Astral Foods Limited v Competition Commission (39/CAC/Feb04) [2004] ZACAC 3; [2004] 1 CPLR 1 (CAC) (25 June 2004)

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Astral Foods Limited v Competition Commission (39/CAC/Feb04) [2004] ZACAC 3; [2004] 1 CPLR 1 (CAC) (25 June 2004)

IN THE COMPETITION
APPEAL COURT
CAC Case No. 39/CAC/FEB04
[Tribunal Case No. :
69/AM/Dec/01]
In the matter between:
ASTRAL FOODS
LIMITED
Applicant/Appellant
and
THE COMPETITION
COMMISSION
Respondent
JUDGMENT
Malan AJA
In this appeal the
Appellant submits that the order of the Tribunal falls to be set
aside because the Tribunal mistakenly failed
to reflect its true
intention in its written judgment and is unable itself to correct
the error. The Appellant therefore appeals
to this Court to have
the order that the Tribunal intended to give substituted for the
order that the Tribunal inadvertently handed
down.
When the relevant
Tribunal order (which related to an intermediate merger, and will
thus be referred to as “the Merger Order”)
was handed down, both
the Appellant and the Commission were in no doubt as to what it
meant. The Appellant implemented the Merger
Order on that basis.
The Commission, which is abiding this appeal, appeared to have had a
similar understanding. It was when
two customers of the Appellant
contended for a different interpretation some months later that the
Appellant felt obliged to obtain
some clarification from the
competition authorities that its own understanding was correct.
After initially
approaching the Commission (which was not prepared to become
involved), the Appellant brought an application to
the Tribunal.
The Tribunal confirmed that the Appellant’s reading of the Merger
Order was in accordance with what it had intended
and that the
customers’ contentions were wrong. Those customers – who had
been permitted to intervene in the variation/clarification
application brought by the Appellant before the Tribunal (“the
Variation Application”) appealed that determination of the

Tribunal to this Court. This Court then held that the Merger Order
clearly and unambiguously meant what the two customers in question
claimed, and that it was accordingly beyond the power of the
Tribunal to have declared that it should be read in any other way
(see the judgment of this court in
Mike’s Chicken (Pty) Ltd,
Daybreak farms (Pty) Ltd and Midway Chix (Pty) Ltd v Astral Foods
Limited and The Competition Commission
CAC 32/cac/sept/03;
Tribunal Case 69/am/dec01 of 28 January 2004) where the history of
this matter is set out).
After considering its
position, in view of the decision of this Court, the Appellant
decided to appeal. It did so within 20 business
days of the date of
this Court’s order. The Merger Order was made by the Tribunal
under Tribunal Case No. 69/AM/Dec01 in the
intermediate merger
between the Appellant (also referred to as “
Astral
”) and
Natchix. The Merger Order was handed down on 2 April 2002 and the
judgment of this court on 28 January 2004.
At the time of the
merger, the primary business of Natchix (the target firm) was the
sale of day-old chicks (hatched in its hatcheries)
to the broiler
and egg-producing industry. It also controlled a company operating
in the animal feed market.
The Merger Order
approved the merger between Astral and Natchix subject to a number
of conditions, some relating to the broiler
industry and others to
the animal feed industry. Only the conditions pertaining to the
former are relevant to this appeal, and
were considered by the
Tribunal in the Variation Application.
Under the heading,
“Conditions in relation to the Broiler Industry”, there are
definitions of “Astral” and “Independent
customer”, and
thereafter three clauses, the first of which has four parts.
Clause 1 provides that:
“
Astral must supply any
independent customer on the following basis:
Subject to
sub-paragraphs 1.3 and 1.4 below, in terms of a standard form
contract approved by the Competition Commission.
In the case of any
disease or any other form of force majeure, Astral must reduce its
supply to all customers, including entities
within the Astral
group, pro rata to their ordinary volumes purchased.
In the event that an
independent customer does not wish to enter into the standard
contract with Astral, Astral must supply that
customer in
accordance with the principles set out in sub-paragraph 1.4 below,
except for those that relate to notice periods.
