20.
The Tribunal thereafter turned its attention to the “juristic nature of the condition attached to a merger”. Under this heathe Tribunal considered, first, whether the Tribunal has the power to require, as a condition of approval of a merger, that the merged
firm void all or part of an existing agreement. Secondly, on the assumption that it has such a power, the Tribunal addressed the
question of whether the imposition of the condition would mean that the contract is ipso factovoided if the merger is implemented. For present purposes, it is only necessary to quote the Tribunal’s conclusion on these
points: “In the present case there was indeed no express requirement in the order that the merged firm cancel its existing contracts. But to
the extent that there may be an implied one, which we do not concede, it still would not have invalidated the existing contracts for the reasons we have outlined” [emphasis added] (Bundle I: 44
par 28, 46 par 40).
21.
The Tribunal subsequently addressed two issues that were irrelevant to the previous appeal to this Court and are also not at issue
in this appeal: (i) the duration of the long-term supply agreements specified in clause 1.4 of the broiler industry conditions, and
(ii) whether the Merger Order forbade any contract to provide for minimum or fixed quantities of supply. The Tribunal concluded:
“The Tribunal order is clear and no ambiguity exists with regard to minimum or fixed quantities of supply. We find no reference to
minimum quantity or fixed quantity of supply in the Tribunal order. In fact the intervenors acknowledge this in their answering affidavit
by saying that it is ‘implicit’ in the conditions that Astral may not include in the new contract a clause which has
the effect of requiring customers to purchase minimum or fixed quantities” (Bundle I: 47 par 47).
22.
Mike’s, Daybreak and Midway brought an appeal against the Tribunal’s declarator in the Variation Application. The appeal
lodged by Mike’s, Daybreak and Midway was argued in December 2003. Judgment of the Court was given on 28 January 2004. This
Court (perMalan AJA, Selikowitz JA and Mailula AJA concurring) upheld the appeal, and found that the Merger Order could not bear the meaning
that the Tribunal had intended to give to it, and thus, also, the meaning which the Appellant had ascribed to it.
23.
This Court did, however, confirm that the arguments by Mike’s and Daybreak to the effect that their supply contracts were automatically
voided on 2 April 2002, the date of the Merger Order, were incorrect. This Court affirmed that those contracts were still in existence
and with full force and effect. It stated the following in this regard (at paragraph 15 of its judgment):
“As the Tribunal has recognized in its Reasons and Decisions, it would have been beyond the power of the Tribunal to “void” or cancel the existing long-term contracts of the Appellants
(§ 29ff at Record 419). Section 16(2) of the Competition Act gives the Tribunal the power to (a) approve a merger, (b) approve
a merger “subject to any conditions”, or (c) prohibit implementation of a merger. There is no restriction in the Act
on the kind of conditions that may be imposed, but they must be conditions, to which the merger by law is subject. The Tribunal could
not have interfered with an existing and on-going contractual relationship between Natchix and its customers.
…
But the Tribunal could not, and did not, declare, when approving the merger, that all such long-term contracts were “voided”
(see s 65(1))” (Bundle II, Part 3 : 662-663).
24.
The effect of this Court’s judgment on 28 January 2004 judgment was, consequently, not that the long-term supply agreements
with Daybreak and Mike’s were at an end. It did, however, mean that in seeking to enforce those agreements against Daybreak
and Mike’s, contrary to their wishes, the Appellant would be acting in breach of the merger conditions. As a result the Appellant
would potentially be liable for any of the sanctions that the Act provides for in the event of an acquiring party not honouring the
conditions under which its merger was approved. (See s 16(3) of the Act, read with s 18(1)(c) thereof, and s 59 of the Act.)
25.
As a result of the judgment of this Court, the Appellant on 25 February 2004, within 20 business days of the date of the Appeal Judgment,
lodged a notice of appeal. This course open to the Appellant was referred to by this Court (at paragraph 15 of the judgment) stating
that “[i]f Natchix finds that it cannot comply with the conditions then it has the option of not continuing with the merger
or of seeking to appeal against the Tribunal’s decision on the grounds that the conditions are unreasonable”..
26.
Section 17(1) of the Act regulates the procedure applicable to appeals in merger proceedings. It provides that:
“Within 20 business days after notice of a decision by the Competition Tribunal in terms of section 16, an appeal from that decision
may be made to the Competition Appeal Court, subject to its rules, by –
(a)
any party to the merger; or
(b)
a person who, in terms of section 13A(2), is required to be given notice of the merger, provided
that the person had been a participant in the proceedings of the Competition Tribunal.”
