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[2018] ZACAC 2
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Dawn Consolidated Holdings (Pty) Ltd and Others v Competition Commission (155/CACOct2017) [2018] ZACAC 2; [2018] 1 CPLR 1 (CAC) (4 May 2018)
THE
COMPETITION APPEAL COURT OF SOUTH AFRICA
Case
No: 155/CACOct2017
In
the matter between
DAWN
CONSOLIDATED HOLDINGS (PTY)
LTD
FIRST
APPELLANT
DPI
PLASTICS (PTY) LTD
SECOND
APPELLANT
SANGIO
PIPE (PTY) LTD
THIRD
APPELLANT
and
THE
COMPETITION COMMISSION
RESPONDENT
Coram:
Davis JP and Rogers and Boqwana JJA
Heard
:
5 April 2018
Delivered:
4 May 2018
JUDGMENT
Rogers
JA (Davis JP and Boqwana JA concurring)
Introduction
[1]
The question in
this appeal is whether, as the Tribunal found, a non-compete clause
in a shareholders agreement contravened
s 4(1)(b)(ii)
of the
Competition Act 89 of 1998
because it was a restrictive horizontal
practice by which markets were divided. The shareholders agreement
was concluded between
the first appellant, Dawn Consolidated Holdings
(Pty) Ltd (Dawn),
[1]
and the
Warplas
Share Trust (WST)
in respect of the third appellant, Sangio Pipe (Pty) Ltd (Sangio).
The second appellant, DPI Plastics (Pty) Ltd
(DPI), is Dawn’s
wholly owned subsidiary.
[2]
The shareholders
agreement was concluded in April 2007. The context was a transaction
in which Dawn acquired a 49 per cent stake
in a plastic pipe
manufacturing business previously wholly owned by WST.
[2]
For purposes of the transaction, the business was transferred to a
new company, Sangio, in which Dawn held 49 per cent and WST
51 per
cent. It was accepted by all concerned that this transaction was not
a notifiable merger.
[3]
In January 2014 Dawn notified to the Commission a merger
in terms of which it was to become the sole shareholder of Sangio. In
the
context of the merger notification, the Commission learnt of the
shareholders agreement and the non-compete clause. Although the
merger was approved, the Commission initiated a complaint into the
question whether the non-compete clause, which was operative
from
April 2007 until the approval of the merger in 2014, violated
s 4(1)(b)(ii).
[4]
The Commission referred the complaint to the Tribunal.
Unusually, the Commission was content to argue the case before the
Tribunal
on the basis of the affidavits. The Commission’s
founding affidavit did little more than allege the conclusion of the
shareholders
agreement and direct attention to the offending clause.
The answering affidavit was sworn by Mr JA Beukes, who was appointed
as
the Chief Operating Officer of the Dawn Group Trading Division in
October 2006, as the Chief Operating Officer of the Dawn Group
as
from 2008 and its Chief Risk and Compliance Officer as from March
2010. The Commission did not file a replying affidavit.
[5]
In their heads of argument before the Tribunal, the
Commission’s counsel made reference to information appearing in
the merger
filing. This took the (then) respondents by surprise. The
Tribunal ruled that although regard could be had to the merger
documents,
the respondents should be afforded an opportunity of
filing a supplementary answering affidavit to deal with the points
raised
by the Commission. Beukes made a supplementary answering
affidavit. Again there was no replying affidavit.
[6]
Dawn is a wholesale trader and distributor of various
hardware products including plastic pipes. In early October 2006 Dawn
acquired
DPI, a pipe manufacturer. At that time DPI manufactured
large quantities of polyvinyl chloride (PVC) pipes and injection
moulded
fittings and small quantities of ‘regular’ high
density polyethylene (HDPE) pipes. (DPI also made corrugated HDPE
piping,
which is a niche agricultural product. References in this
judgment to HDPE piping is to regular, not corrugated, piping.)
[7]
DPI served markets in the Western Cape. At the time of
the acquisition Dawn had no experience in the manufacture of plastic
pipes
but wished to backward-integrate into that field. Insofar as
HDPE pipe manufacture was concerned, the acquisition was not a
success
because the two extruders DPI used to make this piping were
out of date and inefficient. Dawn also established that there was a
risk of contamination if HDPE pipes were made in the same facility as
PVC pipes. Dawn thus decided to mothball the two extruders.
[8]
Although direct entry into HDPE pipe manufacturing
through the acquisition of new generation extruders was a
possibility, Dawn decided
rather to acquire an interest in an
existing business, which it did by acquiring a 49 per cent
shareholding in Sangio. The latter’s
business had been started
by WST’s Mr Gary Warren in 1997. Although Warren’s
business showed good growth, it was a
relatively small player,
focused mainly on the markets in KwaZulu Natal and Gauteng. It had a
very small presence in the Western
Cape, and a substantial part of
its Western Cape sales were to be Dawn group. In order to grow,
Warren’s business needed
access to capital and to an efficient
nationwide distribution system. A partnership with Dawn would enable
these needs to be met.