Astral may not
discriminate in its conditions of supply between entities in its
own group and its independent customers for equivalent
transactions. In particular it may not discriminate between them
in relation to price, discounts or rebates offered. The

determination of prices remains in the discretion of Astral.
Astral may not impose any condition on an independent customer that
requires them to purchase exclusively from Astral. The parties to
the agreement must each be required to give notice to the
other if
they do not wish to renew the contract. The length of this period
must be the same for both parties and must be reasonable
having
regard to the nature of the industry. The contracts must be of a
five-year duration.”
Clause 2 stipulates
that the “conditions set out in clause 1 above shall apply for
five years from [the] date of this order”.
The
conditions relating to the broiler industry did not specifically
refer to existing long-term contracts between independent customers
and Natchix; nor were such contracts mentioned elsewhere in the
Merger Order. The Tribunal itself commented on this in its decision
and reasons in the Variation Application, handed down on 18 July
2003 (“the Variation Application Decision and Reasons”).
In the
first sentence of paragraph 20 thereof, the Tribunal noted: “The
order does not specifically address long-term supply
agreements that
existed before the merger”. At the beginning of paragraph 23
thereof, the Tribunal recorded that:
“
The
order does not shed any light on the status of long-term supply
agreements post the merger, nor is the language of the order clear
on
what the Tribunal’s intentions were” (
Bundle
I: 41, 43).
As of late 2001/early
2002 six independent customers were party to long-term supply
contracts. One of them was Daybreak Farms (Pty)
Limited
(“Daybreak”), which was obliged in terms of its contract to
purchase a minimum of 220 000 chicks per week, subject
to a notice
of termination being given not less than 18 months before the
anniversary date of the contract. Another customer that
had
concluded a long-term supply contract was Mike’s Chicken (Pty)
Limited (“Mike’s”). Mike’s was obliged in terms of
its
contract to purchase a minimum of 54 000 chicks per week, subject to
termination of the agreement on 6 months written notice.
Daybreak
and Mike’s were the two customers who had contested the
Appellant’s interpretation of the Merger Order and had intervened
in the Variation Application.
The Appellant and its
legal advisors were, as of 2 April 2002, when the Merger Order was
handed down, of the view that such conditions
in no way affected,
let alone invalidated, supply agreements concluded between Natchix
and independent customers prior to the date
of the approval of the
merger. The Merger Order was implemented almost immediately, on 9
April 2002.
The Tribunal delivered
reasons for the Merger Order on 16 April 2002. The Tribunal did not
expressly refer to the long-term supply
agreements in those reasons.
What appears from them is a concern on the part of the Tribunal
that, after the merger, Astral could
potentially use its dominant
position as sole supplier of Ross Parent Stock to foreclose markets
downstream to those independent
entities that reared parent broiler
chickens. The broiler conditions imposed in the Merger Order where
therefore designed to prevent
downstream foreclosure after the
merger.
A dispute developed
between the Appellant and Daybreak and Mike’s as to the validity
of the long-term supply contracts. One of
contentions was that the
conditions relating to the broiler industry imposed by the Merger
Order had the effect of terminating,
or voiding, all pre-merger
supply agreements entered into between Natchix and independent
customers. When resolution of the dispute
was unsuccessful, the
Appellant brought an urgent application, the Variation Application,
to the Tribunal in November 2002. This
application was brought in
terms of s 66(1)(b) and/or s 27(1)(d) of the Competition Act, 89 of
1998 (“the Act”), for variation,
alternatively clarification, of
the Merger Order.
The finalisation of the
Variation Application was delayed by an intervention application
brought by Mike’s, Daybreak and Midway
Chicks (Pty) Limited
(“Midway”) (a hatchery operation established by the shareholders
of Mike’s and Daybreak), as well as
by a counter-application
brought by them to clarify, alternatively vary, the Merger Order in
a way that supported their interpretation.
