Court case explains why Cell C must transfer control of its crown jewels

A seemingly mundane ruling by former Pretoria High Court judge Hans Fabricius in 2020 explains why Cell C had to apply to transfer control of its network, service, and spectrum licences to The Prepaid Company.

News that Cell C applied to cede control of one of its biggest assets to its largest shareholder emerged in December when industry regulator Icasa gave notice of it via Government Gazette.

According to the notice, Cell C applied to transfer control of its network (I-ECNS), service (I-ECS), and spectrum licences to The Prepaid Company, a subsidiary of Blue Label Telecoms and Cell C’s largest shareholder.

Cell C applied to transfer its 2100MHz, 900MHz, and 1800MHz spectrum licences, which are all of its premium raw wireless network capacity.

Icasa’s notice immediately raised concerns that Blue Label was trying to secure one of Cell C’s most valuable assets — spectrum — if the mobile operator went bankrupt.

Blue Label and Cell C have repeatedly assured that this was not the case and that they were merely complying with the law.

They explained that there is a difference between licence ownership and control and that Cell C would retain ownership of all its licences.

The companies said the transfer of control was necessary after Blue Label injected more cash into Cell C and took a controlling stake of 63.19% in the operator.

Blue Label’s voting power is currently capped at 49.53% until it gets approval from Icasa and the Competition Commission for the change of controlling shareholding.

However, regulatory experts disagreed on whether a transfer of licence control was necessary or whether applying for a change in shareholding was a separate thing.

For instance, why must Cell C transfer control of its licences, but Vodacom didn’t have to when Vodafone took a controlling stake in the company in 2008?

Cell C explained that this was because the Electronic Communications Act was amended in 2014 to differentiate between ownership and control of a licence:

“…and the control of an individual licence may not be assigned, ceded or in any way transferred to any other person without prior written permission of the Authority.”

However, when Liquid Intelligent Technologies acquired Neotel in 2016, control of its licences was transferred to Liquid’s name rather than parent company Econet.

The apparent disparity between the Liquid and Cell C scenarios could be because Icasa had to give its approval on the Neotel deal from the beginning.

Regardless of whose name is on the licence, should Liquid’s majority shareholder change in the future, it would also have to lodge a transfer of control application.

Another reason could be that Icasa only started strictly enforcing the Electronic Communications Act’s transfer of control stipulations several years after the Neotel acquisition.

Hans Fabricius, retired Pretoria High Court judge

One of those cases, Lesedi Africa Productions vs the Independent Communications Authority of South Africa (Icasa), landed before Judge Fabricius in September 2020.

Although Fabricius marked it as neither noteworthy nor reportable, the judgement contains a significant ruling.

Fabricius noted that the Electronic Communications Act (ECA) prohibits the transfer or change of ownership of a licence when control of a licence is transferred from one shareholder to another without Icasa’s approval.

“It is in my view clear, given the context also, that the prohibition is not only against the transfer of a license itself, but also the change of control of an entity to which a licence has been granted,” Fabricius ruled.

Therefore, a change of control among shareholders of a licensed entity equates to a change of control of licence.

Specialist telecommunications regulatory law firm Ellipsis noted at the time of the ruling that Icasa had taken several licensees to task for making shareholding changes without first applying for a change of control.

These cases were referred to Icasa’s Complaints and Compliance Committee, which ordered offending licensees to undo their shareholding changes.

However, Ellipsis also highlighted then that there was no definition for “control” in the ECA.

To clarify this, Icasa issued a document titled Memorandum Regarding Control on 31 March 2021.

It explained that it would follow the Competition Act’s approach when considering control, which includes one party owning more than 50% of the shares of another.