The shareholders
agreement
[9]
Dawn’s acquisition of a 49 per cent shareholding
in Sangio took place in April 2007. The financial arrangements by
which Sangio
bought Warren’s business and by which Dawn and WST
acquired their 49 per cent and 51 per cent shareholdings respectively
in Sangio do not appear from the papers but it is not the
Commission’s case that these arrangements were concluded
otherwise
then at fair value.
[10]
The shareholders agreement concluded in April 2007
included among its terms the following:
(a) Dawn
and WST were obliged to contribute R5.5 million each to Sangio on
loan account to settle the cash component of the
price payable by
Sangio for the purchase of Warren’s business.
(b) WST
and Dawn were entitled to appoint three directors and two directors
respectively to Sangio’s board. At least
one director from each
camp had to be present in order for the board to be quorate.
(c) By
way of typical minority protections, Sangio was precluded from taking
certain actions unless Dawn consented in writing
or unless the board
unanimously agreed. Among the identified actions were the engagement
by Sangio in business activities in fields
other than those
associated with the company’s business as at the signature date
or any material change in the nature or
scope of its business.
(d) If
Dawn or WST wished to sell its shares in Sangio, the other
shareholder had a pre-emptive right buy them. A similar arrangement
applied where Dawn or WST underwent a change of control.
(e) On
the fourth anniversary of the effective date (or earlier if Warren
ceased to be employed by Sangio), Dawn was entitled
to buy WST’s
shares and loan account in Sangio.
(f) If,
on or before the fourth anniversary, Dawn concluded that Sangio was
not performing to its expectations, it was entitled
to require WST to
buy its shares.
(g) No
shareholder was entitled to hold out to any third party that the
relationship between the shareholders was a partnership,
joint
venture, consortium or other similar relationship.
[11]
Clauses 19 to 21 contained restraint provisions, clause
20 being the one attacked by the Commission:
(a) Clause
19 applied if Dawn exercised its option to buy WST’s shares. In
that event, WST and Warren were restrained,
for a period of three
years from the date of exercise, from being interested or engaged in
the manufacturing or distributing of
plastic piping systems and
components.
(b) Clause
20 applied as from the effective date and for as long as Dawn or its
associates held shares in Sangio. During that
period Dawn and its
subsidiaries were not entitled to manufacture HDPE piping in South
Africa and were required to procure all
their South African HDPE
piping requirements from Sangio. (Corrugated piping was excluded from
this restraint.)
[3]
(c) Clause
21 recorded that the shareholders, by virtue of their association
with Sangio, would become possessed of and have
access to Sangio’s
trade secrets and confidential information. In order to protect
Sangio’s proprietary interest in
its confidential information,
the shareholders were precluded – while they were shareholders
and thereafter – from
using or disclosing any of the
confidential information other than as might be required to comply
with the law or to enforce their
rights as shareholders in terms of
the agreement.
The issues
[12]
Section 4(1)
applies to an agreement between parties in
a ‘horizontal relationship’. The latter expression is
defined as meaning
‘a relationship between competitors’.
One of the questions debated in the Tribunal and before this court
was whether,
when the shareholders agreement was concluded, a
horizontal relationship existed between DPI and Sangio.
[13]
The other main question on which counsel focussed their
submissions was the characterisation of clause 20. In isolation,
clause
20 could be seen as dividing markets because Dawn agreed that
it and its subsidiaries (one of which, DPI, was involved in the
manufacture
of PVC pipes) would stay out of the market for
manufacturing HDPE pipes. In
American Natural
Soda Ash Corporation v Competition Commission of South Africa
2005
(6) SA 158
(SCA) the Supreme Court of Appeal said, with reference to
s 4(1)(b)
, that it was necessary to establish whether the
character of the conduct complained of coincided with the character
of the prohibited
conduct, the former being a factual enquiry, the
latter a matter of statutory interpretation. Conduct, which on its
face may seem
to contravene the prohibition, may be found not to do
so pursuant to a proper process of characterisation. The process of
characterisation
was applied by this court in
Competition
Commission v South African Breweries Ltd & others
[2014]
2 CPLR 339
(CAC) paras 25-47 with particular reference to the
distinction drawn in United States antitrust law between per se
violations and
conduct tested by the rule of reason.
[14]
Since the two competition law issues – the
existence of a horizontal relationship and the characterisation of
the impugned
conduct – involve factual matters, a preliminary
issue addressed by counsel was the approach to the evidence. In the
present
case I do not think, in the event, that much turns on this
but it is necessary to touch on it because of the Tribunal’s
approach.