The Tribunal ruled in
the intervention application on 20 February 2003, whereafter a date
was set for a hearing on the merits
of the Variation Application.
The Tribunal handed down
a written decision in the Variation Application on 18 July 2003. In
that determination (referred to as
the Variation Application
Decision and Reasons), the Tribunal confirmed the Appellant’s
interpretation of the Merger Order, insofar
as the validity of the
long-term supply contracts was concerned.
The
Tribunal’s order in the Variation Application was as follows:
“
49. In
view of the fact that the reference to the five years period in
paragraph 1.4 is confusing we are persuaded that the Order
is
ambiguous and that the ambiguity will be cured by its deletion. In
order to make the status of contracts that were in existence
at the
time of the Order clear, we do not need to amend the Order, but it
will suffice to add two declaratory orders as well, given
the dispute
between the parties.
We
make the following order:
Varying
the Order of the Tribunal dated 2 April 2002, (the “Order”) by
deleting in paragraph 1.4 the words:
“The contracts must be of a five year duration.”
2) Declaring that the
validity of any contract that was in existence with an independent
customer, at the time of the Order, remains
unaffected by the Order.
3) Declaring that to the
extent that any provision in any existing contract with an
independent customer, is inconsistent with the
principles in
paragraph 1.4 of the Order, as amended by this order, that such
inconsistency does not invalidate those terms of the
contract, but
will if enforced by Astral Foods Limited and/or National Chick
Limited constitute a breach of the conditions attached
to the
approval of the merger.”
The reasoning in support
of this conclusion, in the Variation Application Decision and
Reasons, was broadly as set out in the following
paragraphs.
The Tribunal recognized
that it had the power to vary an order in the circumstances set out
in s 66(1) of the Act, but that its
powers in this regard are
circumscribed. The Tribunal stated, in this regard, at paragraph
11:
“
It
is a limited inquiry and the basic rule that the court follows is to
ascertain the court’s intention, primarily, from the language
of
the order. If the meaning of the order is clear and unambiguous, no
extrinsic fact or evidence is admissible to contradict, vary,
qualify
or supplement it. It is decisive and cannot be restricted or extended
by anything else in the judgement. But, if any uncertainty
in its
meaning emerges, the extrinsic circumstances surrounding or leading
up to the court’s granting of the order may be investigated
and
taken into account in order to clarify it. In doing so the order and
the court’s reasons for giving it must be read as a whole
in order
to ascertain its intention. Only if it still leaves the matter
unclear and ambiguous would the court go to the record to
cure the
ambiguity” (
Bundle
I : 40).
The Tribunal then
considered whether the words “independent customers” were
ambiguous and whether a variation of the 2003 Tribunal
Order was
needed in that regard. It concluded that this phrase was not
ambiguous. It applied to all customers of Natchix that
were not
controlled by the Appellant, whether they were party to a long-term
agreement or not (Bundle I: 40-41).
The Tribunal next
addressed the effect of the conditional approval of the intermediate
merger on existing long-term supply contracts.
“
23. The order does not
shed any light on the status of long-term supply agreements post the
merger, nor is the language of the order
clear on what the Tribunal’s
intentions were. To find clarity we will consider the Tribunal’s
reasons. If no clear answer can
be found, we’ll step back further
in history, to search the record of the hearing.
The Tribunal concluded
in its reasons that the merger raised competition concerns and that
it needed to impose conditions specifically
in order to lower the
risk of foreclosure, which was very real in the short term because
of structural problems in the upstream
market.
The
concern of those participants at the hearing who represented the
industry was not that they would be held to an oppressive contract
by the merged firm but that, on the contrary, the merged firm with
its own broiler outlets would self deal and not supply them
.
It was told that Cobb, Ross’ main rival in the upstream market
needed at least 5 years to fully enter the South African market.
However,
nowhere in its reasons does it specifically mention or address the
status of existing long-term contracts post the merger
or is it
possible to derive what the Tribunal had in mind. There was simply
no necessity to do this
.
