You are here:
SAFLII >>
Databases >>
South Africa: Competition Appeal Court >>
2003 >>
[2003] ZACAC 4
[Database Search]
[Name Search]
[Recent Decisions]
[Noteup]
[Download]
[Help]
Patensie Sitrus Beherend v Competition Commission and Others (16/CAC/Apr02) [2003] ZACAC 4; [2003] 2 CPLR 247 (CAC) (7 July 2003)
REPUBLIC OF SOUTH AFRICA
(Reportable)
BEFORE THE COMPETITION APPEAL COURT
CASE NO: 16/CAC/Apr02
In the matter between:
PATENSIE SITRUS BEHEREND BEPERK
Appellant
and
THE COMPETITION COMMISSION
1st Respondent
JAKOBUS JOHANNES PIETRUS BEZUIDENHOUT
2nd Respondent
JAN DANIEL DU PREEZ
3rd Respondent
JUDGMENT DELIVERED ON 7 JULY 2003
SELIKOWITZ J:
Selikowitz JA: This is an appeal against the decision and order handed down by the Competition Tribunal (hereinafter “the Tribunal”)
on 8 April 2002 following a remittal hearing held in terms of the provisions of Part D of chapter 5 of the Competitions Act, No.
89 of 1998 (hereinafter “the Act”).
Appellant is Patensie Sitrus Beherend Beperk, a public company duly registered and incorporated during 1999 in accordance with the
company laws of the Republic of South Africa.
First Respondent is the Competition Commission of South Africa, (hereinafter “the Commission”) a juristic person established
in terms of section 19 of the Act
Second Respondent is Jacobus Johannes Petrus Bezuidenhout, a citrus farmer and the owner of the farm “Fairview” situated
in the Gamtoos River Valley (hereinafter “the GRV”) in the Eastern Cape. At all material times Second Respondent was
a shareholder in Appellant.
Third Respondent is Jan Daniel Du Preez, a citrus farmer who owns the farm “Hardleigh” in the Gamtoos River Valley. Third
Respondent was also a shareholder in Appellant.
The hearing before the Competition Tribunal concerned a consolidation of two referrals to the Tribunal. The one referral related to
complaints made by the Second and Third Respondents which raised the issue of conduct prohibited by the Act. The complaint was referred
by the Honourable Mr Justice Horn from the South Eastern Cape Local Division of the High Court of South Africa in terms of section
65 2 (b) of the Act. The other referral was by the Commission in terms of section 50 of the Act pursuant to a complaint.
It is unnecessary to set out the rather complex history of the disputes which en route to the remittal hearing before the Tribunal first came before the High Court both in the Eastern Cape and in Gauteng and also before
the Tribunal for interim relief. Suffice to say that at a pre-hearing conference the parties agreed to consolidate the two referrals
before the Tribunal.
Background to and History of Appellant
The history of the citrus industry in South Africa as also the genesis of Appellant were concisely described by the Tribunal as follows:
“The South African citrus industry accounts for approximately 2% of the total citrus production in the world market. Approximately
65% of the citrus produced in South Africa is exported, the balance either being sold in local markets or to a local processor to
be made into juice.
In 1939 citrus co-operatives – many of which had been established in the ‘twenties - belonged to the South African Citrus
Exchange, a central co-operative which handled more than 81% of the fruit produced in South Africa. At about this time, the government
established a statutory control board which brought the single channel marketing system into being. In terms of this system, all
packers (co-operative and independent) had to channel the packed fruit to the co-operative Citrus Exchange, later replaced by Outspan
International. Prior to the repeal, in 1996, of the Marketing Act of 1968, the citrus industry had deregulated the selling of fruit
on the South African market.
[Appellant is the successor of an entity] originally registered as Patensie Citrus Co-operative Limited in terms of the Co-operative
Societies Act 29 of 1939. Until July 1998 it conducted its packing and distribution operations as a co-operative under
the Co-operative Societies’ Act. On 3rd July 1998 the co-operative was converted into a limited liability company. All former members of the co-operative became shareholders
in (or ‘members’ of) a restructured company, Patensie Sitrus Beperk (‘PSB’). The company’s Articles
of Association purported to eliminate any distinction between producers and members. However a producer was a specific type of member
because certain members were not producers, but only made use of the trading department which supplied farm equipment.
In March 1999, a second company, namely Patensie Sitrus Beherend Beperk, the [Appellant] in the present matter, was incorporated.
