Competition Authority decision of 30 November 1995 relating to a proceeding under Section 4 of the Competition Act, 1991.

Notification No. CA/698/92 - F.B.H. Distributors Limited/Harty Security Limited/Harty Holdings Limited/F.B.H. Limited - Asset Purchase Agreement

Decision no.  444.

Introduction

1.	An asset purchase agreement dated 7 February 1992 between F.B.H. Distributors Limited, Harty Security Limited, Harty Holdings Limited and F.B.H. Limited was notified to the Competition Authority on 30 September 1992. The notification requested a certificate under Section 4(4) or, in the event of a refusal to issue a certificate, a licence under Section 4(2) of the Competition Act, 1991.  A Statement of Objections was issued on 13 October 1995 to which no response was received. 

The Facts

(a)  The subject of the Notification

2.	The notification relates to an agreement dated 7 February 1992 between F.B.H. Distributors Ltd, Harty Security Ltd and Harty Holdings Ltd (the vendors) and F.B.H. Ltd (the purchaser) for the sale and purchase of the assets and business of a security products and equipment business which was owned by the vendors.

(b)  The Parties

3.	The vendors, located at Crossbeg Industrial Estate, Ballymount Road, Dublin 12 form part of a group of companies of which Harty Holdings Ltd is the ultimate parent company. F.B.H. Ltd is a relatively new company which was established to take over the assets pursuant to the sale.

(c)	The product and the market

4.   The arrangements concern the sale of assets relating to the vendor's security business, including stocks and spare parts as well as office furniture and equipment. According to the parties there are many other companies in Ireland involved in the buying of security equipment from suppliers outside the State. In addition it is easy for new entrants to enter the market. The purchasing company was set up to take over the assets and the business and therefore did not have a turnover in the relevant market at the time of the notification.   

(d)  The Arrangements

5.   The notified arrangements relate to an asset purchase agreement dated 7 February 1992 for the purchase by F.B.H. Ltd of all of the assets and business, including the intellectual property rights owned by the vendors. The business is described in the agreement as the 'Stockholding, Supplying, Servicing, Designing, Manufacturing, Physical and Electronic Security Products electronic swipe card systems, electronic funds transfer systems, electronic point of sale systems, and associated or related products, and office furniture and fittings including but not restricted to safes, locks, doors, cabinets (including fire), drawers, strong-rooms, access controls, alarms, CCTV, cash dispensing and vending machines.' F.B.H. Distributors Ltd and Harty Security Ltd owned the assets and business while Harty Holdings Ltd owned certain intellectual property rights in connection with the business. Of the total consideration [£   ], 79.37% [£   ] was paid on 7 February 1992, 10.25% [£   ] on 1 February 1993, 4.78% [£   ] on 31 July 1993 and 5.46% [£  ] on 31 January 1994. 

6.	Article 16 of the agreement contained a restrictive provision whereby the vendors covenanted that they would not compete with the business, either directly or indirectly, within the Republic of Ireland, for a period of five years from the date of the agreement.

(e)	Submissions of the Parties

7.	F.B.H. defended the five year non-compete clause, arguing that it was justified because the purchaser was paying for the assets over a three year period and the restrictive covenant extended for two years from the date of the last payment. It would not be commercially viable for the purchaser to buy the business and assets without the protection that the vendors could not commence in competition with them. The vendors were perfectly happy to enter into the restrictive clause. F.B.H. submitted that the intent of the agreement was not to restrict competition but merely to protect the purchaser's investment.

(e) Subsequent developments

8.	The Authority issued a Statement of Objections to the parties on 13 October 1995 indicating that it intended to refuse a certificate or licence to the notified agreement and setting out the reasons why it intended to do so. No response was received from them.

Assessment

(a)  Section 4(1)

9.	Section 4(1) of the Competition Act states that 'all agreements between undertakings, decisions by associations of undertakings and concerted practices which have as their object or effect the prevention, restriction or distortion of competition in trade in any goods or services in the State or in any part of the State are prohibited and void.'

(b)	The undertakings and the agreement

10.	Section 3(1) of the Competition Act defines an undertaking as 'a person being an individual, a body corporate or an unincorporated body of persons engaged for gain in the production, supply or distribution of goods or the provision of a service'. The parties to this agreement are the vendors and F.B.H. Ltd. At the time of the agreement the assets, business, and intellectual property rights of the business were owned by the vendors who were engaged for gain in the importation, supplying, servicing, designing and manufacturing of security products and equipment. F.B.H. Ltd purchased the business from the vendors and was therefore engaged for gain.
(c)	Applicability of Section 4(1)

11.	The Authority has stated its views on sale of business agreements in a number of previous decisions. It does not consider that it is necessary to restate these views at any length in this instance.  It has indicated that a sale of business per se  does not offend against Section 4(1). In this instance the purchaser is a company which was set up merely to take over the assets and was not previously involved in the business. Therefore the sale did not result in any increased concentration in the market concerned. In addition there are many other competitors importing and supplying security equipment in Ireland and there are no barriers to entry into the market. Consequently the Authority does not believe that this sale of business had any significant effect on the relevant market in the State.

12.	Article 16 of the agreement contained a restrictive provision whereby the vendors agreed that they would not compete with the business, within the State, for a period of five years from the date of the agreement. The Authority has considered similar restrictions in sale of business agreements in a number of previous decisions. It has indicated that provided such restrictions are limited in terms of duration, subject matter and geographical scope to what is necessary to secure the transfer of goodwill of the business being sold, it does not regard them as offending against Section 4(1). It has stated that it would normally consider a period of two years as adequate for such a purpose.  Therefore, the Authority considers that the five year restriction in Article 16 exceeds what is necessary to secure the transfer of the goodwill of the business. The parties have argued that the five year restriction is justified because of the three year deferred payment arrangement and that the restrictive covenant runs for two years after the final payment. The Authority does not accept that this is a legitimate reason for extending the non-compete clause. In any case the majority of the consideration (80% approx) for the business was paid on the date of the agreement and all of the assets and equipment on the business premises were transferred to the purchaser on that date. Therefore the Authority considers that in effect, the goodwill was also transferred on that date. The purchaser acquired control of the business upon completion. The fact that the full consideration was not paid upon completion did not impede the transfer of the goodwill.

Applicability of Section 4(2)

13.	Under Section 4(2), the Competition Authority may grant a licence in the case of any agreement or category of agreements which offends against Section 4(1) but which, `having regard to all relevant market conditions, contributes to improving the production of goods or provision of services or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit and which does not -
(i) impose on the undertakings concerned terms which are not indispensable to the attainment of those objectives;

(ii) afford undertakings the possibility of eliminating competition in respect of a substantial part of the products or services in question.'

14.	The restriction on competing in Article 16 of the Agreement goes beyond what is necessary to secure the transfer of the goodwill of the business. Consequently, in the Authority's opinion, it cannot be regarded as indispensable to the attainment of the objectives of the agreement and so does not satisfy the requirements for a licence. 
The Decision

15. 	In the opinion of the Competition Authority, the asset purchase agreement dated 7 February 1992, between F.B.H. Distributors Limited, Harty Security Limited, Harty Holdings Limited and F.B.H. Limited (notification no. CA/698/92) notified on 30 September 1992, under Section 7, constitutes an agreement between undertakings. It considers that the restriction in Article 16 of the agreement on the vendors competing with the business  offends against section 4(1) of the Competition Act and does not satisfy the requirements for a licence under section 4(2).   Consequently the Authority refuses to issue a certificate or grant a licence in respect of the notified agreement.

For the Competition Authority

Patrick Massey
Member
30  November  1995.