Joint ventures are generally only of interest to competition authorities when they trigger merger notification obligations, or are otherwise used as a platform for collusive or anticompetitive behavior.
Recently, the South African competition authorities’ interest has been peeked in joint ventures that have purportedly been used as a platform for cartel activity, and a number of decisions were handed down in 2018. This post answers a number of questions in light of these decisions, and highlights the implications of these decisions on future conduct by competitors looking to establish, or operate in, a joint venture.
Are joint ventures between competitors illegal under South African competition law?
No, joint ventures between competitors are not illegal in South Africa, and the Competition Commission does not automatically view joint ventures between competitors as cartel activity.
In the recent Wasteman Holdings case, the Commission recognized that the joint venture created a new investment that the competitors might not have invested in on their own or in competition with one another. What the Commission sought to impugn were the downstream activities of the competitors, which were coordinated through the joint venture.
Should joint ventures between competitors be formalized for purposes of competition law compliance?
Whilst not strictly required, formalization of joint venture agreements is encouraged. In Geometry Global the Competition Tribunal warned that “to those claiming to operate as a joint venture, we would caution that whispered agreements at side meetings are poor substitutes for formalized memorandums of understanding or joint venture agreements”.
When incorporating a joint venture with a competitor, may a non-compete clause be imposed?
In Dawn Consolidated Holdings, the Competition Appeal Court set out a three-step test to determine, objectively, whether a restraint (such as a non-compete clause) could be ‘characterized’ as falling outside of the scope of section 4(1)(b). These steps were:
- Is the main agreement (in this instance, the shareholders agreement or joint venture agreement) unobjectionable from a competition law perspective?
- If so, is a restraint of the kind in question (i.e. a non-compete clause) reasonably required for the conclusion and implementation of the main agreement?
- If so, is the particular restraint reasonably proportionate to the requirement served?
If a firm can answer all three steps in the affirmative, the restraint may be imposed in the joint venture agreement without contravening section 4(1)(b).
When might activities in joint venture contravene the cartel provisions in section 4(1)(b) of the South African Competition Act?
In the recent Wasteman Holdings decision, the Competition Tribunal found that competitors could not hide behind the notion of a separate legal entity to protect themselves from competition law contravention – even where a separate legal entity is involved, the true economic relationship will have to be considered for purposes of a section 4 complaint. The Competition Tribunal held that “It is not difficult to imagine how liability for collusion could be avoided if competitors could sanitize what would otherwise be a collusive arrangement by changing hats…. The real economic relationship remains one of two competitors reaching an agreement”.
Key take away points
There are at least three points arising from the cases referred to above which, if taken aboard, help mitigate the competition law risks arising from joint ventures between competitors:
- Geometry Global – Joint venture agreements between competitors should be in writing and formalized.
- Dawn Consolidated Holdings – Restraints in joint venture agreements between competitors should be assessed with regard to the Competition Appeal Court’s three step test, essentially requiring a reasonable relationship between any non-compete provision and the objective of the joint venture.
- Wasteman Holdings – Even though acting as a separate entity, such as a joint venture, firms will likely continue to wear the hat of “competitors” unless it can be shown that the entity is sufficiently independent. Actions and conduct by the separate entity, or joint venture, may be imputed on the competitors, who are shareholders or partners. Further, competitors, when exchanging information in the joint venture, should identify in advance and record the limits of the required information and the reason for the exchange – this would help explain the purpose of the exchange if ever questioned by the competition authorities.
The South African competition authorities have taken a balanced approach between preserving the efficiency gains arising from joint ventures and intervening when competitors use joint ventures for anti-competitive purposes. These recent cases provide welcome clarity on a range of issues which often confront joint venture parties.