The copyright act of 1978 (as amended) prohibits the reproduction of this copy IN ANY FORMAT, (See Clause 4 Terms and Conditions)without prior permission of the original publisher.

Publication

DE REBUS

Page

45+46

Date

Mon 01 Oct 2018

AVE (ZAR)

41813.2

By Not alUnathiJukuda

CASE NOTE - COMPETITION LAW

restraints of trade falfoul of the Competition Act

Dawn Consolidated Holdings (Pty) Ltd and Others v Competition Commission(CAC) (unreported case no 155/CACOct2017, 4-5-2018)

(Rogers JA) (Davis JP and Boqwana JA concurring)

estraints of trade have beena contentious issue for com-petition law. For example,the significant concern aboutestraints of trade, is the pos-

sibility that such arrangements can leadto the creation of a cartel and attract li-ability for all those involved. In a recentCompetition Appeal Court case, the mat-ter of restraints was once again consid-ered with interesting implications forcompetition law.

In Dawn Consolidated Holdings (Pty)Ltd and Others v Competition Commis-sion (CAC) (unreported case no 155/CACOct2017, 4-5-2018) (Rogers JA) (Da-vis JP and Boqwana JA concurring) thecase dealt with a merger transactionwhere Dawn, which held 49% in a joint-venture company called Sangio, wishedto increase its shareholding to 100%. TheCompetition Commission (the Commis-sion) initially approved the transactionwithout conditions, however, on investi-gation, the Commission found that theshareholders' agreement between Dawnand Sangio contained a 'non-competeclause'. The non-compete clause provid-ed that Dawn and its subsidiaries wouldnot manufactur e high density polyeth-ylene piping (HDPE) in South Africa (SA)in competition with Sangio, and that therestriction would prevail for as long asDawn continued to hold shares in San-gio.

The Commission alleged that theclause sought to allocate the market ascontemplated in s 4(1)(D)(ii) of the Com-petition Act 89 of 1998 (the CompetitionAct) by preventing Dawn from enteringthe relevant market. In essence s 4(1)(D)(ii) provides that:

'An agreement between, or concertedpractice by, firms, or a decision by an as-sociation of firms, is prohibited if it isbetween parties in a horizontal relation-ship and if -

(b) ...(ii) dividing markets by allocating cus-

tomers, suppliers, territories, or specifictypes of goods or services'.

Section 4(1)(b), provides for a per seprohibition against agreements between

competitors to fix prices, divide marketsor engage in collusive tendering. Dawnadvanced that, if properly characterised,the non-compete clause did not amountto a per se prohibition but was rather arestraint in the normal course of a busi-ness transaction, intended to protect itsunderlying investment in Sangio.

The Competition Tribunal (the Tribu-nal) in considering whether the restraintof trade was reasonable, decided thatthe restraint was not one of commercialnecessity . Other factors that the Tribu-nal consider ed when making its decisionwas the extent of the duration of thenon-compete clause, which the Tribu-nal concluded was too lengthy and thatthe restraint operated against the buyer(Dawn) as opposed to the seller.

There has been uncer tainty in SouthAfrican competition law as to whetherrestraints of trade constitute a contra-vention of the Competition Act. On theone hand, in Nedschroef Johannesburg(Pty) Ltd v Teamcor Ltd/Waco Interna-tional Ltd/CBC Fasteners (Pty) Ltd/AvlockInternational (Pty) Ltd (CT) (unreportedcase no 95/IR/OctO5, 1-2-2006) (N Ma-niom) the Tribunal found the restraintof trade to be disproportionate, in thatit operated against the purchaser in fa-vour of a party that was not a party tothe transaction and in addition the re-straint was for an extensive duration.On the other hand, in Replication Tech-nology Group (Pty) Ltd v Gallo AfricaLimited (CT) (unreported case no 92/IR/SepO7, 10-12-2007) (D Lewis) at para32, the Competition Tribunal found therestraint to be proportionate due to itslimited nature.

