[6]
The Notice of Motion in this application for interim relief formulates the relief sought in the following terms:
“1. That the respondents be and are interdicted and restrained from enforcing clause 13 of the Sale Agreement...and/or from requiring that the applicant abide by aforesaid clause 13 and/or from implementing such clause on the basis that such clause constitutes a restrictive and/or prohibited horizontal practice as contemplated in section 4(1)(b) of Act No. 89 of 1998.
2. The relief sought in paragraph 1 above operates and/or remains in force until the earlier of-
2.1. a final determination of the applicant’s complaint in terms of Act No. 89 of 1998 (and which complaint will be lodged with
the Competition Commission simultaneously herewith) that clauses 2.9 and 13 of the aforesaid Sale Agreement constitutes a restrictive
and/or prohibited practice as contemplated in section 4(1)(a), alternatively section 4(1)(b) and 5(1) of Act No. 89 of 1998; or
2.2 a date that is 6 (six) months after the date of the granting of the relief sought in paragraph 1 above.
3. That the costs of this application be paid by the respondent in the event of it opposing this application.
4. Granting the applicant such further and/or alternative relief as the Honourable Tribunal deems fit.”
BACKGROUND
[7]
The applicant is RTG. When RTG was founded in 2000 its management held 50.1% of its issued share capital while RMB Corvest, a subsidiary
of the FirstRand Group, held the remaining 49.9%.
[8]
From its inception RTG focused principally on the market for the manufacture of analogue audio-visual formats (that is, VHS and audio
cassettes). Its entry into the market came through the acquisition of the analogue manufacturing and replication business of Abacus
Technology Holdings. In an effort to enhance its presence in the analogue market, an agreement was reached on 7 December 2001 between
RTG and Gallo, represented by Johncom, its holding company, whereby RTG acquired 100% of Gallo’s analogue business. The imperative
underlying Gallo’s disposition of its analogue business is understood to have been the rapid obsolescence of analogue technologies
and Gallo’s desire to focus on the newer technological formats, namely, Compact Discs (“CDs”) and Digital Versatile
Discs (“DVDs”), which were rapidly replacing the analogue formats.
[9]
The respondent is Gallo, a music and entertainment company located within the Johnnic Communications Limited Group (“Johncom”).
The Gallo Group comprises Gallo Music Group, Gallo Record Company, Gallo Music Publishers and CDT. Gallo’s interest in the
CD and DVD manufacturing, replication, editing, authoring, printing and packaging market resides in CDT. CDT was formed in February
1999 when key players in the South African music content industry, namely Gallo, EMI, and Warner Music, formed a joint venture –
CDT - to manufacture CDs in South Africa. In due course all other parties withdrew from the joint venture and CDT became wholly owned
by Gallo.
[10]
On 13 March 2002, RTG acquired a 28.55% shareholding in CDT from Gallo. In due course RTG acquired a further 12%, bringing its shareholding
in CDT to approximately 40%. Gallo continued to hold the remaining 60% of CDT. Prior to RTG’s acquisition of its interest in
CDT it did not participate in the DVD and CD market. Indeed, as is confirmed by the affidavit of Hermanus Carel Trollip, RTG expressly
acquired a shareholding in CDT in order to gain exposure to the CD and DVD market. Although Gallo continued to control a majority
of the shares in CDT, managerial responsibility was effectively assumed by its joint venture partner, RTG, whose CEO, Shimon Henry
Teperson, was appointed the CEO of CDT.
[11]
During 2004 RTG decided to sell its 40% stake in CDT in order to redeem its shareholders’ investments. Various explanations
are offered for RTG’s decision to exit CDT. It is claimed that the decline of the analogue format market underpinned financial
problems in RTG. There is also evidence that the management of RTG wished to pursue interests in the digital format market in Australia.
What is clear is that the management of (and majority shareholders in) RTG had decided to exit the South African CD and DVD market.
Accordingly, Teperson and his fellow shareholders concluded an agreement to sell RTG’s 40% shareholding in CDT to RMB Corvest.
