Altair Richards Thina Ntsaluba Pesachya Glixman May 17 2023 Constitutional Court settles seven-year dispute on interpretation of "beneficial interest" in respect of ownership of pharmacies in South Africa ENS | Healthcare & Life Sciences - South Africa Altair Richards, Thina Ntsaluba, Pesachya Glixman Healthcare & Life Sciences BackgroundFactsHigh CourtSupreme Court of AppealConstitutional CourtCommentOn 28 March 2023, the Constitutional Court, in a five-to-four split, upheld an appeal of a Supreme Court of Appeal judgment(1) filed by the Independent Community Pharmacy Association (ICPA).(2) This article highlights the salient points of the judgment as well as possible next steps following the judgment.BackgroundThe aim of the Pharmacy Act 53 of 1974 (the Pharmacy Act) is, among other things, to provide for the regulation of the ownership of pharmacies.Section 22A of the Pharmacy Act empowers the minister of health to prescribe:who may own a pharmacy;the conditions under which such person may own such pharmacy; andthe conditions upon which such authority may be withdrawn.Regulation 6 of the Regulations Relating to the Ownership and Licencing of Pharmacies (the Ownership Regulations) regulates the ownership of community pharmacies and provides that:Any person may, subject to the provisions of regulation 7, own or have a beneficial interest in a community pharmacy in the Republic, on condition that such a person or in the case of a body corporate, the shareholder, director, trustee, beneficiary or member, as the case may be, of such body corporate(a) is not prohibited by any legislation from owning or having any direct or indirect beneficial interest in such a pharmacy;(b) is not an authorised prescriber;(c) does not have any direct or indirect beneficial interest in or on behalf of a person contemplated in paragraphs (a) and (b); or(d) is not the owner or the holder of any direct or indirect beneficial interest in a manufacturing pharmacy.FactsThis case involved the following entities (the Clicks entities):Clicks Group Limited (Clicks Group);New Clicks South Africa (Pty) Limited (New Clicks);Unicorn Pharmaceuticals (Pty) Limited (Unicorn);Clicks Investments (Pty) Limited (Investments); andClicks Retailers (Pty) Limited (Retailers).The Clicks Group is the holding company of the Clicks entities, holding all the shares in New Clicks. New Clicks holds all the shares in Unicorn and Investments. Investments in turn holds all the shares in Retailers. Schematically, the organisational structure of the Clicks entities is shown in Figure 1.Figure 1: organisational structure of the Clicks entitiesUnicorn holds a manufacturing licence in terms of section 22C of the Medicines and Related Substances Act 101 of 1965 (the Medicines Act). Retailers holds a community pharmacy licence (also known as a "retail pharmacy licence") in terms of section 22(1) of the Pharmacy Act.In 2016, the ICPA lodged a complaint against the Clicks entities with the Department of Health (DoH). Briefly, the ICPA's complaint was that Unicorn and Retailers clearly had a direct or indirect beneficial interest in each other. The complaint referred to section 22A of the Pharmacy Act and regulation 6 of the Ownership Regulations. The ICPA requested the director-general (DG) of the DoH to revoke the manufacturing pharmacy licence of Unicorn as well as the retail pharmacy licences held by Retailers obtained after the date on which Unicorn's manufacturing licence was granted. The ICPA's request was on the grounds that such licences had the effect that the Clicks entities contravened section 22A of the Pharmacy Act, read with regulation 6(d) of the Ownership Regulations.The deputy director-general (DDG) of the DoH, following a delegation of the complaint by the DG, dismissed the complaint. The DDG stated that that neither Retailers nor Investments could be said to have a beneficial interest in Unicorn. On appeal, the Appeal Committee decided that:[I]t is clear that neither Clicks Group, the 100% shareholder of New Clicks, nor New Clicks, the 100% shareholder of Unicorn and Investments, can be said [to] own or have [a] beneficial interest in Retailers' community pharmacies, since a shareholder may never be said to have a beneficial interest in the assets of the company other than his/her entitlements to the share of the profits or, in the event that the company is liquidated, to the share of the surplus of the liquidation account.High CourtThe ICPA approached the High Court to have the above decisions set aside.