The assessment of the
affidavit evidence
[15]
The Commission criticised Beukes’ answering
affidavits for its supposed lack of detail and the absence of
corroborating documents.
Some of these criticisms found favour with
the Tribunal. In my view, the Tribunal erred in rejecting parts of
Beukes’ affidavits
as unsubstantiated or improbable.
[16]
Where a case is argued before the Tribunal solely with
reference to the affidavits (other than a case for interim relief),
the Tribunal
should apply the same test as civil courts when final
relief is sought on motion, namely that the respondent’s
version is
to be accepted unless a purported dispute of fact is not
real or genuine or bona fide or unless the respondent’s version
is so far-fetched or clearly untenable that the court is justified in
rejecting it on the papers (
Plascon-Evans
Paints Ltd v Van Riebeeck Paints (Pty) Ltd
[1984] ZASCA 51
;
1984
(3) SA 623
(A) at 634E-635C). In
National
Director of Public’s v Zuma
[2009] ZASCA 1
;
2009 (2) SA
277
(SCA) Harms DP put the matter thus (para 26):
‘
Motion
proceedings, unless concerned with interim relief, are all about the
resolution of legal issues based on common cause facts.
Unless the
circumstances are special they cannot be used to resolve factual
issues because they are not designed to determine probabilities.
It
is well established under the Plascon-Evans rule that where in motion
proceedings disputes of fact arise on the affidavits,
a final order
can be granted only if the facts of erred in the applicant’s .
. . affidavits. Which have been admitted by
the respondent . . .,
together with the facts alleged by the latter, justify such order. It
may be different if the respondent’s
version consists of bald
or uncreditworthy denials, raises fictitious disputes of fact, is
probably implausible, far-fetched also
clearly untenable that the
court is justified in rejecting them merely on the papers.’
[17]
Complaint
proceedings in the Tribunal are of a hybrid nature. They must be
initiated by affidavit. Provision is made for answering
and replying
affidavits. In terms of the Tribunal’s rules,
[4]
the founding and answering affidavits must contain a ‘concise
statement’ of the grounds of the complaint or the grounds
of
opposition and ‘the material facts or points of law’ on
which the party relies. An answering affidavit must also
admit or
deny each ground and each material fact contained in the founding
affidavit. Usually the matter then goes to trial, preceded
by
directions for discovery, the filing of witness statements and so
forth. Since a trial is envisaged, the affidavits rarely contain
all
the evidence or annex all the documents available to the litigant and
it is doubtful whether a statement of the ‘material
facts’
calls for all such evidence.
[18]
In the present case the Commission could have insisted
on the usual trial, in which case the respondents would have been
required
to make discovery and file witness statements. The
Commission could have cross-examined Beukes and other witnesses. The
Commission
chose not to follow this course. Given the inquisitorial
nature of the Tribunal’s proceedings, the Tribunal – if
it
was sceptical or dissatisfied about the answering affidavits –
could have required oral evidence but it did not do so.
[19]
Beukes’
first affidavit was filed at a time when it was not known that the
case would be argued on the papers and his second
answering affidavit
was filed only after the Commission’s heads of argument were
served. Apart from the fact that an assertion
of fact cannot be
rejected in motion proceedings merely because corroborating documents
are not annexed, the affidavits in complaint
proceedings, as I have
said, cannot be expected to contain all the evidence which the party
would adduce if there was a trial.
Importantly, the Commission did
not file replying papers. Although the Tribunal’s rules provide
that an applicant who does
not file a replying affidavit is taken to
deny the allegations in the answering affidavit,
[5]
that is a matter of pleading, which would be relevant if the case
went to trial. The deemed denial does not constitute evidence.
Horizontality
[20]
In his first answering affidavit, Beukes stated that
negotiations with Warren began in early 2007. Warren was concerned
that Dawn,
by becoming a significant shareholder of Sangio, would
gain insights into his business and access the skills, know-how and
goodwill
his business had developed and that Dawn might be able to
use this to compete against Sangio. It was on his insistence that
clause
20 was included. Beukes said that from Dawn’s
perspective clause 20 was unnecessary because it had decided,
unilaterally,
to withdraw from the manufacture of HDPE pipes and
rather to invest in Sangio as its exclusive supplier. Warren
nevertheless felt
vulnerable and Dawn had no objection to the clause.
[21]
Beukes denied that Dawn/DPI and Sangio were competitors.
Dawn had decided to cease DPI’s manufacture of HDPE pipes and
had
mothballed the two HDPE extruders. Although DPI made PVI pipes,
Sangio was not in that market.