However, Gallo elected to exercise a pre-emptive right to purchase RTG’s interest in CDT and so displaced RMB Corvest as the
purchaser of RTG’s shareholding. CDT thus became a wholly owned subsidiary of Gallo.
[12]
Gallo, through CDT, is the largest domestic participant in the South African market for CD and DVD manufacturing, replicating, DVD
authoring, editing, printing, packaging, marketing and sales with focus on music and film home entertainment (“the South African
CD and DVD Market”).
[13]
The Sale Agreement entered into between Gallo and RTG contained a restraint clause forbidding RTG from furnishing CD and DVD manufacturing,
replication, marketing, packaging and sales services to approximately 592 CDT customers for a period of two (2) years. Put differently,
RTG was free to remain in the market and furnish its services to any customer, except to those customers specifically identified
as CDT customers. It is interesting to note that the identical restraint clause is to be found in the aborted sale agreement concluded
between RTG and RMB Corvest.
[14]
Note that RTG has not exited the digital format market, nor is this required by the terms of the restraint which is limited to specified
customers. Indeed, it appears that RTG utilised part of the proceeds of its sale of its share of CDT to purchase the equipment necessary
to remain in this market. Hence, it is active in the adult entertainment niche of the market which Gallo/CDT eschews. It also appears
to have serviced customers not listed in the annexure to the sale agreement and therefore not subject to the restraint. It has also
undeniably continued to service certain customers whose custom is indeed subject to the restraint.
[15]
Central to this application is the desire on the part of RTG – which appears to have abandoned its Australian ambitions soon
after concluding the sale of CDT - to extend its digital services to customers from whom it is precluded under clause 13 of the Sale
Agreement. RTG has accordingly now approached us seeking an interim order interdicting and restraining Gallo from enforcing clause 13 on the ground that the clause constitutes market division by allocating customers in contravention of section
4(1)(b)(ii) of the Competition Act. Gallo opposes the application. These are the contending positions upon which the Tribunal must
adjudicate.
INTERIM RELIEF
[16]
Section 49C(2)(b) of the Competition Act provides:
“The Competition Tribunal-
....
(b) may grant an interim order if it is reasonable and just to do so, having regard to the following factors:
(i) the evidence relating to the alleged prohibited practice
(ii) the need to prevent serious or irreparable damage to the applicant; and
(iii) the balance of convenience.”
[17]
We have previously decided that section 49C(2)(b) properly construed does not require that each of the listed factors be independently
and separately satisfied before interim relief is granted. In National Wholesale Chemists (Pty) Ltd and Astral Pharmaceuticals (Pty) Ltd et al, also an application for interim relief, we held that in terms of section 49C(2)(b) the Tribunal is not required to establish that
each of the requirements has been established in isolation, but must rather consider all the factors listed in section 49C(2) as
a whole to see whether a case for interim relief has been established. That is, a weak case on, say, irreparable harm may be counterweighted
by a very strong case on the balance of convenience or particularly persuasive evidence of prohibited practice. In Nedschroef we observed that the section starts of by making the threshold requirement that the granting of the order is ‘reasonable and just’ and then requires that the Tribunal has regard to the constituent factors which must again be balanced and weighed through
the prism of what is ‘reasonable and just’. Section 49C therefore confers a discretion on the Tribunal to grant interim
relief having regard to what is reasonable and just in the circumstances. Indeed the Competition Appeal Court took a similar view
in National Association of Pharmaceutical Wholesale et al v Glaxo Wellcome (Pty) Ltd where it held: “The above requirements are however not determinative and even where all these requirements are present a court has discretion to refuse
an interim interdict.”
EVIDENCE OF A PROHIBITED PRACTICE
[18]
As noted above, the complaint lodged by RTG with the Commission alleges that Clause 13 of the Sale Agreement is a market sharing arrangement
between RTG and CDT in contravention of Section 4(1)(a) of the Competition Act, alternatively Section 4(1)(b) and Section 5(1) thereof.
This application has focused on an alleged violation of Section 4(1)(b)(ii) which provides for a per se prohibition of agreements between firms in a horizontal relationship which divide markets by ‘allocating customers’. It is from this alleged contravention that RTG seeks interim relief.