(3) The important issue before the High Court was whether "beneficial interest" included the interest that a shareholder has in the business of the company, as contended by the ICPA. The Clicks entities disagreed, arguing that a shareholder of a company does not have a beneficial interest in the assets of the company.The High Court held that the Ownership Regulations must be interpreted in line with their purpose. The High Court provided that the Ownership Regulations:recognise that where a community pharmacy is owned by an entity other than pharmacists themselves, it is [un]desirable for there to be a direct or indirect beneficial interest in both such a community pharmacy and a manufacturing pharmacy.The High Court agreed with the ICPA, holding that:It would be artificial to contend that a company which owns 100% of the shares in a company does not have a direct or indirect beneficial interest in the business owned and operated by that company. The shareholder appoints directors to the company's board. The board determines what dividend is declared, which is then paid to the shareholder from the funds generated by the business. The proceeds of the winding up of the company go to its shareholder. The shareholder thus clearly has a beneficial interest in the business owned by the company.In setting aside the decision of the Appeal Committee, the High Court held that a shareholder, without owning the assets of the company, has a beneficial interest in the operations and profits of the company's business.Supreme Court of AppealThe Supreme Court of Appeal was of the view that the High Court had equated a beneficial interest in a pharmacy owned by a company with the financial interest its shareholder has in the company.The Court held that regulation 6(d) must be interpreted in a way to exclude a shareholder from having a beneficial interest in a company. This interpretation was predicated on the fact that section 22A allows the minister to regulate "ownership". According to the Court, it would surpass this power and therefore be ultra vires for the regulation to extend beyond ownership to regulate shareholding. According to such an interpretation, the Court held that New Clicks did not have a beneficial interest in the pharmacies owned by Unicorn or Retailers.Constitutional CourtInterpretation of "beneficial interest"The majority decision of the Constitutional Court, penned by Rogers J, focused on the meaning of the expression "beneficial interest" in regulation 6(d) of the Ownership Regulations, which was instrumental in determining whether the conduct of Retailers' community pharmacies and Unicorn's manufacturing pharmacy fell foul of regulation 6 of the Ownership Regulations. The Court held that this phrase must be interpreted as a unitary exercise, taking into account the wording, the context and the purpose of the provision.The Court found the wording and its context to point towards "beneficial interest" as including an interest held by way of shareholding. The Court determined that the purpose of regulation 6(d) was to prevent the temptation of individuals in charge of a community pharmacy to place the commercial interests of a related manufacturing pharmacy above the best interests of the clients of the community pharmacy. The Court's interpretation was centred around the fact that it would be irrational to permit certain ownership structures that still have the effect of providing greater scope for perverse commercial incentives.Through its interpretation exercise, the Court therefore confirmed that "a beneficial interest in a manufacturing pharmacy" includes interest by way of the shareholding of a manufacturing pharmacy.The majority criticised the minority decision, which placed more emphasis on the plain meaning of the phrase "beneficial interest" in its interpretation. The minority concluded that a shareholding of a manufacturing pharmacy cannot be encompassed within the plain meaning of "beneficial interest" in a manufacturing pharmacy. In its criticism of this finding, the majority maintained that the ordinary meaning of "beneficial interest" does not accord with the finding of the minority. To illustrate this point, Rogers stated: "If I own all the shares in a company that conducts a pharmacy business, and someone asks me if I have an interest in a pharmacy business, we would both be surprised if I said no."Is regulation 6(d) ultra vires?The minority decision stressed that section 22A of the Pharmacy Act only empowers the minister to prescribe who may "own" a pharmacy and does not empower the minister to prescribe who may have a beneficial interest in a pharmacy. Rogers J reaffirmed the principle that if an interpretation not