Non-Compete Clauses and the Competition Act

In the case of Dawn Consolidated Holdings Pty Ltd (“Dawn”) and others versus the Competition Commission, the Competition Appeal Court (“CAC”) had to consider whether a non-compete clause in a shareholder’s agreement contravened the Competition Act, and laid down some guidance for determining whether agreements exhibit the character of anti-competitive conduct.

In 2014, the Commission approved a merger between Dawn and Sangio Pipe Pty Ltd (“Sangio”) that resulted in Dawn acquiring the entire shareholding in Sangio. An undertaking not to compete formed part of a shareholder agreement entered into by Dawn and Sangio which provided that Dawn would not manufacture HDPE piping in South Africa and would procure all piping from Sangio. The Competition Tribunal had previously held that this prevented Dawn from entering this market, even though Dawn had stopped its manufacturing operations, as it remained a potential competitor.

In the CAC, this was overturned. The CAC held that Dawn’s decision to invest in Sangio terminated its status as a potential competitor, at least for as long as it remained a shareholder. It would have no commercial incentive to undermine Sangio’s business by competing with it as it had provided loan funding.

The CAC held that the character of non-compete clauses 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 a restraint should be objectively necessary may be too strict.

The appropriate test was in the view of Rogers JA to be:

  • Is the main agreement (disregarding the restraint) unobjectionable from a competition law perspective?
  • If so, is the proposed restraint reasonably required for the conclusion and implementation of the main agreement?
  • If so, is the proposed restraint reasonably proportionate to the requirement served?

Dawn maintained that the non-compete clause was unnecessary as it had no intention to compete with Sangio. The court held the sensible approach was to acknowledge that although Dawn was unlikely to enter into the piping market, as long as it remained a shareholder of Sangio, the other shareholders could not reasonably have been expected to rely on the good faith of their partner.

The court held that the non-compete clause was reasonably required for the shareholders’ agreement. The restraint was also to operate only as long as Dawn remained a shareholder of Sangio, but a limited duration after cessation could also have been acceptable.

This article has been written by Rishal Bipraj, a Senior Associate in the Commercial Department at Garlicke & Bousfield Inc.

NOTE: This information should not be regarded as legal advice and is merely provided for information purposes on various aspects of competition law.

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