APPEAL BOARD OF THE FINANCIAL SERVICES BOARD HELD AT PRETORIA CASE NO: A14/2017 In the appeal of: MICROMEGA HOLDINGS LIMITED Appellant and THE JSE LIMITED Respondent DECISION 1. The Appellant lodged an appeal against the decision of the JSE Limited ( JSE ) which imposed a penalty against it in the form of a public censure and a fine as a result of its failure to comply with the JSE Listings Requirements. 2. The Appellant does not challenge or dispute the JSE s findings in respect of its non-compliance. Essentially the appeal centres on the sanction imposed by the JSE. The penalty imposed was in the form of public censure and a fine in the amount of R1 000 000.00 of which R500 000.00 was suspended for a period of twelve months if not found guilty of similar transgressions. 3. In summary, the sanction was due to the Appellant repurchasing its shares during its closed period. The Appellants closed period was between 16 July 2013 to 30 September 2013. The period being during the release of
Page 2 its interim results for the 6 month period ending 30 June 2013 and published on 30 September 2013. During such period, it repurchased a total of 2 349 446 shares. Sections 5.36(h) and 5.72(h) of the Listings Requirements forbids an issuer from repurchasing its securities in terms of a general or special authority during this period. 4. In addition, the specific repurchases were concluded without complying with any of the peremptory provisions of Section 5.69 of the Listings Requirements. 5. The Appellant had been afforded an opportunity to make representations and respond to the JSE s findings in respect of non-compliance aforesaid. 6. The JSE, inter alia, alleged that: 6.1 It had taken into consideration the facts and information at its disposal, including the representations made by the Appellant not to impose any penalty or sanction on the Appellant; 6.2 It initially intended imposing a public sanction and a fine in an amount of R1 400 000.00; 6.3 Upon the Appellant objecting to the JSE s initial decision, it reconsidered same, particularly with regard to further representations made on behalf of the company;
Page 3 6.4 On reconsideration it imposed a lesser sanction, namely a public censure and a fine of R1 000 000.00 of which R500 000.00 was suspended and which is the subject matter on appeal before us; 6.5 Section 10(2)(e) of the Financial Markets Act ( FMA ), imposes a public duty on the JSE to enforce its Listings Requirements and to supervise and enforce compliance thereof; 6.6 The purpose of the Listing Requirements are aimed at ensuring that the business of the JSE is carried on with due regard to the public interest. 7. The General Principles", inter alia, applicable to the Listings Requirements, namely: "to ensure that holders of relevant securities are given full information and are afforded adequate opportunity to consider in advance and vote on the following: (1) substantial changes in an issuer's business operations; and (2) other matters affecting a listed company constitution or the right of holders of securities. (My emphasis) 8. Section 3.1 stipulates that every issuer whose securities are listed on the JSE shall comply with the Listings Requirements. 9. In circumstances where issuers of securities transgress the provisions of the Listings Requirements, the JSE is empowered, and indeed obliged to
Page 4 consider the imposition of censure and penalties as a result of these transgressions. These powers are particularly set out in section 11(1)(g) of the FMA and sections 1.20-1.24 of the Listings Requirements. 10. It has been argued that Sections 5.69 and 5.72(h) of the Listings Requirements are material and peremptory. It was also submitted that compliance with the Listing Requirements promotes investor confidence towards issuers listed on the JSE, protect the rights of shareholders and members of the investing public and further militate against abuse by issuers in repurchasing its own securities. 11. The failure to comply has serious ramifications for the defaulting party. For instance, Section 5.69 of the Listings Requirements deals with specific transactions that are privately entered into by the Company with certain shareholders, hence providing additional regulatory oversight and imposes further peremptory requirements that have to be met in the event of specific repurchases of shares, namely the exclusion of certain shareholders from voting on the specific repurchases. The repurchases herein, were not armslength transactions at market related prices effected on the central order book and such transactions were not tested by the market's comprehensive and transparent price discovery mechanisms. Section 5.69 imposes onerous requirements that have to be met if an issuer intends to acquire its own shares through a specific repurchase. Compliance by issuers with these peremptory provisions and enforcement thereof by the JSE is inextricably linked to the public interest.
Page 5 12. It was further contended by the JSE that during the closed period, the Company, its directors and other representatives are in possession of price sensitive information that has not yet been disseminated to the market or to the investing public, hence the enforcement in respect of Sections 5.69 (h) and 5.72 (h) remains an interest of a public nature. In this instance, had the Appellant repurchased its own shares after the prohibited period, it would have paid a significantly higher price for its own shares. 13. It was also submitted that the repurchases caused the Appellant to pay approximately R 1 411 409.00 less for the acquisition of its own securities from its shareholders than it would have paid, had it complied with the Listings Requirements and repurchased its securities after the prohibited period. The lower purchase price paid by the Appellant was to the detriment of the shareholders from whom the shares were purchased. THE SANCTION: 14. The Appellant s contention on appeal were inter alia that: 14.1 The JSE failed to impose a suitable sanction; 14.2 There has been an unreasonable delay in the imposition of the penalty, approximately 22 months after the event;
Page 6 14.3 The Sanctions Committee did not take into account the historical correspondence between the Appellant and the JSE in respect of the issues raised. Moreover, the JSE failed to have regard to the attempts of the Appellant to rectify the non-compliance after the event. It issued SENS announcement and a circular to shareholders of the Appellant and directed by the JSE. We reiterate one of the Appellant s grounds of appeal Micromega has accordingly done all that was possible to remedy the infractions and breaches and have continuously advised their shareholders of same. There was no economic compromise to the company or its shareholders. 15. On appeal the JSE s response, inter alia, was that: 15.1 It carefully considered the nature of the transgression, the volume of the shares purchased, the interest of shareholders as well as the investing public, the importance of the Listing Requirements that were breached, as well as its regulatory functions. 15.2 The contraventions were serious and strict compliance with the Listing Requirements is fundamental in ensuring the objective of the Financial Markets Act, more particularly the markets are to be conducted fairly, efficiently and transparently. 15.3 The undue delay in the imposition of the penalty should have no bearing on the appropriateness of the penalty.