Existing customers
who were supplied in terms of valid contracts were, per definition,
not foreclosed. In the event that their
contract expired or was
terminated and they were then faced with the threat of foreclosure,
they could then have availed themselves,
in the same way that any
other ad hoc customer would avail itself, of the protection extended
by the conditions imposed by the
Tribunal on Astral. But until they
were denied supply by Astral the existing contract holders had no
need of the protection of
the conditions – they were protected by
the terms of their existing supply contracts. At no stage during the
merger proceedings
was it ever suggested that the existing contracts
were anti-competitive and should thus be vitiated by the insertion
of an appropriate
condition. It was rather suggested that the
structural changes wrought by the merger would permit Astral to
favour downstream
customers within its own stable over ‘independent’
customers, that is customers outside of the Astral stable. This was
the
purpose of the conditions that were imposed
.
In the record of the
merger proceedings we find a passage where the presiding member
briefly referred to the status of existing
customers at page 65 of
the transcript of 20 March 2002:
‘
It’s
just to say that our reach does not extend beyond ensuring that you
have a supplier of day-old chicks and that the transaction
does not
foreclose that. … I presume that they
[referring
to Astral]
have arrangements with existing
customers and it would simply be some sort of alteration in that
arrangement to ensure that those
customers did not have any reason to
fear that their supply would be foreclosed
.’
From the
above it is clear that the Tribunal did not think that it had the
power to render void any pre-merger supply contracts,
nor did it
intend for its conditions to have such far-reaching consequences
because it refers to its “reach” as not extending
beyond the
prevention of foreclosure.
It merely
envisaged that those clauses in existing contracts that did not
comply with the Tribunal’s intention to prevent foreclosure
should
not be enforced or exercised in a manner contrary to the principles
set out in paragraph 1.4
.” [emphasis
added] (Bundle I : 43-44 par 23-27).
The Tribunal thereafter
turned its attention to the “juristic nature of the condition
attached to a merger”. Under this hea,
the Tribunal considered,
first, whether the Tribunal has the power to require, as a condition
of approval of a merger, that the
merged firm void all or part of an
existing agreement. Secondly, on the assumption that it has such a
power, the Tribunal addressed
the question of whether the imposition
of the condition would mean that the contract is
ipso facto
voided
if the merger is implemented. For present purposes, it is only
necessary to quote the Tribunal’s conclusion on these points:
“
In
the present case there was indeed no express requirement in the
order that the merged firm cancel its existing contracts. But
to the
extent that there may be an implied one,
which
we do not concede
, it still would
not have invalidated the existing contracts for the reasons we have
outlined” [emphasis added] (Bundle I: 44
par 28, 46 par 40).
The Tribunal
subsequently addressed two issues that were irrelevant to the
previous appeal to this Court and are also not at issue
in this
appeal: (i) the duration of the long-term supply agreements
specified in clause 1.4 of the broiler industry conditions,
and (ii)
whether the Merger Order forbade any contract to provide for minimum
or fixed quantities of supply. The Tribunal concluded:
“
The
Tribunal order is clear and no ambiguity exists with regard to
minimum or fixed quantities of supply. We find no reference to
minimum quantity or fixed quantity of supply in the Tribunal order.
In fact the intervenors acknowledge this in their answering affidavit
by saying that it is ‘implicit’ in the conditions that Astral may
not include in the new contract a clause which has the effect
of
requiring customers to purchase minimum or fixed quantities”
(
Bundle I: 47 par 47).
Mike’s, Daybreak and
Midway brought an appeal against the Tribunal’s declarator in the
Variation Application. The appeal lodged
by Mike’s, Daybreak and
Midway was argued in December 2003. Judgment of the Court was given
on 28 January 2004. This Court
(
per
Malan AJA, Selikowitz JA
and Mailula AJA concurring) upheld the appeal, and found that the
Merger Order could not bear the meaning
that the Tribunal had
intended to give to it, and thus, also, the meaning which the
Appellant had ascribed to it.
