Contingent liabilities

Competition matters

Telkom is a party to a number of legal proceedings filed by several parties with the South African Competition Commission (CC) alleging anti-competitive practices described below. Some of the complaints filed at the CC have been referred by the CC to the Competition Tribunal (CT) for adjudication.

Should the CT find that Telkom committed a prohibited practice as set out in the Competition Act for each of the cases, the CT may impose a maximum administrative penalty of 10% of Telkom’s annual turnover in the Republic of South Africa and its exports from the Republic of South Africa during Telkom’s preceding financial year. However, Telkom has been advised by external legal counsel that the CT has to date not imposed the maximum penalty on any offender in respect of the contraventions being accused of.

The South African Value Added Network Services (SAVA) and Omnilink

This matter relates to the complaints filed by SAVA in May 2002 and a complaint filed by Omnilink (in August 2002) against Telkom at the CC, regarding certain alleged anti-competitive practices by Telkom. These complaints were referred by the CC to the CT in February 2004. The matter was heard by the CT during 2011 and 2012.

The CT handed down a judgement on 7 August 2012. Telkom was found to be in contravention of section 8(b) (refusal to provide essential facilities) and section 8(d)(i) (inducing customers not to deal with competitors), and imposed an administrative penalty of R449 million.

Telkom appealed the matter and the CC filed a cross-appeal. Pursuant to discussions between Telkom and the CC aimed at arriving at an amicable settlement, the parties reached agreement in March 2013 that, subject to confirmation by the Competition Appeal Court (CAC), each party would withdraw its appeal and cross-appeal, respectively, and each party to pay its own costs. The withdrawal of the appeals were approved by the CAC on 12 April 2013 which was communicated to Telkom on 16 April 2013. Accordingly, Telkom will pay the fine that was originally awarded by the Tribunal in the sum of R449 million, 50% of which is payable within six months from date of the withdrawal and the balance to be paid within 18 months of the said date of confirmation of the withdrawal.

Internet Solutions

This matter deals with the self-referred parts of the Internet Solutions (IS) complaint filed at the CC in December 2007 alleging certain anti-competitive practices by Telkom, such as excessive pricing, margin squeeze, bundling and price discrimination. Certain parts of this complaint were referred to the CT by the CC and these are dealt with in the Multiple Complaints Referral below. The non-referred parts of the IS complaint were self-referred by IS. IS alleged contraventions of the following sections of the Competition Act by Telkom: section 8(a) – excessive pricing, section 8(d) – exclusionary conduct and section 9 – price discrimination. IS requested an administrative penalty in respect of each of its two complaints, namely price discrimination in respect of Resell DSL and a complaint in respect of Telkom’s VPN Supreme product (this complaint also involves a complaint of alleged excessive pricing and price discrimination as regards the VPN Supreme product).

After various amendments to IS papers, IS amendment application was heard by the CT and dismissed with costs. In August 2012, IS filed an appeal against the CT’s order. IS has not yet filed the record. There is no further development in this matter.

Competition Commission Multiple Complaints Referral

The CC served a notice of motion on Telkom on 26 October 2009, in which it referred complaints against Telkom by MWeb and IS as well as the Internet Service Providers’ Association (“ISPA”), MWeb, IS and Verizon respectively, to the CT. The CC alleged certain anti-competitive practices by Telkom.

Pursuant to discussions between the parties, the CC signed a settlement agreement with Telkom on 13 June 2013, in an attempt to settle the MIV referral. In terms of this settlement agreement, Telkom has admitted that its conduct during the complaint period amounted to a contravention of sections 8(c) (margin squeeze) and 8(d)(iii) (bundling and tying) of the Competition Act. Telkom furthermore committed to certain price reductions over the next three years, behavioural remedies which include a form of functional separation between its wholesale and retail business and has agreed to pay an administrative penalty of R200 million, payable in three equal instalments. This settlement agreement is subject to confirmation by the CT and Telkom is awaiting a date on which the CT will hear the matter.

As part of the discovery process to prepare for trial, Telkom and the CC each filed applications to compel the discovery of certain further documentation from each other and the applications were heard by the CT on 25 January 2013. Telkom’s application to compel further and better discovery was dismissed by the CT in a ruling handed down in February 2013. Telkom appealed this ruling, and the appeal has yet to be finalised. In further preparation for the hearing of the main matter, the CC has filed its factual and expert witness statements. Telkom has not filed its witness statements due to the issues around the discovery process not being finalised. The hearing of the matter, which was previously set down for June 2013, has been postponed by agreement between the parties but a new date has not yet been set. Notwithstanding the above, the parties are exploring settlement discussions.