Page 7 15.4 Furthermore, the Appellant has failed to demonstrate that it was prejudiced in any way due to the delay. The JSE s response thereto was A penalty proportional to the transgressions is appropriate. A public censure is aimed at reprimanding the offender in public, it conveys to the investing public and shareholders of issuers listed on the exchange that the JSE enforces its listing requirements and its acts as determined against similar offences. The financial penalty is similarly appropriate as the company benefitted financially at the expense of shareholders from its repurchase of shares during a prohibition period. The financial penalty of R500 000.00 is a small amount if regard is had to the penal jurisdiction if the JSE and the financial loss suffered by shareholders. 1 (My emphasis) 15.5 Furthermore, the JSE motivated that the sanctions imposed must vindicate the importance the prohibited requirements listed above. They are of utmost importance to ensure the integrity of the JSE s market and the transparency and fairness of transactions in listed securities concluded on the JSE and they are essential to protect the rights of shareholders and the investing public. 16. We find a previous decision by this Appeal Board to be relevant. In Michael Berman v The Financial Services Board, Judge Friedman (the chairperson of the panel at the time) specifically acknowledged that if one has regard to the objects of the Act, deterrence is undoubtedly of paramount 1 Page 19 and 20 of the record.
Page 8 importance when a penalty is imposed for a contravention of the kind committed by the Appellant. 17. Section 2 defines the object of the Financial Markets Act 19 of 2012 namely: (a) Ensure that the South African financial markets are fair, efficient and transparent (b) Increase confidence in the South African Financial Markets by: (i) requiring that securities services be provided in a fair, efficient and transparent manner, and (ii) contributing to the maintenance of a stable market environment; (c) (d) (e) promote the protection of regenerated process and clients; reduce systemic risk; and promote the international competitiveness of securities services in South Africa. 18. It was further remarked that the penalty imposed must be fair. It has been suggested that a fair and effective regulatory penalty regime should combine the essential features. Penalties should be set at a level which are sufficiently high to deter future contraventions of the law, provided that any given penalty is not disproportionate to the seriousness of the offence. 19. To determine whether we are entitled to interfere on the basis involves measuring the deterrence against other relevant factors which includes that the penalty must be proportionate when weighed against the seriousness of the offence.
Page 9 20. In Federal Mogul Aftermarkets Southern Africa (Pty) Ltd v Competition Commission and another 2005 (6) BCLR 613 CAC at 636C, it was stated: This court does not enjoy an unfettered discretion to interfere with the Tribunal s assessment and inspection of an administrative penalty. Even if we decided that a different penalty was appropriate we are not merely at large to substitute our finding for that of the Tribunal. This approach is consistent with the general principle the court of appeal has limited power to interfere. It can only do so on certain well-recognized grounds namely, where the court a quo exercised its discretion capriciously or upon a wrong principle or where it has not brought its unbiased judgment to bear on the question where it has not acted for substantial reasons. 21. Having considered the conspectuous of the facts before us, as well as the legislative prescripts relevant, we find that the JSE had not exercised its mind capriciously or upon a wrong principle. Nor do we find that the penalty was excessive or startlingly inappropriate. 22. Cognisance must also be taken of the fact that the sanction had been reconsidered after the JSE had considered the Appellant s submissions. 23. The mitigating factors presented on behalf of the Appellant namely that it had taken 22 months for the JSE to impose the sanction and that valid and acceptable explanations were proffered in respect of their non-compliance has also been noted. As alluded to above, the penalty must be proportionate to the offences committed. It must be weighed against the
Page 10 nature of the transgressions. There is no doubt that the non-compliance was of a serious and material nature. 24. We also note that the JSE as it had reconsidered the sanctions after receipt of the Appellant s representations and had further reduced the sanction period. We may have imposed a different penalty. However, we can only do so if the JSE exercised its discretion arbitrantly capriciously or upon wrong principle. It is on this basis that the appeal must fail. COSTS: 25. The parties agreed that the issue of costs is dependent on the result and we find the principle that costs should follow the result to be applicable in this instance. 26. The following order is made: (1) The appeal is dismissed with costs. SIGNED at PRETORIA on this 26 th day of OCTOBER 2017 on behalf of the Panel. H KOOVERJIE ADV H KOOVERJIE SC with: Mr J Pema Adv W Ndinisa