Irish Competition Authority Decisions

1. Arrangements for the purchase of Scully Tyrrell & Company by Edberg Limited were notified to the Competition Authority on 31 July, 1992. The notification requested a certificate, or in the event of a refusal by the Authority to grant a certificate, a licence. Following discussions with the Competition Authority, certain aspects of the notified arrangements were amended by a supplemental agreement dated 18 December, 1992 and received by the Authority on 14 January, 1993.

2. Notice of the intention of the Authority to take a favourable decision in relation to the arrangements was published in the Irish Times on 18 December, 1992. No observations were received from third parties.

3. The decision concerns a series of related agreements namely;

- The STC Agreement or the Irish Business Sale Agreement;

- The Option Agreement;

- The Putman Sale Agreement;

- The Shareholders Agreement;

- A number of Service Agreements.

Under these agreements Edberg Limited (Edberg) acquired the business of Scully Tyrrell & Co (STC) which was engaged in the business of loss adjusting. Edberg is a subsidiary of Robins Holdings Ltd. (RHL) and had already acquired the business of Robins Davies (Ireland) Ltd. (RDI), a subsidiary of RHL which was engaged in loss adjusting in Ireland. A number of the former partners in STC acquired a 38% shareholding in Edberg with the balance being held by RHL. The arrangements give the STC partners a degree of control over Edberg. The arrangements also include a number of non-competition provisions.

4. Edberg is a private limited company registered in Ireland. It was incorporated on 18 June, 1992, for the purpose of acquiring the business and assets of RDI, insurance loss adjusters, and STC. Edberg is a wholly owned subsidiary of RHL, a private limited company engaged, inter alia , in the loss adjusting business in the UK, which had previously owned RDI. The parent company of RHL is a Swiss company, SGS Societe Generale De Surveillance Holding SA (SGS). Its principal activities are inspection and monitoring concerning trading and shipping of raw materials, petroleum and petrochemical, agricultural produce, consumer goods and industrial equipment. A significant part of the activities of SGS is the provision of loss adjusting services for insurance companies through its subsidiaries RHL and GAB. According to the 1991 Annual Report of SGS ´the division is one of the largest property loss adjusters in the world.' [1] RHL subsidiaries are engaged in loss adjusting in many countries throughout the world.

5. RHL carried on business in the insurance loss adjusting sector in Ireland indirectly through RDI which was established in September 1985. RDI had accumulated losses of £424,000 as of 31 December 1991.

6. STC was a partnership of eight individuals engaged in the business of insurance loss adjusters and related services to the insurance industry in Ireland. They employed 55 people of whom 31 were loss adjusters. The vast bulk of its business was in the property/fire sectors. The instructing principals for STC were almost exclusively insurance companies. The STC partners who are parties to the present arrangements are listed below.

D.P. Scully

J.M. Tyrrell

T.P. Crawford

D.F. Herbert

W. Sleater

T.F. Conroy

M. O'Donoghue

D. Putman

7. This notification relates to the provision of a range of loss adjusting services to the insurance industry. Services covered by the notification include risk monitoring, claims investigation, project monitoring, risk surveying, valuation, revaluation, estate reinstatement, claims handling and surveying in respect of claims for fire and property damage. Loss adjusting in respect of fire and property damage claims constitutes a distinct market from other types of loss adjusting and this is the market in which STC and RDI are engaged. [2]

8. Some insurance companies employ inspectors to assess claims. When, however, the claim involves amounts in excess of £5000, it is the practice for insurance companies to engage a company from their panel of loss adjusters to facilitate the processing of the claim. It is the function of loss adjusters to check the claim made by the insured parties, making any enquiries necessary to agree fair values within the terms of the policy. Should adjustments - either upwards or downwards - be required, the adjuster will bring these to the attention of the insured. After agreement of the proposed settlement figure with the insured, the adjuster will report to the insurers with a recommendation for payment. The instructions under which an adjuster works do not allow him to commit his principals to the payment of a particular sum. His duty is to report the facts and to recommend the amount which he considers is representative of their liability. The final decision on payment then rests with the insurers. Loss adjusters are generally paid a proportion of the final settlement figure calculated on a sliding scale. The parties stated that in the past loss adjusters' fee scales were based on scales recommended by the Chartered Institute of Loss Adjusters (CILA). This practice was abandoned some time ago and now each individual firm sets its own scale of fees. While it appears that virtually all loss adjusters operate a sliding scale of fees based on the final settlement figure, the Authority discovered at least one firm which charges on the basis of time involved in each particular case. The Authority checked with a number of leading insurance companies who confirmed that loss adjusting firms' fees differ.

9. Insurance claims paid in respect of fire and property damage in Ireland amounted to £117.8m in 1990. Almost all of this was paid by firms with head offices in Ireland with the balance attributable to overseas firms. In general, overseas companies will employ locally based loss adjusters unless the policy nominates a specific firm for this purpose.

10. Loss adjusting firms in Ireland are either partnerships or small companies. STC is the largest loss adjusting company based in Ireland. Its major competitors are Farrells, Thornton & Partners, McLarens and Astons. RDI has a negligible share of the market. Foreign loss adjusting companies can and do provide services to principals in Ireland through subsidiaries based here or through intermediaries.