[22]
Counsel for the Commission subjected Beukes’
affidavit to close analysis on the question as to when exactly the
mothballing
decision was taken and when exactly Dawn decided to
invest in an existing HDPE business rather than buying new HDPE
equipment.
This was one of the respects in which his affidavit was
said to be vague. It is clear enough, I think, that according to
Beukes
the mothballing decision was taken before Sangio was
identified as a potential partner. There were operational reasons,
unrelated
to an investment in Sangio, which prompted the mothballing.
[23]
Nevertheless, I am willing to assume in favour of the
Commission that, immediately prior to making its investment in
Sangio, Dawn/DPI
were competitors of Warren’s business and thus
in a horizontal relationship. Both sides accepted, correctly, that
the word
‘competitor’ includes a potential competitor. A
potential competitor, of course, does not mean merely a company with
sufficient resources to enter a market. The potentiality must be
based on realistic grounds, not just a theoretical possibility.
In
the present case, Dawn was a distributor of plastic piping and was
interested in backward-integration. It had the incentive
and
resources to enter the market. It had tried to do so through the
acquisition of DPI, though the latter’s business was
focused on
PVC piping rather than HDPE piping. If Dawn had not found a suitable
business to invest in, its direct entry into the
HDPE piping market
would have been more than a mere theoretical possibility.
[24]
However, Dawn’s decision to invest in Sangio
terminated its status as a potential competitor in the HDPE piping
market, at
least for as long as it remained a shareholder of Sangio.
Having invested in Sangio and having committed to provide loan
funding
to that company, Dawn would have had no commercial incentive
to undermine Sangio’s business by competing with it. As Beukes
said, Dawn had one of two options – to enter the HDPE piping
market directly by acquiring new equipment or by investing in
an
existing HDPE piping manufacturer. Having chosen the latter, the
former ceased to be a realistic possibility. Of course, if
Dawn
ceased to be a shareholder of Sangio, the potential for direct entry
into the market would have re-emerged. That, however,
is not relevant
in the present case because clause 20 was only operative for as long
as Dawn was a shareholder in Sangio.
[25]
The Commission’s counsel submitted that the toll
manufacturing which DPI undertook for Sangio in 2012/2013, using the
mothballed
extruders, shows that DPI was and remained a potential
competitor. This was one of the points taken by the Commission in its
heads
of argument in the Tribunal with reference to the merger
documentation. In his supplementary answering affidavit, Beukes
denied
that the toll manufacturing agreement supported a conclusion
that DPI could and would have entered the market independently. In
terms of the toll manufacturing agreement, Sangio provided all the
raw material to DPI at its own cost and took ownership of all
the
HDPE piping produced by DPI. It was a risk-free arrangement for DPI,
which was simply paid a fee. From Sangio’s perspective,
it
hoped to reduce the cost of supplying HDPE piping to Western Cape
customers by producing piping in Cape Town. This was a small
market.
DPI’s production capacity, with its two old extruders, was only
about 2 per cent of Sangio’s production capacity.
In the event,
the toll manufacturing arrangement was short-lived: DPI’s
extruders were so inefficient that Sangio discontinued
the
arrangement, preferring to transport HDPE piping from KwaZulu Natal
to the Western Cape.
[26]
In the light of Beukes’ uncontested explanation,
the temporary toll manufacturing arrangement cannot support a
conclusion
that DPI remained an actual or potential competitor of
Sangio after the conclusion of the shareholders agreement.
[27]
Again, however, I am willing to assume in favour of the
Commission that Dawn/DPI remained a potential competitor despite the
taking
of the decision to invest in Sangio. I thus turn to the
question of characterisation.
Characterisation
[28]
In several merger
decisions, the Tribunal has found non-compete clauses in business
sale agreements and joint venture agreements
to be commercially
reasonable and unobjectionable.
[6]
To the extent that in these and similar cases the parties to the
agreement were potential competitors, the question arises as to
the
legal basis on which the non-compete clauses were found to be
permissible. If they were a contravention of
s 4(1)(b)(ii)
, the
Tribunal would not have the power to approve them. The answer, it
seems, must be found in the principle of characterisation.
A
restraint which is commercially reasonable in the context of the
transaction is not characterised as violating
s 4(1)(b)(ii).
[29]
Support for this approach can be
found in European Union competition jurisprudence. In
South
Africa Breweries
this
court observed that the distinction between the prohibitions in
s 4(1)(a)
and
s 4(1)(b)
of our Act broadly mirrors the
distinction in United States antitrust law (judicially developed)
between horizontal conduct to
be tested by the rule of reason and per
se violations. This distinction is also found in European Union
competition law. Article
101(1) of the Treaty on the Functioning of
the European Union (formerly article 81(3) of the European Community
Treaty) prohibits
horizontal agreements ‘which have as their
object or effect the prevention, restriction or distortion of
competition’.
