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Netcare Hospital Group (Pty) Ltd and Community Hospital Group (Pty) Ltd (27/CR/Mar07) [2008] ZACT 19 (10 March 2008)

.RTF of original document

COMPETITION TRIBUNAL OF SOUTH AFRICA


Case No: 27/CR/Mar07

In the matter between:

Competition Commission                                       Applicant
                          
And

Netcare Hospital Group (Pty) Ltd                                    First Respondent
Community Hospital Group (Pty) Ltd                         Second Respondent                         

In re the large merger between

Netcare Hospital Group (Pty) Ltd                                    Acquiring Firm

And

Community Hospital Group (Pty) Ltd                         Target Firm


Panel             :        N Manoim (Presiding Member), U Bhoola (Tribunal Member)
and Y Carrim (Tribunal Member),
Heard on         :        05 December 2007
Order Issued     :        10 March 2008
Reasons Issued:  10 March 2008

Failure to notify

DECISION

[1]     
This is an application for the Tribunal to confirm a settlement agreement reached between the Commission and the respondents in terms of section 49D of the Competition Act (the ‘Act’).The agreement purports to settle two alleged contraventions by the respondents. The Commission alleges that the respondents:

a)      
implemented a merger without the approval of the Competition authorities in contravention of section 13 A(3) of the Act; and

b)      
contravened section 4(1)(b) of the Act, in that whilst not being members of a single economic entity, and being instead competitors, they adopted the same pricing structure for the tariffs charged by the hospitals in their respective groups

[2]     
The respondents have agreed to pay a penalty of R6 million as an administrative penalty to settle both matters. The penalty is treated as a lump sum and thus it is not clear from the agreement what proportion of the penalty has been allocated to the respective contraventions. In oral argument Ms Mkhwanazi, who appeared for the Commission, said that for their internal purposes the penalty had been allocated as follows:

Failure to notify – R500 000.00
Section 4(1)(b) – R5 500 000.00
        Total - R6 000 000.00

[3]     
The respondents have not done a similar exercise, but regard the quantum as a reasonable settlement figure.

[4]     
The facts of this case appear more fully in our decision in respect of the merger and need not be repeated in full here. In brief, the Community Healthcare Hospital Group (CHG), is a company that owns 5 private hospitals. CHG arose out of the ashes of the former Malesela Group of hospitals that was liquidated in 1999. In the first phase of its existence CHG, then nominally owned by an attorney acting for the future shareholders, pursued a strategy of securing the erstwhile Malesela hospitals and rights from the liquidators. In this it was partially successful. Once these rights were secured, the nominee transferred ownership to the current shareholders who then held shares in the following proportions: Netcare (with a 43.75% shareholding), Community Hospital Group (with a 43.75% shareholding), Duelco Investments 65 (Pty) Ltd (“Duelco”) (with a 6.25% shareholding), and Private Preview Investments 27 (Pty) Ltd (“Private Preview”) (with a 6.25% shareholding).

[5]     
We are advised that the shareholders’ agreement was concluded in 2002 and in terms of this agreement, Netcare and CHG Holdings, the latter the investment vehicle of two erstwhile Malesela shareholders, - Anna Mokgokong and Joe Madugundaba - enjoyed joint control of CHG. It is common cause that this acquisition of joint control by Netcare was not notified to the Commission and hence the sanction contained in the consent agreement. What is not clear either to the Commission or the respondents is whether joint control may have already been acquired before this date. The reason for this difficulty is that Netcare was active both in the implementation of strategy around the rescue efforts, lent money to CHG, and, once the hospitals were rescued, introduced some of its systems into the hospitals and took over their pharmacies. Thus Netcare is more than likely to have exercised joint control over CHG for the period preceding the conclusion of the shareholders agreement. This period was probably about 24 months. Netcare continued to exercise joint control over the group until its decision to acquire the entire shareholding in CHG from the other shareholders. This latter transaction to acquire the full equity, was the subject of a notification by the respondents on 14 August 2006, and was approved by us without conditions on 2 August 2007.

[6]     
The non-notification of the prior merger was only brought to the Commission’s attention in July 2005 when a third party, Pro Sano Medical Scheme, brought a complaint to the Commission alleging that CHG had adopted the Netcare tariffs for the purpose of determining its fees and that this amounted to a contravention of section 4(1)(b) of the Act which states:

(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)     
...;

(b)     
it involves any of the following:

(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 and services; or

(iii)   
collusive tendering.

[7]     
When confronted by the Commission, Netcare’s response was to say that:

“.. after consideration of the relevant facts in the context of section 12(2)(g) of the Act, it appeared that Netcare had acquired control over Community, and accordingly that Netcare and Community failed to notify this acquisition of control.”

Did the Commission give due weight to all the facts concerning the section 13A(3) contravention.