leading to invalidity exists, such an interpretation should be preferred. Rogers further asserted that the majority's interpretation of regulation 6(d) was not ultra vires, for the following reasons:"own" could be broadly interpreted to include an interest by which a person reaps economic benefits;the Court could invoke the principle that the conferring of an express power is accompanied by the implied power to do whatever is reasonably ancillary to the proper carrying out of the express power. Furthermore, a power can be regarded as reasonably ancillary to the express power if the true object which the lawmaker had in mind would be defeated if the ancillary power was not implied;the minister has the power to regulate generally, all matters which he considers necessary or expedient to prescribe in order that the purposes of the Pharmacy Act may be achieved, under section 49(1)(q). This includes the power to regulate the holding of beneficial interests; andsection 22A confers on the minister the power to prescribe "the conditions under which such person may own such pharmacy" where there is no limit on the content of such considerations other than considerations of the principle of legality. Therefore, such "conditions" could include the power to regulate the holding of a beneficial interest.100% shareholding versus smaller shareholdingsThe Court noted that in this case, the facts involved 100% shareholding in subsidiary companies. However, there may be a need to incorporate a quantitative limit in defining "beneficial interest". While the Court ultimately concluded that there was no need to decide how to deal with smaller shareholdings, as all the shareholdings at stake in the case were 100% shareholdings, the Court noted that there is an argument that the use of "beneficial interest" alongside "own" relates to a "beneficial interest", giving the holder an element of control similar to ownership.CommentThe Constitutional Court judgment confirms that simultaneous 100% shareholding in a manufacturing and community pharmacy is not permitted under regulation 6(d) of the Ownership Regulations.Following the remarks made in passing by the Court in respect of smaller shareholdings, it may be important to have some certainty for situations where companies have shareholdings in both manufacturing and community pharmacies.Will divestment be required?It would be interesting to see how the DG elects to settle the issue of the sanction to be imposed in respect of the confirmed contraventions.Upon deciding that the matter should be remitted to the DG, the Court stated that:Immediate closure or withdrawal of Retailers' community pharmacy licences would be very drastic. It may well be that the DDG would afford Clicks an opportunity to regularise the position, for example by divesting itself of the manufacturing pharmacy.Although this dispute turned on a contravention of the conditions under which a person such as Retailers may own community pharmacies, Retailers (as the owner of the community pharmacies) would need to be afforded an opportunity to furnish reasons to the DG why Retailers' community pharmacies should not be closed before a closure decision is taken by the DG in consultation with the South African Pharmacy Council.In the event that the Clicks Group wishes to retain its licences in respect of its community pharmacies, the divestment of the manufacturing pharmacy (as alluded to by the Court) may very well be the best approach to avoid a scenario where Retailers is required to divest its 691 community pharmacies throughout the country.(4)Irrespective of the Clicks Group's decision as well as the DG's decision, in respect of appropriate sanctions, the Court has reiterated that outside of the minister of health amending the Ownership Regulations, the Clicks Group is legally precluded from having a beneficial interest in both Retailers' community pharmacies as well as in Unicorn's manufacturing pharmacy.For further information on this topic please contact Altair Richards, Thina Ntsaluba or Pesachya Glixman at ENSafrica by telephone (+27 21 410 2500) or email ([email protected], [email protected] or [email protected]). The ENSafrica website can be accessed at www.ensafrica.com.Endnotes(1) Clicks Group Ltd and Others v Independent Community Pharmacy Association and Others  1 All SA 297 (SCA) (3 December 2021).(2) Independent Community Pharmacy Association v Clicks Group Ltd and Others (CCT 11/22)  ZACC 10 (28 March 2023).(3) Independent Community Pharmacy Association v Minister of Health and Others (11647/18)  ZAWCHC 47 (3 June 2020)(4) See Clicks Group profile.