Dawn Consolidated Holdings (Pty) Ltd and Others v The Competition Commission

In October 2006, Dawn Consolidated Holdings acquired DPI Plastics, a PVC pipe manufacturer with limited HDPE pipe manufacturing capacity. Dawn decided to mothball DPI's inefficient HDPE extruders and instead partnered with the Warplas Share Trust (WST). In April 2007, Dawn acquired a 49% stake in Sangio Pipe (Pty) Ltd, a newly formed company that acquired WST's HDPE pipe manufacturing business. The shareholders agreement included clause 20, a non-compete provision preventing Dawn and its subsidiaries from manufacturing HDPE pipes in South Africa for as long as Dawn held shares in Sangio, and requiring Dawn to procure all HDPE piping requirements from Sangio. In January 2014, Dawn notified the Commission of a merger to acquire sole control of Sangio. During this merger review, the Commission discovered clause 20 and initiated a complaint proceeding, alleging the clause violated section 4(1)(b)(ii) of the Competition Act (market division). The Tribunal found in favor of the Commission, holding that clause 20 constituted an impermissible restrictive horizontal practice.

• Whether Dawn/DPI and Sangio were in a 'horizontal relationship' (competitors) at the time the shareholders agreement was concluded
• Whether clause 20 constituted a market division agreement prohibited by section 4(1)(b)(ii) of the Competition Act 89 of 1998
• The proper approach to assessing affidavit evidence where complaint proceedings are argued on the papers
• The application of the doctrine of 'characterization' to assess whether conduct that appears to be restrictive actually contravenes competition law
• Whether a non-compete clause in a shareholders agreement can be justified as ancillary and reasonably necessary to a legitimate commercial transaction
• The evidentiary burden on the Competition Commission to prove a contravention of section 4(1)(b)

The appeal succeeded with costs, including costs for two counsel. The Tribunal's decision was set aside and replaced with an order dismissing the complaint with no order as to costs.

A non-compete clause in a shareholders agreement does not contravene section 4(1)(b)(ii) of the Competition Act if, properly characterized, it is: (1) ancillary to a main agreement that is itself unobjectionable from a competition law perspective; (2) reasonably required for the conclusion and implementation of the main agreement; and (3) reasonably proportionate to the legitimate commercial interest served. A restraint protecting against the misuse of confidential information and know-how is a legitimate commercial interest, particularly where one party to a joint venture gains access to the other's confidential business information through board representation or similar participation. The burden of proof in section 4(1)(b) cases, including the burden of proving proper characterization, rests on the Competition Commission or complainant. The test for assessing affidavit evidence where Competition Tribunal proceedings are argued on the papers is the same as the Plascon-Evans test applied in motion proceedings for final relief.

The Court noted, without definitively deciding, that there may be an additional basis for justifying the restraint: that partners in a joint venture owe fiduciary duties not to compete with the joint venture business, analogous to the principle in Bellairs v Hodnett 1978 (1) SA 1109 (A). The Court suggested this could apply even where the joint venture is conducted through a corporate vehicle, but found it unnecessary to decide this issue definitively. The Court also observed that a boilerplate clause stating that the relationship is not a partnership or joint venture is typically intended to prevent one party from binding the other's credit to third parties, and does not necessarily affect the substance of the relationship or negate fiduciary duties between the parties. The Court noted that a limited restraint continuing after Dawn ceased to be a shareholder might also have been acceptable, though this was not necessary to decide.

This case is significant for establishing the doctrine of 'characterization' in South African competition law, particularly regarding non-compete clauses in commercial transactions. It clarifies that restraints which appear facially to be market division may not violate section 4(1)(b)(ii) if they are ancillary to a legitimate commercial transaction and reasonably necessary for its implementation. The judgment adopts principles from European Union competition law regarding ancillary restraints and establishes a clear three-part test for assessing whether restraints are competitively permissible. It provides important guidance on the protection of confidential information and know-how as legitimate commercial interests justifying restraints in joint venture and shareholder arrangements. The case also clarifies procedural matters regarding the assessment of affidavit evidence in Competition Tribunal proceedings and confirms that the burden of proof rests on the Competition Commission to establish contraventions, including proper characterization of conduct.