27.
Other applicable provisions are Rules 16(1)(a) and 32 of the Rules for the Conduct of Proceedings in the Competition Appeal Court
(“the CAC Rules”).
27.1.
Rule 16(1) reads as follows:
“A person who has a right of appeal to the Court may file a Notice of Appeal, which must satisfy the requirements of sub-rule (3),
-
(a)
within the time, if any, prescribed by the Act or the Competition Tribunal Rules;
(b)
if no time is prescribed by the Act or the Competition Tribunal Rules, within 15 business days after
the date of the decision or order that is the subject of the appeal.”
27.2.
Rule 32 states that:
“The Court may, for sufficient cause shown,
(a)
excuse the parties from compliance with any of these rules; or
(b)
condone any technical irregularity arising in any of its proceedings.”
28.
The reasons for the delay that have been set out in the condonation application are persuasive. It could not be suggested that the
Appellant was flagrantly or grossly acting in breach of the Act or the CAC Rules. The reason for the late filing of the appeal has
also been fully explained. In short, the need for condonation has arisen because none of the entities involved in the merger interpreted
the Merger Order in the way that this Court held that it should be. It was only when it became apparent that the Tribunal had, in
its Merger Order, erroneously failed to reflect its true intention, and the common understanding of all the participants in the hearing,
that the need to appeal the Merger Order became apparent to the Appellant.
29.
The time period for lodging an appeal to this Court in merger proceedings is, in the first instance, found in the Act rather than
the CAC Rules. Rule 32(b), however, seems to provide for an eventuality such as this (cf The Competition Commission and Distillers Corporation (SA) Limited and Another No. 31/CAC/Sept 03)11 December 2003) at paragraphs [2] and [4] although the matter was not decided). Since this Court is a Court with a status similar
to that of a High Court (s 36(1) of the Act) it has the power to condone non-compliance with time limits prescribed by statute (Toyota South Africa Motors (Pty) Ltd v Commissioner, South African Revenue 2002 (4) SA 281 (SCA) at paragraph [10] at 286). No purpose would be served by fixing an inflexible time period within which to lodge
appeals in merger cases giving this Court no power to condone any non-compliance therewith. There is no reason why there must be
rigid adherence to the 20 business day period referred to in s 17(1) of the Act. It is important that the acquiring and target
firms obtain certainty as to whether they can merge, and, if so, subject to what conditions. But this interest can be accommodated
in the exercise of this Court’s discretion when considering whether to condone any delay.
An important factor in this regard is that, were s 17(1) of the Act to be interpreted as denying a party to a merger the right to
appeal the merger decision of the Tribunal after 20 business days, no matter what the circumstances, this would result in that party
being denied the right of access to a court of law. The undesirability of such a result was recognised by the Appellate Division
in 1959 in Phillips(supraSee Price Waterhouse Coopers Inc et al v National Potato Co-Operative Ltd 448/02 (SCA) 1 June 2004) at paragraph 43) and cf Mohlomi v Minister of Defence1997 (1) SA 124 (CC); Moise v Greater Germiston Transitional Local Council: Minister of Justice and Constitutional Development Intervening (4) SA 491 (CC).)
30.
There are also textual indications that the time stipulated for the lodging of appeals in s 17(1) of the Act is not intended to be
peremptory. The word “may” is used, rather than “must” or “shall”. Section 17(1) is also phrased
positively, rather than being cast in negative form (for example, as an injunction that an appeal must not be lodged later than twenty
days). Both of these are indications that there is no mandatory, or peremptory, requirement, and that the provision is instead directory
with the result that this Court is permitted to condone non-compliance.
31.
In the circumstances, the Appellants’ late lodging of its notice of appeal is condoned.
32.