11. The notifying parties have stated, and the Authority accepts, that it is difficult to obtain accurate information on market shares held by the various loss adjusting firms, as many are partnerships or private companies, and do not publish accounts. They have suggested that the number of loss adjusters engaged by each firm as a proportion of the total number of loss adjusters engaged, could be used as a proxy for the market share of STC. The Authority recognises that this is not an ideal measure of market share, but believes nonetheless, that it provides some guide to the market shares of the various firms.

STC 31 26.5

Farrells 20 17.1

Thornton & Partners 14 12.0

McLarens* 13 11.1

Astons 11 9.4

Thomas Howell* 7 6.0

Toplis Hume* 7 6.0

Thornton Adjusters 4 3.4

RDI* 3 2.5

Others (3) 7 6.0

Total 117 100.0

* Denotes subsidiaries of UK firms.

Market share figures are estimated on the basis of the number of loss adjusters engaged by each firm as a proportion of the total number of loss adjusters engaged by all firms in the market. The figures in the table on the number of loss adjusters engaged by each firm were supplied by STC. The Authority checked these figures with each of the other named firms and while it found some discrepancies, it is satisfied that the figures shown are broadly representative of the actual position.

12. There are 12 firms operating in the loss adjusting market. Four of these are subsidiaries of UK firms. Six firms have entered the market within the past 10 years. In many instances these new firms were established by individuals who had previously worked for one of the incumbent firms.

13. RDI accounts for 2.5% of all loss adjusters engaged according to the figures submitted by the parties. More importantly, comparing STC's turnover with that of RDI, would imply that RDI's market share was around 2%, assuming that the STC share is estimated correctly. While recognising the shortcomings of calculating market shares on the basis of employment shares, the Authority believes that estimates of market shares for all firms should be made on a consistent basis, and so it has adopted a figure of 2.5% for RDI's market share.

14. The arrangements were not subject to notification under the Mergers Act because the relevant turnover and value of assets figures did not exceed the thresholds for notification.

15. The notification involves a series of related agreements.

On 24 July 1992 Edberg, (the purchaser), and D.P. Scully & Others, (the ´Vendors') [3], entered into an agreement for the sale and purchase of the business and assets of STC, (´the STC Agreement'), whereby, Edberg agreed to acquire the business of loss adjusters carried on by the Vendors in partnership under the name of Scully Tyrrell & Company. The consideration to be paid pursuant to the terms of the STC Agreement comprised both cash and the issue of shares in Edberg to the Vendors. On completion of the sale and purchase of the business and assets of STC, and payment of the purchase consideration by Edberg, RHL will be the beneficial owner of 62% of the Edberg share capital and the Vendors will be the beneficial owners of the remaining 38%. All of the Vendors, (except Mr. Putman), are to become directors of Edberg under the terms of the Shareholders Agreement which gives them a considerable degree of control over the business. They have also agreed to continue working for the company for a minimum period of 3 years.

16. Mr. Putman, who was a partner in STC based in the UK, will not remain involved with Edberg. The Edberg shares paid to him in respect of his interest in STC are the subject of a separate agreement between Mr. Putman and RHL, (the ´Putman Sale Agreement'), whereby RHL has agreed to purchase Mr. Putman's shares. There are no non-compete clauses or other restrictive provisions in this agreement.

17. The STC Agreement requires the parties thereto to enter into a number of other agreements on completion of the matters provided for therein:

(a) a shareholders agreement between RHL and the Vendors, (other than Mr. Putman), who, following completion of the matters provided for in the Putman Sale Agreement, will be the beneficial owners of the entire share capital of Edberg, with RHL owning 62% and the Vendors, (other than Mr. Putman), owning the remaining 38%, (the ´Shareholders Agreement');

(b) an option agreement between the Vendors, (other than Mr. Putman), and RHL, (the ´Option Agreement'), whereby the Vendors, (other than Mr. Putman), grant an option to RHL to purchase all their equity share capital in Edberg upon the terms and conditions set out therein;

(c) service agreements between each of the Vendors, (other than Mr. Putman), and Edberg, (the ´Service Agreements'), pursuant to which each of the Vendors will agree to act as a director and become an employee of Edberg for three years, with effect from completion of the matters provided for in the STC Agreement, and continuing after the three year period on a rolling basis, subject to termination on six months notice.

18. Clause 12 of the STC Agreement as notified contains a number of restrictions on the future activities of the Vendors. These are:

´12.1 The Vendors hereby severally covenant to the Purchaser that each such Vendor shall not during the longer of (i) a period of 3 years from Completion and (ii) the Second Period (as hereinafter defined), in the Republic of Ireland or Northern Ireland or England or Wales or Scotland or the Channel Islands or the Isle of Man either solely or jointly with or as officer, employee manager adviser consultant or agent of any other person firm or corporation directly or indirectly (other than by way of bona fide investments or holding of shares not exceeding 5 per cent in nominal value of any class or share capital of a company whose share or loan capital is quoted or listed or regularly dealt in on a recognised Stock Exchange) carry on or be engaged or concerned or interested in any business competing with the business of loss adjusting. "The Second Period" means the period of 2 years from the date of termination of the relevant Vendor's employment with the Purchaser, except that:

(a) if such employment is terminated by the Purchaser in breach of the terms thereof, there shall be no Second Period;

(b) if such employment is terminated by notice in accordance with Clause 2.2 of the Service Agreement (or any provision agreed by the relevant Vendor and the Purchaser in substitution therefor), the Second Period shall be the period of 6 months from the date of termination of the relevant Vendor's employment with the Purchaser.