An agreement which is restrictive by object
rather than by effect corresponds broadly with the conduct prohibited
by our
s 4(1)(b).
[30]
The European Commission’s
Guidelines
on the applicability of Article 101 of the Treaty on the Functioning
of the European Union to horizontal co-operation
agreements
2011/C 11/01 explain restrictions on
competition by object as follows (footnotes omitted):
‘
24. Restrictions
of competition by object are those that by their very nature have the
potential to restrict competition
within the meaning of Article
101(1). It is not necessary to examine the actual or potential
effects of an agreement on the market
once its anti-competitive
object has been established.
25. According
to the settled case-law of the Court of Justice of the European
Union, in order to assess whether an agreement
has an
anti-competitive object, regard must be had to the content of the
agreement, the objectives it seeks to attain, and the
economic and
legal context of which it forms part. In addition, although the
parties’ intention is not a necessary factor
in determining
whether an agreement has an anti-competitive object, the Commission
may nevertheless take this aspect into account
in its analysis.
Further guidance with regard to the notion of restrictions of
competition by object can be obtained in the General
Guidelines.’
[31]
The ‘General Guidelines’ mentioned in the
last sentence of the quoted para 25 are the
Guidelines
on the application of Article 81(3) of the Treaty
2004/C
101/08 issued by the European Commission on 27 April 2004. Although
they relate to the previous treaty, para 19 of the European
Commission’s guidelines on article 101 state that the 2004
General Guidelines ‘contain general guidance on the
interpretation
of Article 101’ and that the new guidelines must
be read ‘in conjunction with the General Guidelines’. The
provisions
of the General Guidelines relating to ‘ancillary
restraints’ are of particular relevance in the present case
(footnotes
omitted):
’
29.
In
Community competition law the concept of ancillary restraints covers
any alleged restriction of competition which is directly
related and
necessary to the implementation of a main non-restrictive transaction
and proportionate to it. If an agreement in its
main parts, for
instance a distribution agreement or a joint venture, does not have
as its object or effect the restriction of
competition, then
restrictions, which are directly related to and necessary for the
implementation of that transaction, also fall
outside Article 81(1).
These related restrictions are called ancillary restraints. A
restriction is directly related to the main
transaction if it is
subordinate to the implementation of that transaction and is
inseparably linked to it. The test of necessity
implies that the
restriction must be objectively necessary for the implementation of
the main transaction and be proportionate
to it. . .
30.
The application of the ancillary restraint concept must be
distinguished from the application of the defence under Article 81(3)
which relates to certain economic benefits produced by restrictive
agreements and which are balanced against the restrictive effects
of
the agreements. The application of the ancillary restraint concept
does not involve any weighing of pro-competitive and anti-competitive
effects. Such balancing is reserved for Article 81(3).
31.
The assessment of ancillary restraints is limited to determining
whether, in the specific context of the main non-restrictive
transaction or activity, a particular restriction is necessary for
the implementation of that transaction or activity and proportionate
to it. If on the basis of objective factors it can be concluded that
without the restriction the main non-restrictive transaction
would be
difficult or impossible to implement, the restriction may be regarded
as objectively necessary for its implementation
and proportionate to
it. If, for example . . . Similarly, if a joint venture is not in
itself restrictive of competition, then
restrictions that are
necessary for the functioning of the agreement are deemed to be
ancillary to the main transaction and are
therefore not caught by
Article 81(1). . ..’
[32]
The approach reflected in the General Guidelines strikes
me as sensible. The character of a non-compete clause is not to be
assessed
as if it stood on its own. It must be viewed in the context
of the transaction as a whole and the circumstances of the parties
when they concluded the agreement. The requirement that the restraint
should be objectively ‘necessary’ may, however,
be too
strict. The appropriate test, in my view, is the following:
(a) Is
the main agreement (ie disregarding the impugned restraint)
unobjectionable from a competition law perspective?
(b) If
so, is a restraint of the kind in question reasonably required for
the conclusion and implementation of the main
agreement?
(c) If
so, is the particular restraint reasonably proportionate to the
requirement served?
[33]
This test is an objective one. The fact that the parties
subjectively believed that a restraint was reasonably required does
not
suffice. Since the burden of proof in a
s 4(1)(b)
case rests
on the referring party, it is for the Commission or private
complainant to prove that these requirements are not met.
In other
words, where the characterisation of an agreement is in issue, the
burden of proof is on the Commission or complainant
to establish that
the agreement, properly characterised, falls within the prohibition.
Depending on the circumstances, there may
be an evidentiary burden on
the respondents to raise the issue of characterisation but it is
unnecessary to go into this question
because characterisation was
squarely raised.