This
Court did, however, confirm that the arguments by Mike’s and
Daybreak to the effect that their supply contracts were
automatically
voided on 2 April 2002, the date of the Merger Order,
were incorrect. This Court affirmed that those contracts were still
in existence
and with full force and effect. It stated the
following in this regard (at paragraph 15 of its judgment):
“
As
the Tribunal has recognized in its
Reasons
and Decisions
, it would have been beyond the
power of the Tribunal to “void” or cancel the existing long-term
contracts of the Appellants (§
29ff at Record 419).
Section 16(2)
of the
Competition Act gives
the Tribunal the power to (a) approve a
merger, (b) approve a merger “subject to any conditions”, or (c)
prohibit implementation
of a merger. There is no restriction in the
Act on the kind of conditions that may be imposed, but they must be
conditions, to which
the merger by law is subject. The Tribunal
could not have interfered with an existing and on-going contractual
relationship between
Natchix and its customers.
…
But the Tribunal could
not, and did not, declare, when approving the merger, that all such
long-term contracts were “voided” (see
s 65(1))” (Bundle II,
Part 3 : 662-663).
The effect of this
Court’s judgment on 28 January 2004 judgment was, consequently,
not that the long-term supply agreements with
Daybreak and Mike’s
were at an end. It did, however, mean that in seeking to enforce
those agreements against Daybreak and Mike’s,
contrary to their
wishes, the Appellant would be acting in breach of the merger
conditions. As a result the Appellant would potentially
be liable
for any of the sanctions that the Act provides for in the event of
an acquiring party not honouring the conditions under
which its
merger was approved. (See s 16(3) of the Act, read with s 18(1)(c)
thereof, and s 59 of the Act.)
As a result of the
judgment of this Court, the Appellant on 25 February 2004, within 20
business days of the date of the Appeal
Judgment, lodged a notice of
appeal. This course open to the Appellant was referred to by this
Court (at paragraph 15 of the judgment)
stating that “[i]f Natchix
finds that it cannot comply with the conditions then it has the
option of not continuing with the
merger or of seeking to appeal
against the Tribunal’s decision on the grounds that the conditions
are unreasonable”..
Section
17(1) of the Act regulates the procedure applicable to appeals in
merger proceedings. It provides that:
“
Within 20 business
days after notice of a decision by the Competition Tribunal in terms
of section 16, an appeal from that decision
may be made to the
Competition Appeal Court, subject to its rules, by –
(a) any party to the
merger; or
(b) a person who, in
terms of section 13A(2), is required to be given notice of the
merger, provided that the person had been a participant
in the
proceedings of the Competition Tribunal.”
Other applicable
provisions are Rules 16(1)(a) and 32 of the Rules for the Conduct of
Proceedings in the Competition Appeal Court
(“the CAC Rules”).
Rule
16(1) reads as follows:
“
A person who has a
right of appeal to the Court may file a Notice of Appeal, which must
satisfy the requirements of sub-rule (3),
-
(a) within the time, if
any, prescribed by the Act or the Competition Tribunal Rules;
(b) if no time is
prescribed by the Act or the Competition Tribunal Rules, within 15
business days after the date of the decision
or order that is the
subject of the appeal.”
Rule
32 states that:
“
The Court may, for
sufficient cause shown,
(a) excuse the parties
from compliance with any of these rules; or
(b) condone any technical
irregularity arising in any of its proceedings.”
The reasons for the
delay that have been set out in the condonation application are
persuasive. It could not be suggested that
the Appellant was
flagrantly or grossly acting in breach of the Act or the CAC Rules.
The reason for the late filing of the appeal
has also been fully
explained. In short, the need for condonation has arisen because
none of the entities involved in the merger
interpreted the Merger
Order in the way that this Court held that it should be. It was
only when it became apparent that the Tribunal
had, in its Merger
Order, erroneously failed to reflect its true intention, and the
common understanding of all the participants
in the hearing, that
the need to appeal the Merger Order became apparent to the
Appellant.