12.2 The Vendors hereby severally covenant with the Purchaser that each such Vendor shall not during the longer of a period of 3 years from Completion or a period of 2 years from the termination of the relevant Vendor's employment with the Purchaser either on his own account or jointly with or as officer employee manager adviser consultant or agent for any person firm or corporation directly or indirectly:

(a) canvass solicit orders from in relation to the business of loss adjusting interfere with or endeavour to entice away from the Purchaser any person firm or company with which he has had dealings and who or which has in the period of two years prior to Completion or the date of termination of employment (as the case may be) been a client or employee of the Business or the Purchaser;

(b) use at any time after Completion together as all or part of a name or as a trade or service mark or part thereof or use to trade under the words "Scully" or "Tyrrell" or "Scully Tyrrell" or any colourable imitation thereof (in each case whether or not such words are separated by other words) in relation to any business which is competitive with the business of the Purchaser....'

19. Several provisions in the Shareholders Agreement grant powers to the Vendors. These are as follows:

´3.1 Subject to the terms of this Agreement, the Vendors shall be responsible for the day to day management of the Business subject to the overall control of the chief executive of Robins'.

Clauses 5.1 and 8.2 provide that the quorum at board meetings and general meetings requires one representative from each of Robins and the Vendors.

Clause 6.1 requires the approval of Robins and the majority of the Vendors for a wide range of matters including:

- the creation or issue of any shares or the grant or agreement to grant by the Company any option over shares or uncalled capital of the Company or the issue of any loan capital convertible into shares;

- the distribution of any amount standing to the credit of any reserve of the Company;

- the sale or disposal of any assets of the Company having an aggregate book value in excess of IR£5,000 or the purchase of any assets for an aggregate consideration in excess of IR£5,000;

- the amalgamation or merger of the Company;

- any expenditure in excess of an aggregate of IR£10,000 or the making of any capital commitment in excess of IR£10,000;

- the commencement of any new type of business;

- the borrowing of any moneys;

- the lending of any moneys;

- any change to the terms of employment of the Vendors and all employees and former employees of the Company and the appointment, removal or remuneration of any employee or consultant of the Company;

- the opening or closing of any office.

´7.1 Each of the Vendors shall, for so long as he remains a Shareholder of the Company, be entitled to be a Director of the Company. Robins shall be entitled to appoint such number of Directors of the Company as it shall in its absolute discretion determine. The initial Directors shall be as follows:

D P Scully P Gregg

J M Tyrrell M Creed

T P Crawford C Carter

D F Herbert R Binning

W Sleater

T F Conroy

M O'Donoghue'

In addition Clause 10 provides that all of the distributable profits in any financial period up to 31 December 1994 shall be distributed by way of dividend unless Robins and a majority of the Vendors agree otherwise.

20. Clause 14.1 of the Shareholders Agreement provides for an undertaking by the shareholders relating to the disclosure of confidential information as follows:

´Each of the Shareholders undertakes to the other and to the Company that he will not and the Shareholders will procure that the Company will not at any time hereafter without the prior consent of the Shareholders divulge or communicate to any person (other than to officers or employees of the Company or its subsidiaries whose province it is to know the same or to Robins or to any subsidiary of Robins or when required by law) any confidential information concerning the business, accounts, finance or contractual arrangements or other dealings, transactions or affairs of the Company or any of the Shareholders which may come to his knowledge as a shareholder in, or through a director of, the Company and he shall use all reasonable endeavours to prevent the publication or disclosure of any confidential information concerning such matters and these obligations shall survive the termination of this Agreement.'

21. Under the terms of the Option Agreement RHL has an option on the Vendors' shares in Edberg. The agreement includes the following clauses:

´3.1 To the extent that the Option has not been exercised under Clause 3.2 the Purchaser may exercise the Option in respect of all but not some only of the Option Shares held by each Vendor (and so that the Purchaser may at its sole discretion exercise the Option in respect of any one or more of the Vendors) by serving notice in writing at any time during the period from 1st April 1995 to 31st October 1995 (´ The Option Period ').

3.2 If prior to 31st December 1994 (or, in the case of Mr. Scully, 31st December 1993):

(a) the contract of employment of any of the Vendors with the Company is terminated in circumstances where the Vendor is at fault, that is, either:

(i) the contract is terminated by the Company on any of the grounds set out in sub-clauses (a) to (e) of Clause 12.1 of the Vendor's service agreement; or

(ii) the contract is terminated by the Vendor in circumstances where he was not entitled to do so; or

(b) any of the Vendors is in breach of Clause 12 of the Business Sale Agreement; or

(c) any of the Vendors becomes bankrupt or makes an arrangement or composition with his creditors;

then the Purchaser shall be entitled to serve on that Vendor within three calendar months from the date of such event coming to the knowledge of the Purchaser, a written notice exercising the Option in respect of all but not some only of the Option Shares held by that Vendor.'

22. Schedules 5, 6 and 7 of the Option Agreement provide for the calculation of the consideration payable to the Vendors on termination of their employment contracts. The consideration involved will differ depending on how and when the employment contracts are terminated. If the option is exercised under clause 3.1 of the 'Option Agreement' i.e. after 3 years, the consideration is a proportion of the value of Edberg Limited, calculated by reference to the ratio of the shares held by the Vendors to the entire issued share capital of the company. Where the contract of employment is terminated within 3 years for a reason other than as referred to in clause 3.2(a) above, the consideration payable to the Vendors will be a fraction of that payable under Clause 3.1. This fraction will be based on the number of days worked as a fraction of the number of days to be worked under the employment contract (3 years or 1096 days). If the option is exercised in accordance with any other part of clause 3.2, the consideration payable to the Vendors will be the sum of £1.