The directors of PSB became the directors of, and sole shareholders in, the respondent. In September 1999 a special resolution was
passed bringing the respondent’s Articles into line with those of PSB. Members of PSB, including [Second and Third Respondents],
exchanged their shares in PSB for shares in the [Appellant]. It appears that most of these transfers were affected in late 1999.
The respondent is a public company. It is the holding company of, and the majority shareholder in, PSB. It is envisaged that, once
the restructuring process is complete, Patensie will be the sole shareholder in PSB. The respondent’s shareholders are all
citrus farmers. It provides packing and marketing facilities through its subsidiary, PSB, which it refers to as its operational arm.”
Appellant’s Articles of Association
Appellant submits that, in contrast with other companies, it does not operate as ‘an ordinary company or independently from
its members’. It contends that its Articles reflect the long path that has been trodden. The Articles prescribe specific rights
and obligations relating to inter alia membership; the servicing of the Appellant’s long-term loans; the transfer of its shares; the termination of membership, and
the utilisation of its packing and marketing services.
The origin of these provisions is to be found by reference to the provisions which existed under the old co-operative and which were
relocated in Appellant’s
Articles of Association.
Under the co-operative members held pack rights (“pakregte”) which entitled them to an annual quota fruit which could be packed at the co-operative’s pack shed. The individual
pack rights were determined through a complex formula based on the individual members’ financial contribution to redeeming
the packing facilities capital liability in relation to the total available packing capacity of the pack house and not the volume
of fruit actually delivered.
The pack rights were used to calculate the “pack right levy” (“pakregheffing”) which was the capital contribution that members were liable to pay to the co-operative on resignation. This capital contribution
represented the pro rata obligation of each member for the long-term debt of the co-operative. This system was carried over from the co-operative to PSB,
the predecessor of the Appellant.
With the conversion from PSB to Appellant, a revised system for the calculation of the shareholders’ capital levies was introduced
after consultation with the members. Henceforth the levies would be determined by the number of crates of fruit delivered across
the Appellant’s weighbridge by each of the members. It appears that the size of a member’s shareholding in Appellant
is approximately proportionate such member’s output. The size of a member’s shareholding correlates with the capacity
of the resources of the pack house used by that shareholder. Accordingly, the capital levy refers to a member’s pro rata share of the capital obligation incurred by the company in investing in infrastructure and equipment. The capital levy (member’s
pro rata share of the debt) is directly proportional to the current shareholding of that member. Thus, if a member holds one per cent of the issued shares in Appellant, such member is liable for one per cent of the gross debt of the company.
The packing cost payable by each farmer using Appellant’s facilities is calculated by reference to the quantity and the quality
of fruit delivered by that particular member.
Otherwise, members’ rights remained the same as they had been under both the former co-operative and under PSB.
In Appellant’s answering affidavit, its secretary Mr Jacobus Stephan Du Toit states:
“I have already mentioned hereinbefore that the Respondent’s Articles of Association are the standard ones found in Schedule
1, Table A of the Companies Act 61 of 1973, with certain additions thereto in a document termed ‘Toevoeging tot Statuut van Patensie Sitrus Beherend Beperk om Voorsiening te Maak vir Speciale Kontraktuele Voorwaardes Tussen
Lede en die Maatskappy’ to cater for the sui generis nature of the Respondent and the purposes for which it was established.”
It is the addendum, which forms part of the Articles which contains the provisions that were the subject of the enquiry undertaken
by the Tribunal and are - save in respect of Article 110 which the Tribunal declined to strike down - the provisions relevant in
this
appeal.
Article 112 of the Articles of Association provides in its introduction that Appellant has a ‘first right and option’ to acquire the
whole of the citrus crop of each member or such portion of the crop as Appellant decides upon. The actual text which is in Afrikaans
reads:
“112. Eerste reg en opsie op sitrusoes ten gunste van Maatskappy
Vanaf datum van verkryging van lidmaatskap, verleen elke lid afsonderlik, ‘n eerste reg en opsie aan die Maatskappy om jaarliks
‘n lid se gehele sitrusoes of sodanige gedeelte daarvan as wat die Maatskappy mag besluit, te koop teen ‘n prysbepaling
soos in Artikel 114 uiteengesit en onderneem die lid on sodanige oes of sodanige gedeelte ten opsigte waarvan die Maatskappy die
opsie uitoefen, te lewer onderhewig aan die volgende voorwaardes”
The words “koop” and also “koopprys” appear in the Articles in the provisions which regulate the relationship between Appellant and its member/producers. This
led to debate and some confusion before both the Tribunal when considering interim relief and thereafter before the Commission. The
Commission ultimately concluded that the literal meaning “koop” (‘purchase’) and “koopprys” (‘purchase price’) were inappropriate and that on a proper construction of the modus operandi and the relationship there was no sale of fruit to Appellant. The fruit is handed over to Appellant which then pack and marketed
it. Thereafter the proceeds of the sale of the fruit on the market are divided between the member/producers in accordance with a
formula which allowes for the deduction of Appellant’s expenses including the cost of servicing its debt.