[34]
In the present case, a member of the court asked the
Commission’s counsel whether the Commission accepted that the
shareholders
agreement, leaving aside clause 20, was unobjectionable.
Counsel confirmed this, which is in keeping with the Commission’s
pleaded case. The same applies, a fortiori, to Dawn’s
acquisition of a 49 per cent shareholding in Sangio. The Commission
has never alleged that there was anything anti-competitive about that
transaction.
[35]
We thus have a main agreement which, for present
purposes, can be taken to comprehend the sale of Warren’s
business to Sangio,
the acquisition by Dawn and WST of shareholdings
of 49 per cent and 51 per cent respectively in Sangio, and the
conclusion of a
shareholders agreement to regulate their
relationship. The question then is whether clause 20 was reasonably
required for the conclusion
and implementation of the main agreement
and proportionate to the requirement which the restraint served.
[36]
It might be argued that if, as Beukes says, the clause
was unnecessary because Dawn had no intention of competing in the
HDPE market,
the clause was not reasonably required for the
conclusion and implementation of the agreement. If that argument were
accepted,
however, it would lead to the conclusion that, having
concluded the main agreement, Dawn/DPI were neither actual nor
potential
competitors of Sangio, and for that reason the Commission’s
s 4(1)(b) case would fail.
[37]
The more sensible approach, however, is to acknowledge
that, although Dawn was unlikely to enter the HDPE pipe manufacturing
market
for as long as it remained a shareholder of Sangio, WST and
Warren could not reasonably have been expected to place their trust
solely in the good faith of their partner. They were opening up their
business to a well resourced minority shareholder which could
notionally go into competition with them. Although the circumstances
prevailing at the time the shareholders agreement was concluded
may
not have made this at all likely, those circumstances might have
changed with the passing years.
[38]
The Commission’s counsel argued
that clause 21 contained a sufficient protection against the misuse
by Dawn/DPI of Sangio’s
confidential information and know-how.
However, a party which suspects misuse of its confidential
information and know-how may
struggle to prove that this has
occurred. This is why the protection of confidential information has
always been accepted in our
law as a proprietary interest justifying
the imposition of a restraint of trade. In
Reddy
v Siemens Telecommunications (Pty) Ltd
[2006] ZASCA 135
;
2007 (2) SA 486
(SCA) Malan JA, in the context of
an employee restraint, quoted (in para 21) with approval the
following passage from the judgment
of Lord Denning MR in
The
Littlewoods Organisation Ltd v Harris
[1978] 1 All ER 1026
(CA) at 1033c-d:
‘
It
is thus established that an employer can stipulate for protection
against having his confidential information passed on to a
rival in
trade. But experience has shown that it is not satisfactory to have
simply a covenant against disclosing confidential
information. The
reason is because it is so difficult to draw the line between
information which is confidential and information
which is not; and
it is very difficult to prove a breach when the information is of
such a character that a servant can carry it
away in his head. The
difficulties are such that the only practical solution is to take a
covenant from the servant by which he
is not to go to work for a
rival in trade. Such a covenant may well be held to be reasonable if
limited to a short period.’
[7]
[39]
The relationship between Dawn and WST was not unlike the
relationship between the Argus group and the Caxton group which
featured
in
CTP Ltd & others v Argus
Holdings Ltd & another
[1995] ZASCA 32
;
1995 (4) SA 774
(A), where reciprocal restraints of indefinite duration were found to
be enforceable. In the unreported sequel to this litigation,
which
also found its way to the Appellate Division (
CTP
Ltd & others v Argus Newspapers Ltd & another
(215/95)
[1996] ZASCA 145
(29
November 1996)), Marais JA explained more fully why the restraint
remained enforceable after the termination of the joint shareholding
(in what follows, one could read, for the Argus and Caxton groups,
the Dawn group and Sangio/WST/Warren respectively):
‘
Their
[the Caxton group’s controllers’] concern is easily
understandable. By reason of Argus Holdings' acquisition of
substantial equity in
Afmed
(Pty) Ltd,
the parent company of Caxton Ltd, they were thenceforth both to be
participants in the failure or success of Caxton Ltd.
The 1980
agreement made provision for there to be directors from the Caxton
group on the Argus group's boards of directors, and
for directors
from the Argus group to be on the Caxton group's boards of directors.
The presence of such representative directors
was stated to be
essential to the existence of a quorum. It would follow that the
Caxton group's confidential information and know-how
would have to be
shared with the Argus group. A competing enterprise launched by the
Argus group, prompted by an ever growing confidence
in its ability to
stand on its own feet in the Caxton group's field of activity, could
damage the Caxton group. . .