Phutuma Networks (Pty) Ltd (Phutuma)

Phutuma filed a complaint at the CC early in 2010, wherein Phutuma alleged that Telkom has contravened section 8(c) of the Competition Act by abusing its dominant position in engaging in anti-competitive conduct in the telegraphic and telex maritime services market. The CC in June 2010 decided not to refer the complaint to the CT. However, Phutuma self-referred its complaint to the CT in July 2010, alleging that Telkom engaged in an exclusionary act by appointing Network Telex in 2007 without any formal procurement process. Telkom filed certain preliminary points, which were upheld by the CT in March 2011. Phutuma’s self-referral was dismissed with costs. Phutuma appealed this decision to the Competition Appeal Court (CAC) which was dismissed with costs on 20 November 2012 and accordingly this matter is disposed of.

Matters before ICASA

Phutuma Networks (Pty) Ltd (Phutuma)

Phutuma filed a complaint against Telkom at the Complaints and Compliance Committee (CCC) of ICASA in February 2010. In July 2010, the CCC expressed the view that they lacked jurisdiction to rule on certain of the complaints, which relied on legislation over which the CCC does not have jurisdiction. The CCC requested Phutuma to amend its complaint to address these issues. Phutuma consequently filed an amended complaint sheet, but at a hearing in March 2011, the CCC ruled that the second complaint sheet suffered from the same defects as the original complaint. Phutuma then provided the CCC with a fresh complaint. In terms of the complaint as currently constituted, Phutuma’s complaint currently consists of six (6) complaints, namely:

First Complaint: Telkom breached condition 4 of its Individual Electronic Communication Network Services (IECNS) licence relating to universal service obligations in that the service which Telkom is giving does not conform to the “ITU Standards”.

Second Complaint: Telkom breached condition 4.2.2 of its Individual Electronic Communications Services IECS licence and condition 3.2.2 of its (IECNS) licence in that there is no stipulation in Telkom’s arrangement with Network Telex to ensure that the exercise by Network Telex of Telkom’s function under its licence do not contravene any of the conditions of its licence.

Third Complaint: Telkom has contravened section 16(6) of the Electronic Communications Act (ECA) in that it has allegedly ceded or transferred part of both its IECS and IECNS licence to Network Telex without the prior written approval of ICASA. 

Fourth Complaint: Telkom breached section 67 of the ECA read with section 2 thereof in that Telkom substantially lessened or prevented competition by giving undue preference to Network Telex and by causing undue discrimination against the complainant and did not promote open, fair and non-discriminatory access to electronic communications services by simply appointing Network Telex and appointing a non-BEE, being Network Telex. 

Fifth Complaint: Telkom breached condition 4.4 of its IECS licence and condition 3.4 of its IECNS licence and/or contravened section 15(1) and section 80(1) of the Postal Services Act in that Telkom allegedly entrusted the delivery of telegrams to Network Telex.

Sixth Complaint: Telkom breached condition 4.2.3 of its IECS licence and condition 3.2.3 of its IECNS licence in that it failed to act against Network Telex despite the latter’s known contravention of the Postal Services Act.

The matter was set down for hearing before the CCC in April 2013. At the commencement of the hearing, Phutuma applied for a postponement, due to a lack of legal representation. The matter was postponed for hearing in August 2013.

End-User and Service Charter Regulations

Allegations have been made at the CCC regarding Telkom’s alleged non-compliance with the requirements of the End-User and Service Charter Regulations relating to the clearance of reported faults. A hearing has taken place and the CCC has ruled that Telkom is not in breach of the regulations and recommend that ICASA review the regulations which, as they stand, are not capable of implementation. Telkom, however has already initiated administrative review proceedings seeking to set-aside the applicability of the Regulations since the CCC ruling is not binding on ICASA and the risk remains for similar referrals. No further development in this matter.

Neotel (Pty) Ltd (Neotel)

On 2 December 2011, the CCC notified Telkom of having received ICASA’s referral of notification of dispute. A dispute was lodged by Neotel that broadly relates to Telkom’s alleged refusal to lease its unbundled local loop (LLU) constituting a portion of Telkom’s electronic communication network.

The CCC heard arguments from both parties in the above matter in May 2012. At the culmination of proceedings, the CCC ruled that Neotel’s request to access Telkom’s local loop was a valid request and that Telkom’s response to the same was inadequate. However, the CCC also ruled that there currently exists no regulatory framework to give practical effect to LLU. In the circumstances the CCC has ordered that Telkom and Neotel reconsider the issue and revert to ICASA within three months and that ICASA consider the matter within the context of its December 2011 LLU Determinations. Telkom has instituted High Court proceedings to interdict ICASA from implementing the CCC order and further to have the CCC order reviewed and set aside. No further development in this matter.