[19]
However, as we shall demonstrate, we are, in fact, here dealing with a common garden variety restraint of trade normally associated
with the sale of a business. Indeed to the extent that it differs from a typical restraint of trade, its distinguishing features
are to be found in the limited nature of the restraint imposed.
[20]
Firstly, it is limited as to duration – as noted above, it is a two year restraint that has a little over six months to run.
This stands in stark contract with the 10 year restraint encountered in Nedschroef upon which the applicant places much reliance. As we observed at the time that the Nedschroef matter was decided the restraint still had another 5 years to run.
[21]
Secondly, the restraint before us does not, as is normal in restraints of this sort, require that the restrained party refrain from
participation in the market altogether. As stated above, RTG is free to participate in the adult entertainment market in which CDT
does not compete and it is free to compete for the business of customers who are not listed in the pertinent annexure to the sale
agreement. While we acknowledge that the restraint covers the most significant consumers of the relevant services and products, the
evidence is that it is an expanding market. Moreover, as already mentioned above, the restraint is not absolute insofar as the restrained
party is entitled to compete in the restricted part of the market with the prior written consent of its contracting partner. In fact
RTG did approach Gallo with just such a request, although, as observed above, it appears, that at the time that this approach was
made, it had, contrary to its contractual commitment, already provided certain of the services in question to some of the prescribed
customers. RTG and Gallo could not agree on the terms of the compensation to be paid by RTG in exchange for Gallo’s permission
for it to operate outside of the terms of the restraint. RTG offered compensation by way of a portion of the revenue generated from
customers subject to the restraint, whereas Gallo, consistent with its view that the sale price was, in significant part, constructed
on the basis of the restraint, proposed that the sale price be adjusted in order for RTG to be freed from the restraint.
[22]
However, our essential point is that the specific terms of the restraint imposed upon RTG do not seem unduly restrictive relative
to restraints of this type.
[23]
Counsel for RTG has attempted to distinguish this restraint from those ‘normal’ restraints which are characteristically
cast as mechanisms for protecting the ‘goodwill’ acquired by the purchaser. He argued that goodwill properly resides
in CDT which is, as a result of the sale, now in the sole ownership and control of Gallo. RTG, or so its Counsel appears to argue,
cannot appropriate the goodwill of CDT - only its managers and part-owners and Teperson, in particular, are able to do this and they
are not the subject of the restraint. However, this argument is without merit.
[24]
Prior to the sale RTG managed CDT. Its CEO – Teperson – was also the CEO of CDT. It is admitted that Teperson –
and the RTG management generally – are intimately familiar with the business secrets and strategies of CDT and, but for the
restraint, would have unhindered access to the customer base which they were instrumental in creating. There can be no doubt that
the commercial merit of Gallo’s purchase of RTG’s interest in CDT would be severely compromised if RTG, part-owned and
managed by Teperson and his colleagues, was permitted to act without restraint in the immediate aftermath of the transaction. Gallo
avers that this was the basis for the agreed price and this is indeed confirmed by those sub-clauses of the restraint clause in which
both parties accept that the transaction would not have taken place but for the restraint and, moreover, that the restraint is ‘fair
and reasonable’. While it may have arguably been more appropriate to impose the restraint on Teperson and other RTG managers,
subsequent evidence of their flagrant disregard for contractual commitments and for basic honesty in the conduct of their business
affairs establishes that a restraint of this sort would have been even more difficult to enforce than that imposed on the corporate
entity, RTG, which they control and which was the entity that managed CDT. Moreover, RTG argues that any restraint imposed on Teperson
would have ‘borne no connection to the sale’. The mere fact that an unrestrained Teperson finds it necessary to participate
in the market through the medium of RTG indicates that the restraint is correctly located. And so whether or not the restraint conforms
in all its aspects to a ‘traditional’ restraint of trade is beside the point. What is clear is that the restraint was
necessary to protect the value of the investment made by Gallo and was a precondition for RTG being able to realise its investment
in CDT.
.RTF of original document