Firms can have their (ice cream) cake and eat it too: Non-compete clauses are not necessarily anti-competitive

The Competition Tribunal (Tribunal) recently unconditionally approved a large merger between two firms active in the ice cream industry, namely Nestlé S.A (Nestlé), as the primary acquiring firm, and R&R Ice Cream Public Limited Company (R&R), as the primary target firm. In its reasons issued on 12 August 2016, the Tribunal re-affirmed some of the basic principles surrounding non-compete clauses.

12 Oct 2016 2 min read Competition Alert Article

Prior to the proposed transaction, R&R, which is controlled by PAI Europe V (Fund V), had recently entered the ice cream market through its acquisition of the whole of Nestlé’s South African ice cream business.

The Tribunal noted that the proposed transaction would form part of a global transaction in terms of which Nestlé and Fund V would incorporate a joint venture (JVCo), to which both Nestlé and Fund V would contribute certain rights and assets. Nestlé and Fund V would enjoy joint control of JVCo. Effectively, this would result in Nestlé re-acquiring control of the ice cream business which R&R had recently acquired.

The Tribunal agreed with the Competition Commission’s (Commission) finding that the proposed transaction gave rise to a product overlap in the market for the manufacture and supply of ice cream. However, since there was no geographic overlap as Nestlé did not operate an ice cream business in South Africa, the Tribunal agreed with the Commission’s finding that the proposed transaction was unlikely to substantially prevent or lessen competition.

The Tribunal then considered whether a non-compete obligation, which was agreed to by Nestlé and Fund V in respect of the JVCo, was anti-competitive. The non-compete obligation was such that Nestlé and Fund V would not engage in any activities which would compete with the business of the JVCo. The test applied in this regard is whether the non-compete obligation is reasonable and commercially justifiable.

The Tribunal firstly considered the duration of the restraint. Without mentioning the precise duration of the restraint, the Tribunal held that the restraint was reasonable and commercially justifiable in light of the fact that the restraint was “only limited to a certain period.” The Tribunal proceeded to consider the nature of the restraint and held that since it only concerned the activities that would compete with the JVCo, it was able to pass muster. The Tribunal therefore concluded that the non-compete obligation did not give rise to any concerns from a competition law perspective.

This decision confirms that non-compete obligations are not necessarily anti-competitive, provided that the extent of the activities they seek to limit are not overbroad and the period of time for which they apply is limited.

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