The time period for
lodging an appeal to this Court in merger proceedings is, in the
first instance, found in the Act rather than
the CAC Rules. Rule
32(b), however, seems to provide for an eventuality such as this (cf
The Competition Commission and Distillers Corporation (SA)
Limited and Another
(Case No. 31/CAC/Sept 03)11 December 2003)
at paragraphs [2] and [4] although the matter was not decided).
Since this Court is a
Court with a status similar to that of a High
Court (s 36(1) of the Act) it has the power to condone
non-compliance with time limits
prescribed by statute (
Toyota
South Africa Motors (Pty) Ltd v Commissioner, South African Revenue
2002 (4) SA 281
(SCA) at paragraph [10] at 286). No purpose
would be served by fixing an inflexible time period within which to
lodge appeals
in merger cases giving this Court no power to condone
any non-compliance therewith. There is no reason why there must be
rigid
adherence to the 20 business day period referred to in s 17(1)
of the Act. It is important that the acquiring and target firms
obtain certainty as to whether they can merge, and, if so, subject
to what conditions. But this interest can be accommodated in
the
exercise of this Court’s discretion when considering whether to
condone any delay.
An important factor in
this regard is that, were s 17(1) of the Act to be interpreted as
denying a party to a merger the right to
appeal the merger decision
of the Tribunal after 20 business days, no matter what the
circumstances, this would result in that party
being denied the right
of access to a court of law. The undesirability of such a result was
recognised by the Appellate Division
in 1959 in
Phillips
(
supra
).
See
Price Waterhouse Coopers Inc et al v National Potato
Co-Operative Ltd
(Case 448/02 (SCA) 1 June 2004) at paragraph 43)
and cf
Mohlomi v Minister of Defence
[1996] ZACC 20
;
1997 (1) SA 124
(CC);
Moise v Greater Germiston Transitional Local Council: Minister of
Justice and Constitutional Development Intervening
(4) SA 491
(CC).)
There are also textual
indications that the time stipulated for the lodging of appeals in s
17(1) of the Act is not intended to
be peremptory. The word “may”
is used, rather than “must” or “shall”. Section 17(1) is
also phrased positively, rather
than being cast in negative form
(for example, as an injunction that an appeal must not be lodged
later than twenty days). Both
of these are indications that there
is no mandatory, or peremptory, requirement, and that the provision
is instead directory with
the result that this Court is permitted to
condone non-compliance.
In the circumstances,
the Appellants’ late lodging of its notice of appeal is condoned.
It is clear from what
has been set out above that the Tribunal erred in the formulation of
the Merger Order. More particularly,
it erred by requiring Astral
to offer
all
independent customers, even those party to
long-term supply contracts with 6 or 18 month lead-in times and
termination periods,
new contracts immediately after the
implementation of the merger. The Merger Order should be set aside
because the Tribunal misstated
its intention because the order as
formulated was unreasonable and excessive; went beyond the
competition concerns (relating to
foreclosure) that the Tribunal
sought to address; was not justified by the evidence before the
Tribunal in the intermediate merger
proceedings; was illogical in
the light of the commercial realities explained to the Tribunal in
the merger proceedings; could
potentially contribute to the
occurrence of the very prejudicial effects about which the Tribunal
and the Commission were concerned
(by removing the security that
various independent customers enjoyed as a result of their long-term
supply contracts); had further
potentially deleterious consequences
for the independent customers who were party to such contracts, in
that they could be deprived
of special concessions or benefits that
they had negotiated (relating for example to payment conditions or
placement of orders);
and was commercially impractical and
untenable, in that it made it extremely difficult, if not
impossible, for Astral to value
the merged entity (Natchix), because
there was no certainty about whether the customers who were party to
long-term supply contracts,
and who purchased over fifty per cent of
the day-old chicks sold by Natchix in South Africa, would take the
opportunity to resile
from their contracts without any regard to the
notice periods required for termination of such contracts, the
length of time it
would take for Natchix to reduce the numbers of
parent stock to reflect the decreased orders, or the array of
contracts with other
suppliers that Natchix would be forced to
break. I need not deal with all these grounds of appeal in this
judgment.