23. The Service Agreements provide (in clause 2.2) that the individuals concerned will be employed by Edberg ´for a period of 3 years and thereafter unless and until determined by either party giving to the other no less than 6 months prior written notice expiring on or at any time after the third anniversary hereof.' Clause 2.4 provides that if either party should give notice of termination to the other pursuant to clause 2.2, then the Company is not obliged to provide work and may require the individual concerned not to attend at any of its premises nor to undertake any work for the company during the period of such notice.

24. The Service Agreements also contain the following provisions relating to confidentiality and restrictions on competition:

´Confidentiality

11.1 The Appointee shall not (except in the proper course of his duties hereunder) either during or at any time after the termination of the Employment divulge to any person whomsoever and shall use his best endeavours to prevent the unauthorised publication or disclosure of and shall not use for his own purposes or for any purposes other than those of the Company any knowledge or information relating to any trade secret, process or invention or concerning the business or finances of the Company or any dealings, transactions or affairs of it or of any officers or employees of the Company or any other information of a confidential character (including confidential information belonging to or relating to any third party) which may come to his knowledge during or in the course of the Employment. Such restrictions shall not apply to any knowledge or information which is or may become (otherwise than through the default of the Appointee) available to the public generally.

11.2 All notes memoranda and records made or used by the Appointee in relation to any of the knowledge or information referred to in Clause 11.1 shall be and remain the property of the Company and shall be delivered together with all copies thereof, to the Company or as it shall direct from time to time on demand or forthwith when the Appointee leaves the service of the Company.'

14.1 Subject as hereinafter provided the Appointee shall not either during the Employment or for a period of 2 years from the date of termination of the Employment in the Republic of Ireland, Northern Ireland, England, Wales, Scotland, the Channel Islands or the Isle of Man either solely or jointly with or as officer, employee, manager, adviser, consultant or agent of any other person firm or corporation directly or indirectly (other than by reason of such shareholdings as are permitted by Clause 5.1 hereof) carry on or be engaged, concerned or interested in any business competing with the business of loss adjusting as carried on by the Company at the date of the termination of the Employment. If the Employment is terminated by the Company:

(a) in breach of the terms set out herein, the said covenant shall not apply;

(b) by notice in accordance with Clause 2.2 (or any provision agreed by the Company and the Appointee in substitution therefor), the period of 2 years shall be reduced to a period of 6 months from the date of termination of the Employment.

14.2 The Appointee hereby covenants with the Company that he will not either during the Employment or for a period of 2 years after the termination of the Employment either on his own account or jointly with or as officer, employee, manager, adviser, consultant or agent of any other person firm or corporation directly or indirectly canvass solicit interfere with or endeavour to entice away from the Company any person firm or company with which he has had dealings and who or which has in the period of 2 years prior to the date of termination of the Employment been a client or employee of the Business or the Company.'

25. Clause 12.1 of the Service Agreements sets out the basis on which Edberg Limited may terminate the appointment of the Vendors. The relevant provisions are:

´The Company may at any time by notice in writing to the Appointee forthwith terminate the Employment and the Appointee shall have no claim against the Company in respect of such termination, if the Appointee shall:

(a) commit any material breach of this Agreement other than such a breach which is capable of remedy and is remedied by the Appointee within 14 days of the Company requesting the same in writing, or continue (after being given a written warning stating that continuance or repetition of the breach could lead to the Appointee's contract of employment with the Company being terminated) any other breach of any of his obligations (whether under this Agreement or otherwise) to the Company;

(b) be guilty of any fraud or grave misconduct or be convicted of any indictable criminal offence (other than a motoring offence not resulting in a custodial sentence);

(c) become bankrupt or compound or make any arrangement with his creditors;

(d) be guilty of conduct which might reasonably be considered to be likely to bring himself or the Company into disrepute;

(e) be or become prohibited by law from being a director;

(f) be, for any cause, incapacitated from efficiently performing his duties hereunder for 26 consecutive weeks, or for periods aggregating 130 working days in any period of 52 weeks; or

(g) become a patient for any purpose of any legislation relating to mental health.'

26. It was stated that RHL made an initial takeover approach to STC in the mid 1970s but nothing had come of this. The parties indicated that the initiative for the present arrangements had come from STC as it wished to expand outside of Ireland and considered that such a link-up made sense given the advent of the Single European Market.

27. The notifying parties have asserted that the STC Agreement does not fall within the ambit of Section 4 of the Competition Act for the following reasons:

´(i) The sale and transfer of the business pursuant to the STC Agreement is tantamount to a "concentration" within the meaning of the decisions and practice of the Commission. It is well established that Article 85(1) of the Treaty of Rome does not apply to "Concentrations". Accordingly as the sale and transfer of the business pursuant to the STC Agreement is tantamount to a "Concentration" as outlined above, it does not fall within the ambit of Section 4 CA 91.

(ii) The STC Agreement and the provisions of clause 12 thereof do not constitute an agreement between "Undertakings" within the meaning of Section 3(1) CA 91 in view of the fact that the Vendors have agreed to act as and become directors and employees of and/or minority shareholders in Edberg as and with effect from completion of the transfer of the business to Edberg and in their capacity as such must be treated as forming an integral part of the same economic undertaking as Edberg.'

