In the recently decided Delatoy case, the Competition Tribunal found that several independent private companies described as the 'Delatoy Group' constitute a single 'firm' for purposes of the Competition Act. The implications are very important for a controlling company, which may now in certain circumstances be liable for the conduct of subsidiaries and affiliate companies.
The single economic entity doctrine
Competition laws apply to economic activity. The economic actors who carry out this activity are the ones to whom the law confers rights and on whom the law imposes obligations. Competition laws globally recognise the so-called single economic entity doctrine. This is the principle that juristic entities can sometimes be related so closely to each other that it would be artificial to treat them as separate economic actors for purposes of competition law.
Under the South African Competition Act, the doctrine is recognized by section 4(5) which exempts constituent firms within a single economic entity from the prohibitions in section 4(1) of restrictive horizontal agreements, decisions and concerted practices. The doctrine though, is largely untested - until recently case law has discussed but not provided much clarity on this concept of parent or group liability.
In the recently decided Delatoy case, the Competition Tribunal has given its view on precisely this issue: is it legally permissible to impute liability for one entity's conduct to the other?
The Delatoy case
Through proceedings before the Tribunal, it became common cause that Delatoy Investments (Pty) Ltd was party to a collusive agreement in contravention of section 4(1)(b)(iii) of the Competition Act.
According to the Commission, Delatoy Investments formed part of a group of entities, the so-called 'Delatoy Group', consisting of various companies and family trusts which have two individuals as common directors and trustees.
The Commission found that pursuant to the prohibited collusive agreement, a loser's fee was paid by the winning bidder to another company which formed part of the Delatoy Group (not Delatoy Investments).
The Commission also found that after the collusive conduct, Delatoy Investments was stripped of all its assets by way of a sale of its business to another company which formed part of the Delatoy Group (the 'clean' shares of which were then sold). All remaining funds in the company were then distributed by dividend payments to Delatoy Group Holdings and ultimately to trusts controlled by the two individuals mentioned.
Issues in dispute
The Delatoy Group argued that Delatoy Investments was the firm which participated in the collusive conduct and as a result it was the only 'firm' responsible for any fine imposed. The entities which made up the Delatoy Group, they argued, did not constitute a 'firm' for purposes of the Competition Act and accordingly could not be held liable for the anti-competitive conduct of Delatoy Investments.
Under the Competition Act administrative penalties are calculated based on the turnover of the contravening firm and may not exceed 10% of the firm's annual turnover during the firm's preceding financial year. The Delatoy Group argued that as Delatoy Investments has no turnover, it is incapable of paying a fine.
The Commission alleged that the Delatoy Group had embarked upon a stratagem to assist Delatoy Investments to avoid liability by rendering the company an empty shell - depriving it of any assets and turnover with which to meet potential competition law liability for its role in the admitted collusive conduct.
The Commission successfully argued that the Delatoy Group is a 'firm' - a single economic entity - for purposes of the Competition Act and is consequently in a horizontal relationship with the firms to the collusive agreement. Accordingly, the Delatoy Group should be liable to pay the administrative penalty.
Clarity from the Tribunal
As a general preliminary approach, the Tribunal confirmed that 'the word "firm" can mean different things in different contexts. It could mean an economic entity, or a group where the components of it are related to each other in such a way that they constitute a single economic entity'.
On this set of facts, the Tribunal found that the evidence cumulatively suggests that the Delatoy Group acted as a single economic entity. Taken into account was the conduct of the two individuals who are common directors and trustees of the various Delatoy entities, which was found by the Tribunal to speak volumes. This included using another company as an instrument to receive the proceeds of the loser's fee and subsequently transfer it (in the form of dividends) to the two family trusts, as well as restructuring the group more than once in attempt to conceal the unlawful conduct.
Financial activities between the group companies were also considered. This included large dividends paid by Delatoy Investments to the holding company and trusts as well as many significant sized, soft, uncommercial loans between members of the group.
As a result of the factual nexus between the entities and their various forms of co-operation through the main puppet masters, the Tribunal held that the collusive conduct of Delatoy Investments is imputable to the entities which make up the Delatoy Group. The various Delatoy entities were simply being used by the two individuals as dummies to orchestrate their objects. Further, that the imputation also extends specifically to the relevant natural persons which form part of the group.
Determining the amount of and imposing an appropriate administrative penalty on the Delatoy Group will no doubt be a contentious issue disputed before the Tribunal.
Importance of the single economic entity doctrine
The single economic entity doctrine may seem like a technical, legal issue – a point concocted by lawyers for use in procedural applications. This case demonstrates clearly just one of the reasons why this would be an incorrect viewpoint.
The implications of the single economic entity doctrine for firms' liability for administrative penalties are twofold. First, as in this case, legal entities within the single economic unit may be joint and severally liable for payment of any administrative penalty that arises from an infringement. Second, if the penalty regime calculates a maximum fine based on a percentage of the turnover of the 'firm' then the turnover of the entire economic unit could be used, rather than that of the contravening entity only.
Although the decision was fact specific, this has profound consequences for enforcement policy. First, conglomerate firms can potentially be made responsible for the conduct of their subsidiaries. This increases their incentive to enforce and monitor competition law compliance initiatives throughout the group. Second, the maximum fines payable for competition law violations would increase as the concept of a 'firm's' annual turnover is expanded. Bigger fines cause a stronger general deterrence effect to other firms in the economy. The offending group will also have an increased incentive to avoid future infractions, because these could be considered repeat offences and therefore attract increased sanctions, even if the contravention is carried out by a rogue subsidiary.