It is clear from what has been set out above that the Tribunal erred in the formulation of the Merger Order. More particularly, it
erred by requiring Astral to offer allindependent customers, even those party to long-term supply contracts with 6 or 18 month lead-in times and termination periods, new
contracts immediately after the implementation of the merger. The Merger Order should be set aside because the Tribunal misstated
its intention because the order as formulated was unreasonable and excessive; went beyond the competition concerns (relating to foreclosure)
that the Tribunal sought to address; was not justified by the evidence before the Tribunal in the intermediate merger proceedings;
was illogical in the light of the commercial realities explained to the Tribunal in the merger proceedings; could potentially contribute
to the occurrence of the very prejudicial effects about which the Tribunal and the Commission were concerned (by removing the security
that various independent customers enjoyed as a result of their long-term supply contracts); had further potentially deleterious
consequences for the independent customers who were party to such contracts, in that they could be deprived of special concessions
or benefits that they had negotiated (relating for example to payment conditions or placement of orders); and was commercially impractical
and untenable, in that it made it extremely difficult, if not impossible, for Astral to value the merged entity (Natchix), because
there was no certainty about whether the customers who were party to long-term supply contracts, and who purchased over fifty per
cent of the day-old chicks sold by Natchix in South Africa, would take the opportunity to resile from their contracts without any
regard to the notice periods required for termination of such contracts, the length of time it would take for Natchix to reduce the
numbers of parent stock to reflect the decreased orders, or the array of contracts with other suppliers that Natchix would be forced
to break. I need not deal with all these grounds of appeal in this judgment.
33.
It should be noted, in the first instance, that at no stage in the proceedings did any of the entities participating therein or submitting
evidence thereto argue that there was a need not only to prevent downstream foreclosure by Astral, but also to facilitate the opportunity
of upstream / backward integration by independent customers who at that time sourced their day-old chicks from Natchix. There was
in fact no suggestion in the merger proceedings that such upstream or backward integration by existing customers of Natchix was required,
or that their supply of day-old chicks needed to be protected other than through Astral being obliged to guarantee supplies of day-old
chicks to its independent customers for a period of 5 years after the Merger Order. As a result, the Merger Order was not even intended
to assist Natchix’s customers indirectly to integrate backwards (or upstream) after that order. This is confirmed by the fact
that, as the Tribunal stated in the Variation Application Decision and Reasons, the Merger Order did not preclude Astral from stipulating
in its contracts a minimum, or a fixed, quantity of day-old chicks that various independent customers were required to purchase.
It is significant in this regard that Mike’s, Daybreak and Midway unsuccessfully argued before the Tribunal in the Variation
Application that the Merger Order should be construed as forbidding Astral to stipulate minimum or fixed quantities of supply because
that would retard the backward integration of its customers.
34.
Moreover, not only was there no evidence upon which the Tribunal could have relied in order to craft an order assisting upstream or
backward integration of Natchix’s customers, but any such order would have gone beyond imposing behavioural remedies, and resulted
in a grossly disproportionate remedy.
35.
Without the order given by the Tribunal, Astral would not be blocking the backward integration of the Mike’s Chicken and Daybreak
businesses. Astral would be permitted to insist that Mike’s Chicken and Daybreak honour their contractual obligations. Astral
could thus not have prevented Mike’s from giving 6-month’s notice in April 2002, and then terminating its contract, at
the expiry of that period, in October of that year. Daybreak could have given notice in August 2002, resulting in its contract coming
to an end 18 months later in February 2004.
36.
The Tribunal and the Commission were concerned with preventing downstream foreclosure by Astral in the event of the merger being approved.
For this reason, Astral was required to conclude 5-year contracts, which complied with certain stipulated conditions, with each of
their independent customers. The Tribunal has confirmed this in its Variation Application Decision and Reasons.
37.
The concerns expressed by the Commission and the Tribunal did not necessitate the termination of existing long-term supply contracts
with independent customers. Quite the contrary, as the Tribunal confirmed in the Variation Application Decision and Reasons, the
Tribunal was desirous of ensuring that long-term contracts with existing independent ad hoccustomers were put into place. Where such contracts were already in existence, it would have served no purpose to permit either party
to end them; they merely had to be adapted, to the extent necessary, to comply with the standard conditions approved by the Commission.
38.
Furthermore, the termination of all Natchix’s long-term supply contracts on 2 April 2002 could well have been prejudicial to
them. If all such contracts were to be brought to an end, Astral / Natchix would have been entitled to have stopped supplying the
independent customers with day-old chicks, or alternatively to have decreased their deliveries to whatever amount was most convenient
to Natchix. Any independent customers that had negotiated special concessions or benefits (relating for example to payment or placement
of orders) could also henceforth have been deprived of those advantages by Natchix, and have been forced to settle for the terms
and conditions in the standard form contract, as well as whatever quantities of chicks Astral / Natchix chose to sell to them. What
is more, the independent customers, who were not party to the merger proceedings, would have had no notice or warning of the possible
impending cancellation of their contracts, and thus the uncertainty into which their businesses could be plunged. This would have
been unfair and improper.