Sub - Articles 112.1 to 112.6 provide:
for an individual member to submit details of the size and quality of the crop he anticipates that will be delivered to Appellant.
In certain instances the management can intervene to establish the facts. (112.1);
for the members to make application for exemption from the requirement to deliver all of their crop and the procedure therefor (112.2);
for Appellant to refuse to exercise its option (112.3 -112.4);
for compliance with a harvesting and delivery schedule specified by the Appellant (112.6.1 - 112.6.2);
and for the levying of fines in the event of a member’s non-compliance (112.6.3).
Sub-article 109.2 provides that, in the event of a member no longer complying with his obligations to deliver his crop, such member
may be required by Appellant to sell his shares failing which Appellant may itself make arrangements for the sale of the dissident
member’s shares.
Article 110 - which, as noted, was not struck down by the Tribunal - specifies the limitations imposed on the transfer of shares in
Appellant. Shares may be transferred to an heir of a deceased member (110.1) and to the purchaser of a member citrus farm (110.2);
However, transfer to any other person is governed by Article 110.3 which provides that:
“enige ander persoon of regspersoon wat met die toestemming van die Raad van Direkteure kwalifiseer vir lidmaatskap kragtens die vereistes
gestel deur die Raad van Direkteure van tyd to tyd.”
Article 114.3 of Appellant’s Articles of Association provides for remedies which are available to Appellant in the event that
any member fails to meet his obligations to Appellant. Inter alia Article 114.3.1 entitles the respondent to apply for an urgent interdict to prevent a member from selling or delivering his citrus
crop to anyone other than Appellant. Article 114.3.2 entitles Appellant to issue summons for specific
performance and/or to recover the fines provided for in the Articles for in the Articles of Association.
In terms of section 65(2) of the Companies Act (Act No. 61 of 1973) the Articles of Association bind the company and the members,
as if the Articles had been signed by every member. One effect is that the Articles of Association have contractual force both between
the company and all its members.
It was common cause before the Tribunal that the Articles alleged by the Commission to be in contravention of the Competition Act
are to be found in the ‘Toevoeging tot Statuut van Patensie Sitrus Beherend Beperk om Voorsiening te Maak vir Speciale Kontraktuele Voorwaardes Tussen Lede
en die Maatskappy’. Furthermore, that Article 112 - which contains the obligation imposed on the members to deliver their citrus crop to Appellant’s
pack house - is at the centre of the dispute. The other Articles in contention are those which are allegedly ancillary to Article
112 in that they are designed to give effect to the obligation contained in the Article.
After considering the record, hearing viva voce evidence and argument, the Tribunal concluded that Appellant’s Articles of Association contained provisions which contravened
section 8(d)(i) of the Act. It found further, that no defence by way of technological, efficiency or other pro-competitive gains
which outweigh the anti-competitive consequences of the offending Articles had been demonstrated. The Tribunal, acting in terms of
section 58(1)(a)(v) of the Act declared Articles 112, 109.2, 114.3.1 and 114.3.2 to be practices prohibited in terms of section 8(d)(i)
of the Act and accordingly void. No order was made in respect of costs.
Grounds of Appeal
Appellant’s grounds of appeal are that the Tribunal erred:
By finding that the relevant product market as the market for the provision of packing and marketing services to citrus farmers;
By finding that Appellant is a seller and its members purchaser of packing and marketing services;
By finding that the relevant geographic market as the market for the packing and marketing of citrus fruit in the Gamtoos River Valley;
By finding that Appellant is dominant in the relevant market;
By finding that Appellant’s members are its customers;
By finding that aspects of Appellant’s Articles of Association constitute “exclusionary acts” as defined in section
1 of the Act;
By finding that Appellant did not show technological, efficiency or other competitive gains which outweigh any alleged anti-competitive
effects of its acts;
By declaring Article 122 of Appellant Articles of Association void in its entirety;
By not striking out certain portions of and annexures to the affidavits filed on behalf of the Commission, alternatively by attaching
too much weight to them;
By not awarding costs to Appellant.