Supplier dispute

Radio Surveillance Security Services (Pty) Ltd (RSSS)

During September 2011 RSSS served two summons on Telkom for the sum of R215,661,866 (including VAT) and R9,913,782 (including VAT), respectively. In the summons for R215,661,866 RSSS alleged that Telkom was indebted to it for the rendering and upgrading of 440 alarm systems previously purchased by Telkom, to be M3010 compliant and for which services Telkom was indebted to it.

Telkom neither concluded any written contract with RSSS for the provision of these alleged services nor did Telkom place any orders or accepted any quotations in respect of these services. In the summons for R9,913,782 RSSS claimed that Telkom was liable for rentals, monitoring and maintenance of alarm systems which were rented and/or purchased from RSSS. Both actions are defended. During November 2011 RSSS withdrew both actions against Telkom in terms of a settlement agreement. Telkom was of the view that the dispute was settled on the basis that RSSS withdraw its summons and each party pays its own legal costs. RSSS reissued summons in both matters in December 2011. The smaller claim was settled. The larger claim is being defended. An exception was filed by Telkom and is set down for hearing in August 2013.

High Court

Phutuma Networks (Pty) Ltd (Phutuma)

In August 2009 Phutuma served a summons on Telkom, claiming for damages arising from a tender published by Telkom in November 2007 for the outsourcing of the telex and Gentex services and for the provision of a solution to support the maritime industry requirements. The tender was cancelled in June 2009, without any award being made, due to the expiration of the validity period of the tender. According to Phutuma, Telkom had awarded the tender to a third party outside a fair, transparent, competitive and cost effective procurement process, hence it has claimed damages of R3,730,433,545.00, alternatively R5,513,876,290.00, and further alternatively R1,771,683,580.00 plus interest at 15.5% per annum to date of payment from April 2008, alternatively from 30 April 2009 being the date of notice in terms of Act 40 of 2002, further alternatively from date of service of this summons plus legal costs. At the hearing in October 2011, Phutuma brought an application to compel Telkom to make better discovery of documents and also applied for a postponement of the trial. The court dismissed Phutuma’s application for better discovery but granted a postponement of the trial with costs in favour of Telkom. The trial was re-enrolled for hearing from 20 May 2013. On 21 May 2013, Phutuma’s second set of attorneys withdrew as attorneys of record without divulging the reasons for same. Phutuma on 22 May 2013, with a new counsel again applied for a postponement of the trial which was refused by the court. Since Phutuma could not establish the facts in support of its case to the satisfaction of the court, the court granted absolution from the instance plus costs. Phutuma has filed a notice of appeal against the judgement.

Bihati Solutions (Pty) Ltd (Bihati) and Merid Trading (Pty) Ltd (Merid)

This matter arose from the award of a tender by Telkom in November 2008 for the construction of network services, after the validity period had expired. Telkom successfully applied to the High Court to set aside its award. Bihati’s application to review and set aside Telkom’s subsequent decision to set aside its own award and for an order compelling Telkom to commence with the negotiations in respect of the award, was dismissed. Both Merid and Bihati filed appeals in the Supreme Court of Appeals against the decisions of the North Gauteng High Court. The appeals which were set down in August 2012 were withdrawn by Bihati and Merid after a settlement agreement was concluded with Telkom. The matter is finalised.

ZTE Mzanzi South Africa (Pty) Ltd (ZTE)

During 2011, Telkom awarded the MSAN tender to Huawei Technologies Africa and Alcatel-Lucent. In March 2012, ZTE successfully obtained an interdict restraining Telkom from implementing the tender and concluding any agreements with the successful bidders. The High Court granted the interim interdict in favour of ZTE. Telkom filed an application for leave to appeal to the Supreme Court of Appeal, which was granted in May 2012. On 4 March 2013, the Supreme Court of Appeal upheld Telkom’s appeal with costs which included the costs of two counsel in the lower court.

African Pre-paid Services Nigeria Limited (APSN) v Multi-Links: Arbitration matter

Multi-Links, a previously wholly-owned subsidiary of Telkom in Nigeria, concluded a Super Dealer agreement with African Pre-paid Services (APS), in December 2008 in terms of which APS was appointed for an initial period of 10 years to sell, market and procure customers for Multi-Links range of products and services in Nigeria (the agreement). On 29 May 2009, APS ceded and assigned all of its rights and obligations in terms of the agreement to APSN. On 26 November 2010 APSN cancelled the agreement on the basis of an alleged repudiation by Multi-Links of the agreement. On 13 June 2011 APSN launched arbitration proceedings in South Africa (as per contract) against Multi-Links claiming damages (9 claims) in the total sum of USD481,199,101. Multi-Links is defending the matter and has filed a counterclaim in the amount of USD123 million. Telkom sold its shareholding in Multi-Links to HIP Oils Topco Ltd (HIP Oils) on 3 October 2011. In terms of an indemnity contained in the Sale and Purchase agreement between Telkom and HIP Oils concluded in August 2011, Telkom is liable for all amounts in excess of USD10 million in respect of the claim between APSN and Multi-Links. In October 2012, APSN reduced its claim to USD457 million.