The Competition Appeal Court in con-sidering the appeal from the Tribunal inthe Dawn case noted that, in principle,when dealing with cases where the par-ties to the agreement are potential com-petitors, the only legal basis on whichnon-compete clauses can be held notto contravene s 4(1)(D)(ii), is if regardis had to the principle of characterisa-tion (at para 28). This principle was suc-cinctly defined in the case of AmericanNatural Soda Ash Corporation and An-

other v Competition Commission andOthers 2005 (6) SA 158 (SCA) at para 47,wherein the court held that the essentialinquiry for characterisation is about es-tablishing 'whether the character of theconduct complained of coincides withthe character of the prohibited conduct'.The court went further and noted thatthe process embodies two elements, onebeing the scope of prohibition, which is amatter of statutory construction and theother being the nature of the conductcomplained of, which is a factual inquiry(American Natural Soda at para 47).

One of the issues that the CompetitionAppeal Court had to grapple with waswhether the Tribunal was correct in find-ing that the restraint of trade was not aclause inser ted in the ordinary cause ofcommercial necessity, because it did notfollow on a joint venture. The sharehold-ers' agreement unequivocally stated thatthe agreement between parties was nota joint venture. The Competition AppealCourt took a distinct view from that ofthe Tribunal. The Competition AppealCourt went further than just solely bas-ing its finding on what the relationshipwas called in the shareholders agree-ment (literal interpretation), but ratherfocused on what the true nature of therelationship was (purposive interpreta-tion). The Competition Appeal Courtapplied the principle of characterisationand arrived at a different conclusion tothat of the Tribunal. The CompetitionAppeal Court found that a restraint,which is commercially reasonable in thecontext of the transaction is not charac-terised as violating s 4(1)(b)(ii) (Dawn atpara 28).

The second issue that the Competi-tion Appeal Court had to decide wasthe length or duration of the restraint.The Tribunal previously expressed itsconcern about the fact that the restraintof trade was for a long period of timeand not the usual short period. Again,the Competition Appeal Court disagreedwith this proposition adopted by the Tri-bunal. The Competition Appeal Courtfound the duration of the restraint tobe reasonable and necessar y to protect

DE REBUS - OCTOBER 2018

CASE NOTE - PERSONS AND FAMILY LAW

the underlying investment. Dawn was onlyrestrained insofar as it continued to holdshares in Sangio.

The Competition Appeal Court delin-eated an appropriate test for assessingancillar y conduct, holding that the char-acter of a non-compete clause is not to beassessed as if it stood on its own. It mustbe viewed in the context of the transac-tion as a whole and the circumstancesof the parties when they concluded theagreement. The court went on furtherand stated that the requirement that therestraint should be objectively necessar ymay, however, be too strict. The appro-priate test, according to the court, wasthe following:e Is the main agreement (ie, disregardingthe impugned restraint) unobjectionablefrom a competition law perspective?* If so, is a restraint of the kind in ques-tion reasonably required for the conclu-

sion and implementation of the mainagreement?e If so, is the particular restraint reason-able proportionate to the requirementserved? (Dawn at para 32).

Ultimately, since the Commission didnot suggest that the shareholders agree-ment in itself was objectionable, the Com-petition Appeal Court concluded that therestraint was in the ordinary course ofbusiness, as it was necessary to protectproprietary confidential information ofSangio, as Dawn would have access toinformation and know-how of the busi-ness of Sangio. The ancillar y restraintwas found to be proportionate as it oper-ated as long as Dawn was a shareholderin Sangio.

The Competition Appeal Court judg-ment is welcomed for bringing muchneeded clarity on some of the issuessurrounding restraints of trade in com-

petition law. This judgment underscor esthat not all agreements, which on theface appear to violate s 4(1)(b) of theCompetition Act will per se amount toa prohibited conduct. The test for ancil-lary conduct developed in this case issignificant as it is one of the first casesthat sets out how one ought to apply itwithin the context of characterisation. Itflows from this judgment that restraintof trade clauses contained in a sale ofbusiness or shareholders agreementwill not necessarily be consider ed anti-competitive, provided that it is designedto protect the value of the investmentand not designed to limit competition.

Unathi Jukuda LLB (UWC) ND: Market-ing (CPUT) is a candidate attorney atWerksmans Attorneys in Cape Town.

Q