28. The notifying parties also argue that the STC Agreement does not have as its object or effect the prevention, restriction or distortion of competition because:

´....the Vendors will become directors, employees and minority shareholders of Edberg, and as such form an integral part of the same economic unit or undertaking as Edberg, the Vendors cannot be said to be competitors or potential competitors of Edberg and, in the absence of the restrictions contained in clause 12 of the STC Agreement, there cannot be said to be any real likelihood of the Vendors engaging in the insurance loss adjusting business [in] competition with Edberg.'

´Notwithstanding that Edberg will have acquired the business of RDI prior to the acquisition of the business of STC, with an apparent reduction in the number of competitors in the market after completion of these acquisitions, there will in fact be no effect or no real or appreciable effect on competition in the market because the insurance loss adjusting business in the Republic of Ireland is a very competitive and fluid market with numerous competitors, fragmented market share and no material cost or other impediments or barriers to market entry or exit.'

29. It is submitted that the insurance loss adjusting business in the Republic of Ireland is relatively easy for new competitors to enter and leave and is therefore highly ´contestable' and that the STC Agreement and clause 12 thereof cannot be regarded as having any effect or any real or appreciable affect on competition in this market in accordance with the economic rationale of the ´contestability theory' and the criteria highlighted in the Nallen/O'Toole Decision.... Insurance loss adjusting services can also be freely provided across international borders and this is occurring on an increasing basis. Insurers generally spread business amongst a number of loss adjusters who compete with each other for the business at competitive rates.

30. Accordingly, even if the restrictive covenants in clause 12 of the STC Agreement could be construed as apparently falling within the parameters of Section 4 CA 91, the covenants do not infringe Section 4 CA 91 since they do not have any effect or any real or appreciable affect on competition in the insurance loss adjusting business in the Republic of Ireland or in any part thereof....'

31. In relation to the restrictive covenants included in Clause 12 of the STC Agreement, the notifying parties argue that:

The covenants contained in clause 12 of the STC Agreement do not involve a restriction on competition as they are limited in terms of duration, geographical scope and subject matter to that which is necessary and reasonable in all the circumstances to complete the transfer of the full commercial value of the goodwill of the business of Edberg pursuant to the STC Agreement. Accordingly, the covenants contained in clause 12 of the STC Agreement do not contravene Section 4(1) CA 91.

This submission is clearly supported by the decisions and practice of the Commission and the ECJ.... by Irish common law and by the previous decisions of the Competition Authority in similar cases....

This submission is further supported by analogy with the policy underlying the EC Mergers Regulation as interpreted by the Commission.... on the basis that, to the extent that the covenants in clause 12 of the STC Agreement may constitute restraints on the Vendors such restraints are directly related and necessary to the implementation of the "Concentration" and are therefore properly ancillary to the "Concentration" and not in breach of Section 4(1) CA 91 since they are reasonable in duration, geographical scope and subject matter.

It is submitted that the covenants contained in clause 12 of the STC Agreement do not restrict competition in the insurance loss adjusting business and do not therefore offend against Section 4(1) CA 91 as they are a legitimate means of ensuring the performance of the Vendors' contractual obligations to effectively complete the sale and transfer of the full commercial value of the business to Edberg and are of a duration, geographical scope and nature which is reasonable and objectively necessary in all the circumstances to complete the proper transfer of the goodwill of the business.

We would submit that in the context of the importance of customer/client relations and the considerable degree of consumer/client loyalty which has been built up over the years by the Vendors in relation to the business carried on by STC, the duration of the covenants in clause 12 of the STC Agreement is the minimum that is objectively necessary for Edberg to assume, by active competitive behaviour, the place in the market previously occupied by the Vendors through STC and therefore satisfies the criteria applied by the Commission in the Nutricia case and endorsed by the Competition Authority in the Nallen/O'Toole Decision and the Athlone Travel Decision.

This analysis is not affected by the fact that the duration of the covenants in clause 12 may potentially, in certain circumstances, exceed three years since the "Second Period" of protection afforded by clause 12 is equally objectively necessary to protect and preserve the value of the investment by SGS and Edberg in the STC business in view of the nature of the business as a service business where customer/client loyalty is invaluable and persists for a period which may well exceed three years....

It is also submitted that as regards the application of CA91 and the Competition Authority's jurisdiction thereunder in relation to competition in the Republic of Ireland the geographical scope of the covenants in clause 12 of the STC Agreement is limited to the extent which is objectively necessary for Edberg to assume, by active competitive behaviour, the place in the market in the Republic of Ireland previously occupied by the Vendors through STC. Insofar as the geographic scope of the covenants extends beyond the Republic of Ireland this is outside the ambit of CA91 which governs competition only in the Republic of Ireland....

It is further submitted that the subject matter of the covenants in clause 12 of the STC Agreement does not restrict competition within the meaning of Section 4(1) CA 91 as it is confined to the business of insurance loss adjusting carried on by the Vendors through STC at the date of the STC Agreement....'

32. In relation to the Service Agreements with each of the Vendors (other than Mr. Putman), the notifying parties have submitted that:

´It is generally accepted by the ECJ that employees acting in their capacity as such are not "undertakings" within the meaning of Article 85(1).... the rationale being that an employee can in principle be regarded as an auxiliary organ forming an integral part of the employer's undertaking bound to carry out the employer's instructions and thus forms an economic unit with the employer. It is submitted that this reasoning applies with equal force to Section 4(1) CA 91 and that the Service Agreements do not therefore fall within the ambit of, or otherwise contravene or offend against Section 4(1) CA 91 as they do not constitute agreements between "undertakings" within the meaning of CA91.