Once
each was admitted to the fold of the other, the risk of subsequent
harmful competition would increase as each learnt more about
the
operations of the other, and the longer the association between them
persisted, the more would be learnt. If the Argus group
were to seek
to compete with Caxton Limited while the association between the
groups persisted, it could no doubt harm its own
interest as a
participant in the fortunes of Caxton Limited, but it was to be a
minority shareholder and it might regard the harm
it might suffer as
a price worth paying for the profits it could make while so
competing. If it sought to so compete after the
association ceased,
the potential damage to the Caxton group would be no less and, the
Argus group's interest in Caxton Limited
having ended, the Argus
group would cause no harm to itself by so competing.’
[40]
Mention may also be made of the European Commission’s
decision in the case of
Areva SA and Siemens
AG
Case Comp/39376 (18 June 2012). Areva and
Siemens established a joint venture through a company in which
Siemens held 34 per cent
and Areva 66 per cent. Because they pooled
resources in a new company, the joint venture was notified to the
Commission as a concentration
and was duly approved in December 2000.
In January 2009 Siemens terminated the joint venture by requiring
Areva to buy its shares.
The contentious issue was whether a
non-compete clause, which was to operate during and after the
termination of the joint venture,
was enforceable when Siemens exited
the joint venture. With reference to the ancillary nature of the
non-complete clause, the Commission
said the following regarding the
clause’s operation during the currency of the joint venture
(para 45):
‘
Non-compete
obligations applicable during the lifetime of the joint venture aim
at protecting the individual parent companies' investments,
which are
"locked in" the joint venture during its lifetime. If the
parent companies started to compete against their
own joint venture,
this could effectively eliminate the existence of the joint venture
as such. Only one parent company starting
to compete against the own
joint venture would increase that parent company's share of profits
to the detriment of the other joint
venture partner. With the
acquisition of sole control over the joint venture by one of its
parents, the value of such investments
is, however, no longer locked
into the joint venture but "re-distributed" between the
parent companies. Therefore, such
protection then becomes obsolete.’
The
Commission went on to hold that a limited restraint for a period of
three years was reasonably ancillary to Areva’s acquisition
of
sole control of the joint venture company in 2009.
[41]
The Tribunal stated that the shareholders agreement ‘put
paid’ to the argument that clause 20 was a restraint ‘in
the ordinary course of commercial transactions’. This was said
to be so because clause 19, the restraint applicable to WST
and
Warren if Dawn were to acquire sole control of Sangio, was an
‘ordinary restraint’ applicable for a limited period
of
time in a specified territory. This is a non sequitur. Clause 19 was
indeed a commercially reasonable restraint. In the circumstances
contemplated by that clause, WST would be selling its 51 per cent
shareholding to Dawn. In purchasing sole control of Sangio, Dawn
would be reasonably entitled to protect the goodwill of the purchased
business by a limited restraint against the seller and by
the
seller’s guiding spirit, Warren. Furthermore, Warren, as the
managing director of Sangio, was an employee against whom
a limited
restraint was justified. The fact that a restraint was reasonably
justified in those circumstances does not mean that
no other
restraints were reasonably required for the transaction. As I have
said, the protection of confidential information and
know-how is well
recognised as a proprietary interest worthy of protection by a
restraint of trade. That was the legitimate interest
which clause 20
protected.
[42]
I am satisfied, in the present case, that a non-compete
clause was reasonably required for the conclusion and implementation
of
the shareholders agreement. Dawn, through its nominees to Sangio’s
board, would have access to Sangio’s confidential
information
and know-how. Dawn could thereby acquire knowledge and insight into
the successful conduct of the business of manufacturing
HDPE piping,
a business in which it had no experience and expertise at the time
the transaction was concluded. The uncontested
evidence is that
Warren insisted on such a clause, and his conduct in so doing was
reasonable, given his legitimate concerns about
the potential abuse
of Sangio’s confidential information and know-how.
[43]
As to whether the restraint was proportionate to the
legitimate interests served thereby, the restraint was only to
operate for
as long as Dawn was a shareholder in Sangio. There can be
no legitimate objection to the restraint in regard to its duration.
Indeed,
a restraint of limited duration after Dawn ceased to be a
shareholder might also have been acceptable. As to geographic extent,
Sangio supplied customers throughout South Africa, although its focus
was KwaZulu-Natal and Gauteng. A countrywide restraint was
not
unreasonable. WST and Warren themselves accepted a countrywide
restraint in the circumstances contemplated in clause 19.