The arbitration which was set down for hearing in November 2012, was adjourned to enable Multi-Links to file a special plea in relation to certain information regarding irregularities which came to the notice of Multi-Links in October 2012. The matter has been re-enrolled for hearing from February 2014 to April 2014. MLT has applied to the High Court in terms of section 3(2) of the Arbitration Act to stay the arbitration hearing pending the outcome of the damages action against Blue Label Telecoms and others. The application is opposed.

OTHER

HIP Oils Topco Ltd (HIP Oils)

With the sale of Telkom’s shares in Multi-Links to HIP Oils, Telkom provided a taxation indemnity and a “creditors” indemnity to HIP Oils and Multi-Links where such liability or obligation was incurred prior to 3 October 2011 and to the extent that such liability exceed the amounts set out in Schedule 4 (creditors’ list) to the Sale and Purchase Agreement.

Telkom has undertaken to indemnify any actual or contingent liabilities, obligations or other indebtedness of any nature owed or owing to trade, financial and other creditors of Multi-Links where such liability, obligation or other indebtedness was incurred and not disclosed to HIP Oils prior to the completion date.

Consumer Protection Act (CPA)/National Consumer Commission (NCC)

In August 2011 the NCC served compliance notices on Telkom for both fixed-line and mobile services to be brought in line with CPA. The NCC alleged that Telkom’s terms and conditions for fixed-line and mobile services (8•ta) were, at that stage, not compliant with the CPA. Telkom filed an objection to these compliance notices and filed applications on the NCC for the setting aside of both notices. In February 2013 the National Consumer Tribunal cancelled both compliance notices on the basis that they were defective.

Contingent assets

High Court

Former Senior Executive of Telkom

Telkom has issued a summons against a former senior executive of Telkom in April 2013, claiming an amount of US$6 million, for damages suffered as a result of certain irregularities. The summons is based on two claims, namely:

Blue Label Telecoms Limited and Five Others

On 17 May 2013, Telkom (and Multi-Links Telecommunications, Nigeria) issued a summons against Blue Label Telecoms Limited and certain subsidiaries of Blue Label and individuals, including a former senior executive of Telkom, claiming an amount of US$528,071,116.00 being damages suffered by Telkom arising out of a Super Dealer Agreement (SDA) concluded between African Pre-paid Services (Pty) Ltd (a subsidiary of Blue Label) and Multi-Links. The damages claim is based, inter alia, on a breach of a duty of care and misrepresentations made by Blue Label at the time that the SDA was concluded with Multi-Links. The claim against the former senior executive of Telkom is based on a breach of his fiduciary duty owed to Telkom and Multi-Links. Multi-Links is also claiming several millions US Dollars for damages suffered. In addition, as part of the relief sought by Multi-Links, the court has been requested to declare that the SDA dated 1 December 2008 between Multi-Links and APS and the purported cession thereof to African Pre-paid Services Nigeria, to be void ab initio. To find jurisdiction, against APSN , MLT and Telkom had obtained a High Court order. APSN has applied to the High Court to set aside the jurisdiction order.

Multi-Links (MLT)

Telkom is claiming an amount of US$20.5 million from MLT in respect of amounts due by MLT to Telkom with regards to the provision of resources, legal costs and an interest free loan.

Tax matters

During the period commencing May 2007 to October 2011, Telkom provided a loan totalling US$531 million to Multi-Links. In October 2011, Telkom and Telkom International disposed of their shares in Multi-Links and sold their rights in respect of the Multi-Links Loan to an unconnected third party for a consideration of US$100. The amount was received by Telkom during its year of assessment ended 31 March 2012.

In determining the taxable income for the Annual Financial Statements ended 31 March 2012, Telkom included a foreign exchange (FX) gain to the value of R247 million on the realisation of the loan. Telkom subsequently obtained external tax advice, including two Senior Counsel opinions, which support the contention that instead of a FX gain of R247 million a FX loss of R3.9 billion should be realised. The 2012 tax return has been submitted on the basis of the Senior Counsel opinions obtained. Since the tax treatment of the R3.9 billion loss is based on an unique set of circumstances and a complex legislative environment the financial statement adjustments will only be recognised once the Telkom interpretation has been accepted by SARS or in the case of a dispute has been positively resolved in the Tax Court.

The Group is regularly subject to an evaluation, by tax authorities, of its direct and indirect tax filings. The consequence of such reviews is that disputes can arise with tax authorities over the interpretation or application of certain tax rules applicable to the Group’s business. These disputes may not necessarily be resolved in a manner that is favourable to the Group. Additionally, the resolution of the disputes could result in an obligation to the Group.