Restraints in sale of business agreements may pass competition law muster

It is important for contracting parties who are actual, or even potential, competitors to ensure that any restraints they agree to in the context of a sale of business agreement are necessary to protect the legitimate commercial interests of the parties (rather than to stifle competition), are not unduly long, and only relate to the products or services produced by the business which is being sold. A recent decision of the Competition Tribunal in the Afgri Operations/Pride Milling merger provides further clarity on the Competition Commission’s attitude to restraints which are agreed to by parties to a sale of business.

Restraints are frequently sought by the purchaser of a business in order to protect its legitimate commercial interest in the business it buys – purchasers pay for the goodwill in a business, and do not want to find that the seller starts up in competition with it shortly after the sale. However, the outright prohibition on market division between competitors in section 4(1)(b) of the Competition Act is very broad, and technically prohibits any agreement between actual - or even potential - competitors not to compete with one another. An agreement which falls foul of this prohibition cannot be defended on the basis that it has a legitimate commercial purpose, or gives rise to efficiency or pro-competitive benefits. Even a first time contravention is punishable by a fine of up to 10% of the parties’ turnover.

The Tribunal has previously imposed fines on parties to a restraint in a sale of business agreement. In the Nedschroef case, the purchaser of automotive fasteners manufacturing business, Nedschroef Johannesburg (Pty) Ltd (Nedschroef), gave an undertaking to Teamcor Limited (Teamcor), the seller, that it would only manufacture particular kinds of fasteners. The Tribunal confirmed a consent agreement in which Nedschroef agreed that this restraint contravened the prohibition on market division in section 4(1)(b) of the Act, and agreed to pay R200 000 in order to settle the matter. This decision created significant uncertainty amongst commercial practitioners about when restraints in sale of business agreements were permissible in terms of the competition legislation.

Subsequently, the Replication Technology (Pty) Ltd/Gallo Africa case provided some clarity when the Tribunal held that a restraint which precluded the seller of a business from providing competing services in the Republic for a two year period after the sale did not contravene section 4(1)(b) of the Act. The Tribunal observed that this was a ‘common and garden’ variety restraint of trade normally associated with the sale of a business, which was limited as to duration. These kinds of restraints are mechanisms for protecting the goodwill acquired by a purchaser when it purchases a business. In particular, the Tribunal noted that this restraint did not require that the restrained party refrain from participation in the market altogether, and the terms of the restraint did not seem unduly restrictive relative to restraints of this type. Most importantly, it was a temporary and partial restraint, which was necessary to protect the value of the investment made by the purchaser.

The recent Pride merger decision reinforces this principle. Afgri re-purchased three mills which it had sold to Pride in 2001, in order to enter the downstream processing sector for the milling of yellow maize into grit itself. The Tribunal’s decision on the merger notes that the Commission accepted that the restraint in the sale of business agreement which restricted Pride from milling yellow maize into grit did not contravene section 4(1)(b)(ii) of the Act, because it was limited to a total duration of only two years, and only related to Pride’s milling of yellow maize into grit. This suggests that despite the very broad language used in the section 4 prohibition, the Tribunal is inclined to take cognizance of commercial realities and adopt a purposive rather than a literal approach when assessing whether a particular restraint should properly be characterised as anticompetitive or not.

If there is any doubt about whether a restraint clause is potentially anti-competitive, parties should check with their competition law advisors.