The Process: From Citrus Farm to Consumer
It is useful to consider the processes followed from the point where the citrus fruit is produced on the producers farm until it reaches
the shelves of retail outlets. The explanation will also note Appellant’s practices.
Production Stage:
The farmers grow the fruit on their farms utilising various resources including the land, labour, equipment, water, fertilisers and
pesticides. When harvested the fruit has to go through further preparatory and handling processes before it is marketable for consumption.
Market Preparation:
The citrus fruit is washed, disinfected and sometimes waxed. It is graded for quality and size before being packed in suitable containers.
These containers are palletised and the fruit is inspected to ensure compliance with official regulations. These functions are normally
performed in a specially equipped packhouse. Farmers who do not have their own packhouses will normally deliver the fruit to a packhouse
for processing as aforesaid.
In Appellant’s case it has a modern packhouse. Its facilities were updated and improved some four years ago at a cost of R21
million. There are in excess of two hundred packhouses in South Africa and Appellant packs and arranges to market approximately five
per cent of the country’s total citrus production. Appellant packs and arranges to market approximately seventy per cent of
the citrus fruit produced in the Gamtoos River Valley.
Farmers do not sell their fruit to Appellant - neither money nor risk passes when the fruit is delivered to Appellant’s packhouse.
Transportation to point of intake:
After preparation and packaging, the fruit is transported to the next “station”. Where the fruit is not destined for export, the “station” could be a municipal market, a local wholesaler or retailer or a processing facility which might process extract the juice
or manufacture a citrus preserve or similar product.
Some sixty five per cent of the citrus fruit produced in South Africa is marketed overseas. Where the fruit is exported, the next
“station” is a seaport or an airport. The fruit which travels by road or rail is received at the port by a marketing agent. Appellant
appoints a number of marketing agents on a per season basis to attend to the citrus fruit which it markets on behalf of its members.
The fruit is not sold to the marketing agent and the producer continues to carry the risk.
Port Handling:
The citrus fruit is inspected and then placed into cold storage to bring the temperature down to required standards for shipment.
The fruit is then loaded into a ship or aeroplane.
Shipping:
The fruit is shipped - less frequently, flown - to its overseas destination.
Overseas Port of Entry;
On arrival at the destination port the fruit is cleared for entry, stored and then forwarded by clearing agents to the wholesale markets,
interim service providers or customers who can be fruit importers or retail suppliers.
It is only at this point that the citrus fruit is sold and where the price which the producer will receive is determined. Until this
point of sale the producer continues to carry the risk. Even at this point of sale the risk includes a need to destroy fruit that
has deteriorated or fails to comply with local regulations.
End consumer:
The fruit is thereafter sold to the retailer and, in turn to the consumer.
Price received by the producers
South African citrus fruit farmers have no influence upon the market and the price received for their fruit. They are “price
takers” on the international market.
Because of the fact that the overwhelming majority of the citrus fruit handled by Appellant in the Gamtoos River Valley is destined
for export and because that market accounts for approximately ninety three per cent of the income of Appellant’s members, the
parties before the Tribunal focussed almost exclusively on the export market. Nothing turns on the ommission to analyse the local
citrus market. The determinations made in respect of the export market apply with equal force to the local marketing of citrus fruit.
Certain costs are deducted from the market price received before the producer receives payment for his citrus crop. Those include
the following costs directly related to the packing and marketing process.
Production costs:
These are the costs of preparing the fruit for the market.
DIP costs:
These include transport costs and statutory levies which are incurred when the fruit reaches the point of intake.
FOB costs:
The costs of shipping, handling, storage, loading and insurance from the point of intake until the fruit is loaded into the ship or
aeroplane.
Sea or air freight:
These costs are significant as they are US dollar related and a fluctuating exchange rate can have an effect.
Import duty:
Also a significant cost, it can vary from market to market and over time.
Overseas costs:
The cost of clearing, storage in cooling facilities and transport to the point of sale.
