To justify his deviation from the strict company law approach, Judge Griesel gave a number of reasons.  Firstly, he found that by the wording of Section 21 “a wider, more extended meaning of transfer was intended by the legislature”.  In this regard he referred to the words “otherwise transferred” and stated that they extended the ordinary meaning of transfer so as to include within its ambit the lease or division of fishing rights.  The court found therefore that it would be wrong “to attach a narrow literal interpretation to the concept of transfer of fishing rights”.

The court also referred to the concession of Foodcorp that in fact, in certain circumstances, the Minister’s approval would be required for the transfer of shares.  This concession by Foodcorp in its papers has always been a strange one, and in my view diluted their entire ultra vires argument.

The court then referred to an approach taken in the Constitutional Court matter of Bato Star 2004 (4) SA 490 CC wherein statutory interpretation took into account the context in which the words occur.  Furthermore, the word “context” is not only referring to the actual dictionary language of the rest of the statute, but more importantly to the “apparent scope and purpose of the statute and within limits its background”.

The court continued that, with regard to the apparent scope and purpose of the MLRA, the Constitutional Court has made it abundantly clear that in the process of interpreting the MLRA, one must recognize that its policy was founded on the need both to preserve marine resources and to transform the fishing industry.  Therefore, the Act “unequivocally indicates the policy which the Minister is to follow”.  The court’s broad conclusion therefore is that when decisions are taken by the decision maker in terms of the MLRA, the need for transformation must be addressed.

The court therefore concluded that in the context of Foodcorp’s challenge, it was clear that the considerations contained in the transfer policy did not override or amend the policy as contained in the MLRA, nor were those considerations in the transfer policy in conflict with the policy embodied in the MLRA.  The court continued along this vain and found that the question of transformation had played a vital role in the allocation of fishing rights and in assessing transformation, the corporate veil had been “rendered completely transparent”.    Thus, during the rights allocation process, the Minister and the Department were entitled to look behind the legal entity in question to see the identities and profiles of those holding shares and interests in such entities.  Therefore a similar consideration should apply when it comes to the transfer of those very same rights.  Accordingly, on this issue, the transfer policy was in line with the policy embodied in the Act which policy in turn had been followed during the rights allocation process.  The purpose for these provisions in the policy was to avoid “regression in relation to transformation of the industry”.  According to the court, this is a perfectly legitimate policy consideration.

According to the court’s finding, if Foodcorp’s arguments were to be upheld, and the narrow company law approach adopted, then it would allow for a glaring loophole in the law which would permit shareholders or members in corporate rights holders to freely dispose of their shares or members interest without the approval of the Minister, “even where such transfer would have a drastic effect on the control and/or racial profile of the particular corporate entity”.  The court continued by stating that this “would also mean that the constitutional and statutory objectives regarding transformation could be easily circumvented or undermined” if there was such a loophole.  It could result in the Minister and the Department having no control over the transfer of shares or members interest in the periods between the allocation of rights.  The court accordingly held that this could not have been the intention of the legislature to allow for such a loophole.  Therefore, Foodcorp’s challenge to the transfer of shares / members interest provisions contained in 6.2 and 6.3 of the policy was dismissed and the court found that such provisions were not ultra vires (outside the powers) of the MLRA.

There were also other less important arguments raised by Foodcorp which were also rejected by the court and which I do not intend to discuss in this article.

Foodcorp are in the process of appealing this judgment.

WHERE DOES THAT LEAVE INDUSTRY?

It is clear from this judgment that a prudent purchaser or seller of shares or members interest within a rights holding entity must assume that where there is a change in control of shares / members interest or a reduction in black ownership due to a transfer of shares / members interest, then any such sale must be made subject to the Minister’s approval in terms of Section 21.  Any agreement therefore must make provision for such contingency.

This is all very well, but outside of the courts and the legal drafting arena, the clear conduct of the Department indicates that Section 21 transfer applications are simply not being processed or dealt with in any manner visible to industry.  In fact, recent “summits” held in Cape Town and in the Eastern Cape are apparently for the purposes of the Minister establishing what the reasons are why rights holders are wanting to transfer their rights.  This is a strange enquiry in light of the fact that neither the transfer policy nor the transfer application forms call for any reasons from the transferor of such rights.

It is submitted that these summits may be part of a process by the Minister to review the current transfer policy notwithstanding the fact that it has taken almost three years to publish in the first place and only a handful of transfers have been processed after such publication.  My submission is corroborated by the fact that in the Oceana Section 21 challenge which was set down for hearing on the same date as the Foodcorp challenge, the parties agreed a court order in terms of which the Minister has undertaken to reconsider the transfer policy.

If we put all of this in the melting pot, then it would appear that the current transfer applications which have been submitted to the Department may informally be placed on hold pending a total review of the transfer policy by the Minister.

What are the choices for industry players who are requiring Section 21 transfers to be processed?  Parties will either have to bring court applications in terms of the Promotion of Administrative Justice Act to force decisions from the Minister or delegated authority, or alternatively keep corresponding with the Department on an amicable basis in an attempt to push the process along until the Minister is in a position to make decisions on such applications.  Either way, one must not forget that in certain sectors long term rights terminate at the end of December 2013 and prior to that, provision needs to be made for a new rights allocation policy and process.  Time is accordingly of the essence.

P. A. EDWARDS