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.

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