[44]
My reasoning thus far has focused on the justification
for the restraint in clause 20 as a mechanism for protecting the
confidential
information and know-how mentioned in clause 21. The
appellants’ counsel submitted that the restraint was also
justified
on the more fundamental basis that partners are under a
fiduciary duty not to compete with the partnership business and that
this
applies also where the joint venture is conducted through a
company, as was the case in
Bellairs v Hodnett
1978 (1) SA 1109
(A). It was argued that
Sangio was effectively a vehicle for a joint venture between Dawn and
WST.
[45]
The Commission’s counsel riposted by referring to
clause 9 of the shareholders agreement, which states that no
shareholder
was entitled to represent or hold out to any third party
that the relationship between the shareholders was a partnership or
joint
venture or other similar relationship. Clause 9 is, in my view,
a boilerplate clause, typically inserted into an agreement to ensure
that the one party does not attempt to bind the other’s credit.
I do not think it can affect the substance of the relationship
between the parties in the present case, which is to be inferred from
the agreement as a whole. The fact that the shareholders
were not to
hold out to the world that they were partners or joint venturers does
not mean that they did not have fiduciary duties
to each other.
[46]
However, it is unnecessary to express a definite opinion
on this additional ground of justification advanced by the
appellants.
As a fact, clause 20 – which was not a reciprocal
restraint but one applicable only to Dawn – found its way into
the
shareholders agreement because of Warren’s concern that
Dawn, by being exposed to his business’ confidential
information
and know-how, could be unfairly advantaged if in due
course it chose to enter the market in competition with Sangio. That
is a
sufficient justification for the existence and terms of the
restraint.
Conclusion
[47]
The Tribunal considered that clause 20 prima facie
contravened
s 4(1)(b)(ii)
and that the respondents had failed
‘convincingly’ to rebut the prima facie case. Apart from
the supposed absence of
corroborating documents, the Tribunal held
against the respondents that Beukes had ‘elected not to
testify’. This was
a misdirection. The litigants agreed to
argue the case on the papers and the Tribunal chose not to override
that arrangement. This
said, I do not think that clause 20, read in
the context of the agreement as a whole, established a prima facie
case of a contravention
of
s 4(1)(b)(ii).
At any rate, having
regard to the agreement as a whole and the uncontested evidence
contained in Beukes’ affidavit, the Commission
did not
discharge the onus of proving that clause 20, properly characterised,
amounted to a contravention of
s 4(1)(b)(ii).
Since the
Commission did not advance an alternative case based on
s 4(1)(a)
,
the Tribunal should have dismissed the complaint.
[48]
The following order is made:
(a) The
appeal succeeds with costs, including those attendant on the
employment of two counsel.
(b) The
decision of the Tribunal is set aside and replaced with an order in
the following terms:
(i) The
complaint is dismissed.
(ii) There
is no order as to costs.
______________________
O L Rogers
Judge of Appeal
APPEARANCES
For
Appellants
W Trengove SC (with
him G Marriott)
Instructed by
Nortons Inc, Sandton
For
Respondent
D Mpofu SC (with him
TL Marolen and I
Kentridge)
Instructed by
Ndzabandzaba
Attorneys Inc, Bryanston
[1]
The named party was Distribution and Warehousing Network Ltd (DWN)
or its nominee. DWN is Dawn's holding company. Since the parties
treated Dawn as the contracting shareholder, it was presumably
nominated by DWN.
[2]
The business was conducted by an entity called
Warplas
CC.
[3]
The clause reads
thus:
’
20.
From the effective date a
nd
for as long as Dawn or its associates hold/s shares in the company,
Dawn will procure that –
20.1
neither it nor any of its subsidiaries will manufacture HDPE piping,
other than corrugated HDPE piping,
in the Republic
of South Africa;
20.2
Dawn and its subsidiaries will procure all their South African
HDPE piping, other than corrugated HDPE piping, requirements
from
the company,
provided
that the company is able to fulfil the said requirements timeously
and in full at competitive prices.’
[4]
Rules 15
and
16
.
[5]
Rule 17.
[6]
In the context of sale agreements, see for example
Replication
Technology Group v Gallo Africa
[2007]
ZACT 99
paras 18-25;
Swanvest
120 (Pty) Ltd v RMB-SI
Investments (Pty) Ltd
[2017]
ZACT 36
paras 23-24. In the context of joint venture agreements, see
Compagnie Gervais Danone
Clover Beverages and Clover SA (Pty) Ltd, Danone-Clover (Pty) Ltd
[2003] ZACT 13
para 8;
Heinz Foods South Africa
(Pty) Ltd and Today Frozen Foods
[2003]
ZACT 53
paras 13-15.
[7]
See also
BHT
Water Treatment (Pty) Ltd v Leslie & another
1993
(1) SA 47
(W);
International
Executive Communications Ltd t/a Institute for International
Research v
Turnley
&
another
1996
(3) SA 1043
(W) at 1055C-1057D.