It should be noted, in
the first instance, that at no stage in the proceedings did any of
the entities participating therein or
submitting evidence thereto
argue that there was a need not only to prevent downstream
foreclosure by Astral, but also to facilitate
the opportunity of
upstream / backward integration by independent customers who at that
time sourced their day-old chicks from
Natchix. There was in fact
no suggestion in the merger proceedings that such upstream or
backward integration by existing customers
of Natchix was required,
or that their supply of day-old chicks needed to be protected other
than through Astral being obliged
to guarantee supplies of day-old
chicks to its independent customers for a period of 5 years after
the Merger Order. As a result,
the Merger Order was not even
intended to assist Natchix’s customers indirectly to integrate
backwards (or upstream) after that
order. This is confirmed by the
fact that, as the Tribunal stated in the Variation Application
Decision and Reasons, the Merger
Order did not preclude Astral from
stipulating in its contracts a minimum, or a fixed, quantity of
day-old chicks that various
independent customers were required to
purchase. It is significant in this regard that Mike’s, Daybreak
and Midway unsuccessfully
argued before the Tribunal in the
Variation Application that the Merger Order should be construed as
forbidding Astral to stipulate
minimum or fixed quantities of supply
because that would retard the backward integration of its customers.
Moreover, not only was
there no evidence upon which the Tribunal could have relied in order
to craft an order assisting upstream
or backward integration of
Natchix’s customers, but any such order would have gone beyond
imposing behavioural remedies, and
resulted in a grossly
disproportionate remedy.
Without the order given
by the Tribunal, Astral would not be blocking the backward
integration of the Mike’s Chicken and Daybreak
businesses. Astral
would be permitted to insist that Mike’s Chicken and Daybreak
honour their contractual obligations. Astral
could thus not have
prevented Mike’s from giving 6-month’s notice in April 2002, and
then terminating its contract, at the
expiry of that period, in
October of that year. Daybreak could have given notice in August
2002, resulting in its contract coming
to an end 18 months later in
February 2004.
The Tribunal and the
Commission were concerned with preventing downstream foreclosure by
Astral in the event of the merger being
approved. For this reason,
Astral was required to conclude 5-year contracts, which complied
with certain stipulated conditions,
with each of their independent
customers. The Tribunal has confirmed this in its Variation
Application Decision and Reasons.
The concerns expressed
by the Commission and the Tribunal did not necessitate the
termination of existing long-term supply contracts
with independent
customers. Quite the contrary, as the Tribunal confirmed in the
Variation Application Decision and Reasons, the
Tribunal was
desirous of ensuring that long-term contracts with existing
independent
ad hoc
customers were put into place. Where such
contracts were already in existence, it would have served no purpose
to permit either
party to end them; they merely had to be adapted,
to the extent necessary, to comply with the standard conditions
approved by the
Commission.
Furthermore, the
termination of all Natchix’s long-term supply contracts on 2 April
2002 could well have been prejudicial to them.
If all such
contracts were to be brought to an end, Astral / Natchix would have
been entitled to have stopped supplying the independent
customers
with day-old chicks, or alternatively to have decreased their
deliveries to whatever amount was most convenient to Natchix.
Any
independent customers that had negotiated special concessions or
benefits (relating for example to payment or placement of
orders)
could also henceforth have been deprived of those advantages by
Natchix, and have been forced to settle for the terms and
conditions
in the standard form contract, as well as whatever quantities of
chicks Astral / Natchix chose to sell to them. What
is more, the
independent customers, who were not party to the merger proceedings,
would have had no notice or warning of the possible
impending
cancellation of their contracts, and thus the uncertainty into which
their businesses could be plunged. This would have
been unfair and
improper.
