The decision of Attorney General for the State of NSW v Now.com.au Pty Ltd [2008] NSWSC 276 has the potential to have a severe impact on the Coles supermarket chain’s plans to break into the Australian pharmacy market. While the decision, handed down on 2 April 2008 by Chief Justice Young of the New South Wales Supreme Court (Equity division), does not signal the end of the case, it is a big win for the plaintiff – the Pharmacy Guild of Australia.
The proceedings were issued by the NSW Attorney General, for the Pharmacy Guild of Australia (Guild), to seek declarations and orders on the conduct of Sydney Drug Stores Pty Ltd (SDS) (of the which the defendant is the sole shareholder). SDS is the owner of a pharmacy in Silverwater NSW, but is not a pharmacist. The ultimate owner of SDS is Coles Myer Pty Ltd (Coles), also not a pharmacist, all the shares of which are currently owned by Wesfarmers Limited (Wesfarmers), a publicly listed company whose shares are held by the public.
The legislation in dispute is s25 of the Pharmacy Act (NSW) 1964 (the Act) which dictates that, in general, persons other than pharmacists are not to have financial interests in pharmacists’ businesses:
"(1) A person (not being a pharmacist), a corporation or a body of persons unincorporated shall not carry on, as owner or otherwise, the business of a pharmacist in a pharmacy or otherwise have a pecuniary interest, direct or indirect, in the business of a pharmacist or in a pharmacy…"
In brief, the Guild argued it was a case of the defendant having a pecuniary interest in a pharmacy, but not being a person allowed or exempted by any provisions of the Act and therefore acting contrary to law. The Act has been amended significantly since its introduction and contains numerous ‘savings’ provisions protecting those having pecuniary interests which were acceptable in the past but unacceptable now. The most recent relates to the period of time before October 1990. Maintaining those once acceptable interests is, subject to conditions, allowed under such provisions. Coles, however, acquired SDS in March 2006.
SDS submitted materials on its relationship with Coles, which the Guild relied on to show the pharmacy was a part of a group of national stores with a common culture and involved in large scale merchandising – matters inconsistent with the Act. The Guild argued these materials demonstrated the controlling role of the ultimate parent shareholder (Coles) in the business being conducted by SDS. The defendant submitted that the interest it holds as sole shareholder in SDS does not constitute a pecuniary interest in the pharmacy business carried out by SDS.
Young CJ looked to a long line of authority on exactly what constitutes a 'pecuniary interest,' from both general principles of company law and the Act. It was stressed that not only must the shareholding be looked at, but also the surrounding circumstances and level of control. The overriding analogy was that of landlord, for example at 49 Young CJ states:
"
…there is a general trend of authority that merely because a person receives rent from a tenant which conducts a business on the leased premises, the landlord does not have a financial interest in the tenant’s business. However, when one adds other factors such as a percentage of turnover or some active involvement, then the fact that one person is the landlord of the premises can be added to those other factors to show that there is a financial interest in the tenant’s interest."
It was noted that merely being a shareholder (for example, a Wesfarmers shareholder) with ordinary rights such as receiving dividends and voting is not sufficient of itself to constitute a pecuniary interest. These ordinary rights, however, when combined with additional actions and control (in this case, evidenced in the materials about the relationship with Coles) were sufficient to constitute a financial interest in the business being conducted by SDS.
The Court said that because Coles was not a party, it could only be said that it 'appeared' to be the peak operating company of SDS, and that SDS was under its control and did its bidding. It followed that the defendant, owned entirely by Coles, was found to have a pecuniary interest in SDS.
The Court found that, subject to any discretionary defences, the Guild was entitled to the basic relief sought (by way of declarations) as Coles did have a pecuniary interest in SDS’ pharmacy and therefore breached the Act. Young CJ, however, decided an appropriate course of action was for him to decide the question of principle and indicate what declarations could be made, and then stand the matter over to consider whether any injunctive orders should be made.
Accordingly, the matter has been stood down for three weeks (to 24 April 2008), to allow both parties time to digest the decision and to consider what their next step will be. The time also allows either party to appeal to the Court of Appeal for leave to appeal.
We will update you as soon as the final decision is handed down – watch this space!
For further information, please contact Anna Smits on +61 3 9608 2103 or a.smits@cornwalls.com.au.