The fact that the Vendors are also minority shareholders in Edberg does not render the[m] "undertakings" within the meaning of Section 3(1) CA 91 since none of the Vendors will control Edberg. This submission is entirely consistent with the decisions of the Commission in Reuter v BASF (op. Cite.) and H. Vaessen v Alex Morris (Commission Decision 79/86/EEC [1979] 1 CMLR 511).

It will be noted that the provisions of clause 2.4 and 14 of the Service Agreement come into operation only in connection with or upon termination of the Service Agreements. Even if an employee entering into covenants with his employer to take effect in connection with or subsequent to the termination of the employment relationship is regarded as an "undertaking" within the meaning of Section 3(1) CA 91, neither clause 2.4 nor clause 14 of the Service Agreements contravene or offend against Section 4(1) CA 91 since they are reasonable in subject matter, duration and geographical scope of application in the context of the STC business being acquired by Edberg and the importance of personal relationships and customer loyalty and goodwill in such a business.'

33. At a meeting with the Authority the parties indicated that a number of the provisions of the Shareholders' Agreement were designed to protect the Vendors' interests. They also indicated that they were designed to ensure that RHL exercised its option to acquire the Vendors' 38% shareholding in Edberg after 3 years thus buying out the Vendors' interest in the business.

34. In a subsequent letter dated 19 October 1992 the parties restated many of their arguments. In particular they argued that the EC Commission has maintained that there is a fundamental distinction between restrictive practices relating essentially to the conduct of companies and to mergers/acquisitions which relate essentially to the structure of a market. They claimed that the Commission would only examine mergers or acquisitions under Article 85 where the merger or acquisition agreements extended beyond acquisition of ownership of shareholdings to encompass contractual obigations facilitating a co-ordination of market behaviour or commercial policies between the relevant parties. They cited the European Court of Justice decision in the Philip Morris case [4]. They also argued that the notified arrangements differed from those in Woodchester [5] as they did not constitute an agreement between undertakings since the Vendors would not be undertakings following completion.

35. The parties also argued that the arrangements would not result in any diminution of competition as RDI had less than 1% of the market. In addition they argued that the loss adjusting market was highly competitive as there were a sizeable number of firms in the market, rates were competitive, the consumers of loss adjusters' services had considerable bargaining power, there were no restrictions on market entry and contracts were concluded on an ad-hoc basis with no long term contracts or retainers between insurers and loss adjusters.

36. Following discussions with the Authority the parties made amendments to the agreements in a Supplemental Agreement dated 18 December, 1992. The parties agreed to delete clause 12.1 of the Irish Business Sale Agreement (referred to above as the STC Agreement) and the first paragraph of clause 12.2 ., (see para 18 above), and substitute the following.

´12.1 The Vendors hereby severally covenant to the Purchaser that each such Vendor shall not for so long as such Vendor remains an employee of or a shareholder in the Purchaser and for a period of 2 years from the date of disposal of the relevant Vendor's shares in the Purchaser, in the Republic of Ireland or Northern Ireland or England or Wales or Scotland or the Channel Islands or the Isle of Man either solely or jointly with or as officer, employee manager adviser consultant or agent of any other person firm or corporation directly or indirectly (other than by way of bona fide investments or holding of shares not exceeding 5 per cent in nominal value of any class or share capital of a company whose share or loan capital is quoted or listed or regularly dealt in on a recognised Stock Exchange) carry on or be engaged or concerned or interested in any business competing with the business of loss adjusting, save that where the relevant Vendor's employment with the Purchaser is terminated by the Purchaser in breach of the terms thereof the restrictive covenants shall cease to be binding on such Vendor immediately upon such termination.'

´12.2 The Vendors hereby severally covenant with the Purchaser that each such Vendor shall not for a period of 2 years from the date of disposal of the relevant Vendor's shares in the Purchaser either on his own account or jointly with or as officer employee manager adviser consultant or agent for any person firm or corporation directly or indirectly:....'

The parties also agreed to delete Clauses 14.1 and 14.2 of the Service Agreements (see para 24 above) and to replace them as follows.

´14.1 Subject as hereinafter provided the Appointee shall not during the Employment in the Republic of Ireland, Northern Ireland, England, Wales, Scotland, the Channel Islands or the Isle of Man either solely or jointly with or as officer, employee, manager, adviser, consultant or agent of any other person firm or corporation directly or indirectly (other than by reason of such shareholdings as are permitted by Clause 5.1 hereof) carry on or be engaged, concerned or interested in any business competing with the business of loss adjusting as carried on by the Company at any time during the continuance of the Employment.'

´14.2 The Appointee hereby covenants with the Company that he will not during the Employment either on his own account or jointly with or as officer, employee, manager, adviser, consultant or agent of any other person firm or corporation directly or indirectly canvass solicit interfere with or endeavour to entice away from the Company any person firm or company with which he has had dealings and who or which has been or is at any time during the continuance of the Employment a client or employee of the Business or the Company.'

The parties agreed that para 7 of Schedule 2 of the Option Agreement (see para 22 above) should be deleted in its entirety and the following substituted therefor:

´7.1 If the Option is exercised in accordance with Clause 3.2(a) the Consideration payable to the Vendor in respect of the Option Shares purchased from him shall be the price determined by the Auditors to be the market value, on the basis of a willing seller and a willing buyer and that the Option Shares constitute a minority shareholding, less an agreed discount of [5%]'

Clause 3.2(a) (see para 21) refers to the termination of the Vendor's employment contract, by the company, where he was at fault, or by the Vendor where he was not entitled to do so.