The termination of the
existing long-term contracts with independent customers after 2
April 2002 would also have had significant
financial and other
consequences for Astral and Natchix. Three examples were submitted
in argument:
First, the existing
customer base of Natchix was an important asset of the company, and
would clearly have been taken into account
by Astral when assessing
its value. A crucial component of this customer base was the larger
purchasers with whom long-term contracts
had been concluded.
Long-term supply contracts accounted for over 60% of Natchix’s
South African order book pre-merger; Daybreak
and Mike’s made up
almost half of the sales pursuant to such long-term supply contracts
at the time of the merger; and orders from
Daybreak and Mike’s
alone constituted as much as a third of Natchix’s total sale of
day-old chicks in South Africa. Accordingly,
were this customer base
to have been thrown into jeopardy on 2 April 2002, and in particular
were existing long-term customers then
to have been at liberty to
reduce their weekly orders drastically, or even discontinue purchases
altogether, this would have affected
the value of the entity being
acquired (i.e. Natchix). This in turn would have led to Astral
paying a considerably reduced purchase
price for Natchix, or even
perhaps not going through with the merger at all ( Bundle II, Part 3
: 547-548 par 20-23, 556 par 53).
Secondly, the termination
of contracts such as those with Daybreak and Mike’s, which
guaranteed the purchase of a total of 274 000
day-old chicks a week,
would have significantly reduced Natchix’s turnover and future
profitability. The loss of the Daybreak
and Mike’s contracts alone
would have a serious economic impact on the business of Natchix. It
stands to reason that, when almost
a third of a business disappears
overnight, a portion of the workforce would have to be retrenched.
Moreover, quite apart from the
damages and lost profit, the loss of
about one third of Natchix’s business would result in it losing
significant economies of scale
( Bundle II, Part 3 : 556 par 52-53).
Thirdly, a sudden
termination of the long-term supply contracts would also have left
Natchix with a surfeit of parent stock. It would
take Natchix at
least 72 weeks, effectively the length of the poultry cycle, to
reduce the number of parent stock to make allowance
for the
termination of the Daybreak and Mike’s contracts ( Bundle II Part 2
: 529; Bundle II, Part 3 : 556 par 52).
The order inadvertently
given by the Tribunal on 2 April 2002 was accordingly not justified
by the evidence or the concerns of the
Commission or the customers
that gave evidence, and, moreover, was unreasonable and excessive,
devoid of commercial logic, and
potentially deleterious for the
independent customers that the Tribunal (and the Commission) were
intending to protect.
In the circumstances,
the following order is made:
(1) condonation for the
late lodging of the appeal is granted;
(2) The appeal succeeds
and the Merger Order is amended to read as follows:
by amending the opening
clause of subparagraph 1.1 thereof (which currently reads “Subject
to sub-paragraphs 1.3 and 1.4 below”)
to read as follows:
“Subject to
sub-paragraphs 1.3, 1.4 and 1.5 below, in terms of the standard form
contract approved by the Competition Commission.”
2.2 by inserting a new
subparagraph 1.5 as follows:
“
1.5
1.5.1 The validity of
any contract that was in existence between Natchix and/or Astral on
the one hand and independent customers
on the other hand at the time
of the Order remains unaffected by the Order, subject to amendments
required to ensure consistency
with sub-paragraph 1.4 of the Order,
and independent customers who are party to such contracts shall
remain bound thereby unless
and until they conclude standard form
contracts as envisaged in sub-paragraphs 1.5.2 and 1.5.3 below.
Subject to paragraph
1.5.3 hereof, independent customers who have concluded supply
contracts must be afforded an opportunity
to enter into the
standard form contract approved by the Competition Commission.
1.5.3 In the event of any
independent customer with an existing contract concluding a standard
form contract, neither the volume of
chicks ordered in terms of the
existing contract, nor the notice period specified therein, can be
varied in the standard contract.”
Malan AJA
I agree and it so
ordered
Jali JA
Hussain JA
Counsel for
appellants: PB Hodes SC and PBJ Farlam
Date of appeal: 14
June 2004-06-18
Date of judgment: 25
June 2004