A not so restrictive horizontal practice

A not so restrictive horizontal practice

By Roxanne Ker

Dawn Consolidated Holdings (Pty) Ltd and Others v Competition Commission, a judgment of the Competition Appeal Court on 4 May 2018, dealt with the illegal restrictive horizontal practice by which two competitors (including potential competitors) divided up a market by allocating customers, suppliers, territories, or specific types of goods or services.

Dawn was a wholesale trader and distributor of various hardware products including plastic pipes.  Dawn wished to enter the high density polyethylene piping market.  It did so in April 2007 by investing in an existing HDPE piping manufacturer (Sangio).  It acquired 49% of the share capital of Sangio.  Warplas Share Trust held the other 51% of the share capital of Sangio.

The Sangio shareholders agreement (signed in April 2007) included a non-compete clause stipulating that, whilst Dawn held shares in Sangio, Dawn and its subsidiaries would stay out of the market for manufacturing HDPE pipes, and would procure all their South African HDPE piping requirements from Sangio.

In January 2014, Dawn filed a merger notification with the Competition Commission, as Dawn wished to become the sole shareholder of Sangio.  In the context of the merger notification, the Commission learnt of the non-compete clause in the shareholders agreement.  The Competition Tribunal approved the merger.  But the Commission initiated a complaint before the Tribunal into the question whether the non-compete clause was an illegal restrictive horizontal practice.

The Tribunal found in favour of the Commission.  Dawn and the others appealed to the Competition Appeal Court.

The Appeal Court noted that in several merger decisions the Tribunal had previously found non-compete clauses in business sale agreements and joint venture agreements to be commercially reasonable and unobjectionable.  The current matter was no different.

The Appeal Court considered European Union competition law jurisprudence, and held that:

  •     –    A non-compete clause that is commercially reasonable in the context of the overall transaction of which it is past is not characterised as violating the prohibition of an illegal restrictive horizontal practice.
  •     –    The character of a non-compete clause must be viewed in the context of the transaction as a whole and the circumstances of the parties when they concluded the agreement.

The Appeal Court regarded the non-compete clause in the Sangio shareholders agreement as commercially reasonable.  Dawn would have access to Sangio’s confidential information and know-how, and would acquire insight into the successful conduct of the business of manufacturing HDPE piping.  So Sangio and Warplas Share Trust had legitimate concerns about the potential abuse of Sangio’s confidential information and know-how.  The non-compete clause was a ‘stock standard’ solution.

The appeal was a ‘sitter’, and succeeded.  Both the Commission and the Tribunal had been overzealous.

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