´7.2 If the Option is exercised in accordance with Clause 3.2(b) or (c) the Consideration payable to the Vendor in respect of the Option Shares purchased from him shall be the aggregate sum of £1.'

Clause 3.2(b) relates to a breach by the Vendor of Clause 12 of the STC Agreement, while clause 3.2(c) relates to a situation where the Vendor becomes bankrupt or makes an arrangement with his creditors.

The parties also indicated by letter dated 23 November 1992 that the confidentiality provisions in clause 15 of the STC Agreement, clause 14.1 of the Shareholders Agreement and clause 11.1 of the Service Agreements ´are not intended or designed to prevent the Vendors from competing with the business carried on by Edberg but rather are intended and designed simply to prohibit a Vendor from using or abusing information that is confidential to Edberg or any of the Edberg shareholders.'

37. 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.'

38. 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 involved in the notified arrangements are:

- 'D P Scully and Others' (the Vendors), who carried on in partnership the business of loss adjusters under the name 'Scully Tyrrell & Company' (STC);

- Edberg Limited, a private limited company which has acquired the business and assets of RDI, a firm of insurance loss adjusters;

- Robins Holdings Limited (RHL), a private limited company, which is engaged in the business of insurance loss adjusting and the provision of other services in the insurance industry in the UK. Edberg Limited is a wholly owned subsidiary of RHL. As a result of these arrangements RHL retain 62% of the shares in Edberg with an option to purchase the remainder on certain conditions.

Both Edberg and RHL are undertakings within the meaning of the Act since they are engaged for gain in the provision of loss adjusting services to insurance companies.

39. The notifying parties have argued that the agreement relating to the purchase of STC does not constitute an agreement between undertakings within the meaning of the Act, because the Vendors have agreed to act as, and become directors, employees, and minority shareholders in Edberg, and must be treated as forming an integral part of the same economic undertaking as Edberg. The Vendors clearly owned and controlled the business of STC prior to the conclusion of this agreement and were, therefore, undertakings at the time of the agreement. [6] The Authority is satisfied therefore that the present arrangements constitute an agreement between undertakings within the meaning of Section 4(1).

40. The Authority also believes that under the notified arrangements the Vendors will not become simply employees of Edberg. The Authority has stated that in line with EC precedents it does not consider employees to be undertakings. [7] It noted, however, that EC precedents indicate that once an employee pursues his own economic interests and these differ from those of his employer he may well become an undertaking within the meaning of Article 85 and, by analogy, of Section 4(1). In addition to becoming employees of Edberg under the notified arrangements, the Vendors will also acquire 38% of Edberg Limited. The Authority has concluded in previous decisions that individuals who either own or control a business are undertakings. In particular in Budget/Phil Fortune it decided that an individual who had purchased a business was an undertaking, a view which is again consistent with EC precedents. [8]

41. The Vendors are minority shareholders and this might not be sufficient in itself to regard them as undertakings. They have, however, been granted extensive powers under various clauses of the Shareholders Agreement. They are able to exert control over many, including the most important, facets of Edberg's operations by virtue of these clauses. Clause 6, for example, requires the approval of the majority of the Vendors concerning a wide range of matters including:

- the creation or issue of any shares, or the grant or agreement to grant any option over shares or uncalled capital, or the issue of any loan capital convertible into shares;

- the distribution of any amount standing to the credit of any reserve of the Company;

- the sale/disposal of any assets worth in excess of £5,000 or the purchase of any assets for an aggregate consideration in excess of £5,000;

- the amalgamation or merger of the Company;

- the commencement of any new type of business;

- any expenditure in excess of an aggregate of £10,000 or the making of any capital commitment in excess of £10,000;

- the borrowing of any moneys;

- the lending of any moneys;

- any change to the terms of employment of the Vendors and all employees and former employees of the Company and the appointment, removal or remuneration of any employee or consultant of the Company, etc.;

- the opening or closing of any office.

It is incorrect to claim therefore that the Vendors will not control Edberg.

42. The parties have stated that clause 6 exists to protect the Vendors' shareholding and maximise the value of Edberg in the light of the option held by RHL to buy out that shareholding in 1995. Decisions which are in the long-term interests of the business may reduce the firm's short-run profits, thereby reducing the amount to be paid as dividends to the Vendors in accord with clause 10 of the Shareholders Agreement, and the amount they would receive from RHL for their shares in Edberg, if it exercises its option to buy them after 3 years, in accord with clause 3.1 of the Option Agreement. Accordingly, the interests of the Vendors and of Edberg and RHL differ in that measures which are in the long-term interests of the business are not in the Vendors' interest. The fact that one of the objectives of clause 6, according to the Vendors, is to provide RHL with a strong incentive to buy out the Vendors' shareholding in Edberg after 3 years, implies that they do not regard the relationship as permanent. As pointed out it is recognised under EC law that once an employee pursues his own economic interests and these differ from his employers, he may well become an undertaking. In addition, unless a majority of the Vendors agree, all of the profits of the business in the period up to 3 December 1994, must be distributed by way of dividends to the shareholders under Clause 10. It is clear that the Vendors will exercise considerable control over the business. They cannot be regarded as mere employees bound to carry out their employer's instructions.