39.
The termination of the existing long-term contracts with independent customers after 2 April 2002 would also have had significant
financial and other consequences for Astral and Natchix. Three examples were submitted in argument:
First, the existing customer base of Natchix was an important asset of the company, and would clearly have been taken into account
by Astral when assessing its value. A crucial component of this customer base was the larger purchasers with whom long-term contracts
had been concluded. Long-term supply contracts accounted for over 60% of Natchix’s South African order book pre-merger; Daybreak
and Mike’s made up almost half of the sales pursuant to such long-term supply contracts at the time of the merger; and orders
from Daybreak and Mike’s alone constituted as much as a third of Natchix’s total sale of day-old chicks in South Africa.
Accordingly, were this customer base to have been thrown into jeopardy on 2 April 2002, and in particular were existing long-term
customers then to have been at liberty to reduce their weekly orders drastically, or even discontinue purchases altogether, this
would have affected the value of the entity being acquired (i.e. Natchix). This in turn would have led to Astral paying a considerably
reduced purchase price for Natchix, or even perhaps not going through with the merger at all (
Bundle II, Part
3 : 547-548 par 20-23, 556 par 53).
Secondly, the termination of contracts such as those with Daybreak and Mike’s, which guaranteed the purchase of a total of 274
000 day-old chicks a week, would have significantly reduced Natchix’s turnover and future profitability. The loss of the Daybreak
and Mike’s contracts alone would have a serious economic impact on the business of Natchix. It stands to reason that, when
almost a third of a business disappears overnight, a portion of the workforce would have to be retrenched. Moreover, quite apart
from the damages and lost profit, the loss of about one third of Natchix’s business would result in it losing significant economies
of scale (
Bundle II, Part 3 : 556 par 52-53).
Thirdly, a sudden termination of the long-term supply contracts would also have left Natchix with a surfeit of parent stock. It would
take Natchix at least 72 weeks, effectively the length of the poultry cycle, to reduce the number of parent stock to make allowance
for the termination of the Daybreak and Mike’s contracts (
Bundle II Part 2 : 529; Bundle II,
Part 3 : 556 par 52).
40.
The order inadvertently given by the Tribunal on 2 April 2002 was accordingly not justified by the evidence or the concerns of the
Commission or the customers that gave evidence, and, moreover, was unreasonable and excessive, devoid of commercial logic, and potentially
deleterious for the independent customers that the Tribunal (and the Commission) were intending to protect.
41.
In the circumstances, the following order is made:
(1)
condonation for the late lodging of the appeal is granted;
(2)
The appeal succeeds and the Merger Order is amended to read as follows:
2.1
by amending the opening clause of subparagraph 1.1 thereof (which currently reads “Subject to sub-paragraphs 1.3 and 1.4 below”to read as follows:
“Subject to sub-paragraphs 1.3, 1.4 and 1.5 below, in terms of the standard
form contract approved by the Competition Commission.”
2.2
by inserting a new subparagraph 1.5 as follows:
“1.5
1.5.1
The validity of any contract that was in existence between
Natchix and/or Astral on the one hand and independent customers on the other hand at the time of the Order remains unaffected by
the Order, subject to amendments required to ensure consistency with sub-paragraph 1.4 of the Order, and independent customers who
are party to such contracts shall remain bound thereby unless and until they conclude standard form contracts as envisaged in sub-paragraphs
1.5.2 and 1.5.3 below.
1.5.2
Subject to paragraph 1.5.3 hereof, independent customers who have concluded supply contracts must be afforded an opportunity to enter
into the standard form contract approved by the Competition Commission.
1.5.3
In the event of any independent customer with an existing contract concluding a standard form contract, neither
the volume of chicks ordered in terms of the existing contract, nor the notice period specified therein, can be varied in the standard
contract.”
Malan AJA
I agree and it so ordered
Jali JA
Hussain JA
Counsel for appellants: PB Hodes SC and PBJ Farlam
Date of appeal: 14 June 2004-06-18
Date of judgment: 25 June 2004
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