[8]     
No explanation for the failure to notify is made in the papers nor was one given to the Commission during negotiations in respect of the present consent agreement. We can only surmise from the record in the merger hearings that due to the limping manner in which the group was reconstituted, no ‘crystalline moment’, to quote Netare’s counsel, emerged during the period prior to the conclusion of the shareholders agreement at which it appeared that joint control had arrived and hence animated the shareholders attention sufficiently to consider notification. Even if one gives the merging parties the benefit of the doubt due to the murky nature of legal relationships during this embryonic period, no explanation is given to account for the period after the conclusion of that agreement, when clarity as to the parties’ legal relationships must at last have crystallised. Given hospital groups history of interest in one another’s mergers that has manifested itself in hearings before us it hardly seems likely that Netcare at least, was ignorant of these considerations. Where matters of this nature appear to have been discussed in the minutes of Netcare, the relevant portions have been excised by the attorneys on the basis of alleged privilege.

[9]     
A fair reading of the minutes suggests that Netcare had an interest in not appearing as a controlling shareholder of CHG during its formative years. The motive for keeping CHG’s real control structure opaque was not to escape competition scrutiny, but rather to present CHG to the outside world as an emerging empowerment company, an image that would have been compromised if it was known to be subject to the control of one of the three large private hospital groups. This appears to have been important for several reasons not least of which was to ensure that the group acquired transfer of the licences from the erstwhile Malesela group as the following passage from Netcare’s memorandum to the board of directors dated 22 March 2001 suggests:

“Netcare also recognised MHG’s potential strategic appeal in that a closer association with MHG would increase Netcare’s network of referral and cooperative hospitals. Having committed to the project as consultants to Malesela, the strategy was to develop and promote a contest between Malesela and Afrox Healthcare, a contest which was politically far more easily manageable.

I will not herein dilate on the details of the fascinating contest and exchange that has taken place between Malesela, the Macmed liquidators, Afrox Healthcare, the bondholders in each case, the bank’s creditors involved, save to record that Malesela are emerging with a degree of credibility and honour far greater than they previously enjoyed and have developed a groundswell of support for their re-entry into the private healthcare industry (Afrox excluded). (Our underlining)

[10]    
Ms Mkhwanazi referred us to an earlier merger involving a takeover of the Afrox group by a consortium. CHG, emerged as an objector and applied to intervene in those proceedings. In the course of the intervention application, the then chief executive officer of CHG, Dewald Dempers gave evidence and was cross-examined on the relationship between Netcare and CHG. He alleged that Netcare did not control CHG. This emerges from the following extract from those proceedings where counsel for Afrox is cross-examining Dempers:

“ADV SUBEL: In other words, it would be fair to say, is it not, that Community Hospital Group (Pty) Limited and its various subsidiaries or hospital interest is a joint venture company between Netcare on the one hand and Community Healthcare Holdings on the other?
MR DEMPERS: It’s jointly owned company. That’s correct sir.
ADV SUBEL: Look colloquially it’s a JV company.
MR DEMPERS: No I don’t think so.
ADV SUBEL: Well, there is a common interest at both Netcare…
MR DEMPERS: There is a common equity holding. That’s correct sir and that’s it.
ADV SUBEL: Netcare and Community Healthcare Holdings each own 43.75% of the shares in Community Hospital Group (Pty) Limited.
MR DEMPERS: That’s correct.
ADV SUBEL: And through that company both Netcare and the first applicant conduct these various hospital businesses.
MR DEMPERS: No sir.
ADV SUBEL: Not?
MR DEMPERS: No.
ADV SUBEL: Well why not?
MR DEMPERS: Through that company the hospital business is conducted. Netcare has got no control over Community Hospital Group. It has got one Board representative out of 6 members.
ADV SUBEL: It’s represented on the Board of Community Hospital Group.
MR DEMPERS: One Board member out of six, that’s correct sir.
ADV SUBEL: Yes, and it’s as significant a shareholder in that company as is Community Healthcare Holdings.
MR DEMPERS: That’s correct sir.
ADV SUBEL: Well does it have any more or less influence than does Community Healthcare Holdings?
MR DEMPERS: It’s got much less influence than Community Healthcare Holdings.
ADV SUBEL: Why?
MR DEMPERS: Because of the Board representation..”

[11]    
For this reason in our present consent order hearing the Commission’s counsel submitted that when the Commission commenced investigating the Pro Sano complaint, it did so on the assumption that Netcare could not control CHG. Netcare’s representatives responded by alleging that CHG was in fact the subject of joint control and had been at the relevant time period to which the Pro Sano complaint related.

[12]    
It is clear why it suits the respondents to allege joint control now faced with an allegation that there has been collusion between Netcare and CHG. In the past, the Commission has settled contraventions for unlawful implementation of a merger at penalties that are miniscule in relation to those for prohibited practices. By emphasizing joint control now, and de-emphasizing the aspect of collusion, Netcare tries to put the best face on an unfortunate set of facts. However, as the quote from Dempers (above) illustrates, this only underlines the cynicism with which this relationship has been used in the past. When it suited the respondents to allege that Netcare did not have control over the group it did so. When it became apparent that Netcare was taking sole control then the history was glossed in an entirely different manner. Contrary to Dempers testimony in Afrox Healthcare, Netcare now emerges as having, at the least, joint control over CHG and indeed being the most influential of the three shareholders.

[13]    
There has been no change in the de jure or de facto relationship between Netcare and CHG, that is on record, that would reconcile the evidence of Dempers in Afrox Healthcare and the respondents’ version in the present proceedings. In the absence of such an explanation it would appear that Netcare’s role as a shareholder has been finessed to suit the legal exigiencies of the moment.

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