Appellant’s heads of argument filed before this court, it is stated that:
“The essence of the Appellant’s case is that, with reference to its co-operative origins and background; its peculiar relationship
with its members, who are all citrus producers, and the exigencies and demands of the highly competitive citrus market in which it
operates, the Articles of Association had been formulated and agreed to in precisely the disputed form in order to enable its members
to compete effectively in that market, to the benefit of all its members, the end-consumer and the national economy. It was argued
that, in the light of the proven facts, the Articles of Association of the Appellant constitute no more and no less than an ordinary
contractual arrangement which does not fall foul of the Act and which should not have enjoyed the attention of the Commission in
the first place.”
It is also submitted that:
“Since 1928 to the present day, and even after the former co-op had changed into a company, the relationship between the entity itself
(currently the Appellant) and its members has not changed: for pro-competitive, sound economic, cost-effective and efficiency reasons,
a number of farmers have come together to pool their resources for the purposes of packing and marketing, thereby ultimately ensuring
a higher net return to themselves”
and further that:
“The whole purpose of the joint packing and marketing arrangement is to manage the packing and marketing facilities on a more economical
basis. The second paragraph of the pre-amble to the Additions to the Appellant's Articles of Association makes special reference to the pro-competitive
gains expected to flow from the said arrangement.”
A considerable amount of evidence was advanced to establish that the joint packing and marketing of citrus fruit by a number of farmers
was beneficial. That it benefits the producers who utilise the services would appear to be clear. What is in issue, however, is whether
the means chosen by Appellant and its members to achieve their stated goals contravenes the Act. More particularly, whether the “arrangement”
between Appellant and its members who are the producers amounts, in the circumstances, to an unjustified abuse of dominance as is
prohibited by section 8 of the Act.
It is useful at this stage to set out out a number of matters which bear upon the decision in this matter.
Firstly, Appellant is no longer a co-operative. Since March 1999 Appellant is a public company. It remains, however, possible to view
the company as the vehicle through which its shareholders jointly undertake the packing and marketing of their citrus produce. So
viewed, Appellant is a public company which exhibits many of the characteristics of an agricultural co-operative.
Secondly, a co-operative is an enterprise linking assets, business activities, financial obligations and people in a distinctive way.
Care must constantly be taken to recognise and in some cases to distinguish the dual status of people who are both its customers
and the owners of the co-operative, in casu, the members to whom earnings will be distributed according to customer patronage.
Thirdly, large agricultural co-operatives are very different from what they were a century, or even half a century ago. South African
citrus farmers have seen major changes in the citrus industry and, in particular, in the packing, processing and marketing of citrus
fruit. The industry has undergone important institutional changes over the past eight decades. As noted the legal form of the entity
undertaking the packing and marketing of citrus fruit in the Gamtoos River Valley has changed from that of a co-operative (of which
the farmers were members) to that of a limited liability company of which the farmers are now shareholders. A further important change
concerns the marketing of the crop. The international marketing of agricultural produce was, until recently, the exclusive preserve
of a number of statutory ‘control boards’ established in terms of The Marketing Act No. 59 of 1968. This statute was
repealed by the Marketing of Agricultural Products Act, No. 47 of 1996. The upshot is that the packing companies and others who desire
to offer fruit on the international market will market the fruit through the agency of one of the many market agents who undertake
the marketing function.
The advantages gained by farmers and producers of food forming co-operatives has long been recognised in foreign jurisdictions. The
special treatment usually affords limited exemption from the reach of competition law. Wherever such special treatment has been given
it is to be found in statutory enactments. In the United States since 1914, section 6 of the Clayton Act (36 Stat. 730 [1914]) partially exempted agricultural organisations from the competition laws. The Capper-Volstead Act (42 Stat. 388 [1922]) extended the exemption to capital stock agricultural co-operatives.
Articles 32 to 38 of the European Community Treaty establish a special regime for agriculture and allow the Council to limit the application of the rules of competition law in regards
to the production and trade in agricultural products.
Indeed, the fact that the Act does not exempt agricultural activities from its reach ought to sound a note of caution in the approach
to the issues raised in this matter. It should be noted that the Act does allow for agreements and practices to be granted exemption
from the provisions of Chapter 2 which deals with prohibited practices including abuse of dominance. (Section 10).
In seeking to determine the relevant market, the analysis advanced by Warren CJ in the United States Supreme Court in Brown Shoe v United States, 370 U.S. 294 (1962) at 325 provides a useful analysis and insight into the appropriate methodology.
“The outer boundaries of a product market are determined by the reasonable interchangeability of use or the cross-elasticity of demand
between the produc