43. The Authority concludes that because the Vendors have a substantial share in Edberg, exercise extensive control over its operations and could pursue interests which differ from those of the company, they can continue to be regarded as undertakings following completion of the notified arrangements.

44. The arrangements involve a series of related agreements between undertakings with effects within the State. The Authority considers that the agreements are so closely related that they may be read together as a single agreement. In this respect it is following the practice adopted by the EC Commission and the European Court of Justice that: 'A series of connected agreements will be read together as one agreement.' [9]

45. The notifying parties have also argued that the agreement for the purchase of STC is tantamount to a 'concentration' within the meaning of the decisions and practice of the EC. They assert that Article 85(1) of the Treaty does not apply to ´concentrations' and therefore this agreement does not fall within the ambit of Section 4 of the Competition Act, 1991.

46. The arrangements involved in the present notification are rather complex. Two enterprises (Scully Tyrrell and RDI) have come under common control and this constitutes a merger as defined in the Mergers Act. The Authority has already indicated in Woodchester/UDT that it does not believe that a merger which has been notified and approved by the Minister is automatically excluded from the prohibition contained in Section 4(1) of the Competition Act. In this instance the merger is below the thresholds set for notification under the Mergers Act. The Authority believes, for similar reasons to those outlined in its decision on Woodchester, that the present arrangements are not automatically outside the scope of Section 4(1) simply because they constitute a merger. The arrangements represent an agreement between undertakings and the issue therefore is whether or not that agreement has the object or effect of preventing, restricting or distorting competition.

47. The arguments made by the parties that EC precedents indicate that such arrangements do not come within the scope of Section 4(1) were also dealt with at length in the Woodchester decision and are not restated here. The Authority, however, notes the views expressed by the EC Commission following the European Court of Justice decision in the Philip Morris case:

´The judgement has far-reaching implications. It underlines the need for an economic approach in interpreting Articles 85 and 86. Conduct cannot cease to be anti-competitive merely by reference to the legal form in which it is presented. Even purchases of blocks of shares may in particular circumstances infringe the competition rules.' [10]

In effect the parties' argument seeks to exclude any consideration of economic circumstances and contends that the arrangements do not offend against Section 4(1) because they constitute a merger.

48. RHL has been involved in the Irish market for the provision of loss adjusting services through RDI. This company has already been acquired by Edberg Limited, a subsidiary of RHL. RDI held a very small share of the market. The effect of the transaction will be that STC and RDI who were competitors in the Irish market will be replaced by Edberg.

49. The Vendors, however, have, under the arrangements, acquired a considerable shareholding in, and a substantial degree of control over Edberg. Indeed in effect Edberg will be jointly controlled by RHL and the Vendors for at least 3 years under the arrangements. The arrangements in some respects resemble a cooperative joint venture rather than a merger, as normally, in the case of a merger or takeover, the former owners or management leave the business. The Authority does not believe that the present arrangements constitute a joint venture as the Vendors will no longer carry on business in their own right and Edberg cannot, therefore be regarded as jointly owned by undertakings which continue to operate in other markets. It therefore considers that the arrangements should properly be regarded as a merger.

50. The Authority indicated in Woodchester that the agreement did not offend against Section 4(1) as the arrangements had not resulted, and were not likely to result, in a diminution of competition in the relevant market. The Authority in that decision restated the view expressed in its first decision that the prohibition contained in Section 4(1) ought not to be interpreted literally. In adopting such a view the Authority has followed the approach of the EC Commission and the European Court of Justice. Such an approach is well established in competition law following the US Supreme Court decision in the Standard Oil case in 1911. In that case, (which involved a merger), White CJ, in delivering the opinion of the Court, rejected the view that the blanket prohibition in Section 1 of the Sherman Act applied to every contract in restraint of trade and imposed the plain duty of applying its prohibitions to every case within its literal language. The US Supreme Court decision in that case was cited by Keane J in the Mars/HB case when considering the correct interpretation of Article 85(1) of the Treaty of Rome on which Section 4(1) is based. [11]

51. In Woodchester the Authority stated that:

´before a merger can be found to offend against Section 4(1) of the Competition Act, it must be shown that it would, or would be likely to, result in an actual diminution of competition in the market concerned. A reduction in the number of competitors or the fact that a merger will result in the merged entity having a larger share of the market than that previously held by either of the merged undertakings individually, are not, of themselves, sufficient to establish that such a diminution of competition has occurred or would be likely to occur.' [12]

52. Among the factors which the Authority believes need to be considered in order to decide whether a merger would result, or would be likely to result in a diminution of competition are the actual level of competition in that market, the degree of market concentration and how it is affected by the merger, the ease with which new competitors may enter the market and the extent to which imports may provide competition to domestic suppliers.

53. The market share figures set out in Table 2 would imply that the arrangements will result in Edberg having a market share of 29% (assuming that it retains the shares previously held by STC and RDI). The parties have argued that the impact of the acquisition on competition will be insignificant as RDI had only a very small share of the market.

54. Although the parties contend that this is a highly fragmented market, the figures in Table 2 indicate that it is in fact highly concentrated. The top two firms accounted for almost 44% of the market, while the top four accounted for 67%. The four firm concentration ratio (the aggregate market share of the four largest firms) is a standard measure of market concentration used in economics. The Authority believes that it would generally be accepted that a market where the four firm concentration ratio fell below 40 percent was effectively competitive. The degree of concentration in this market, however, is such as to give some cause for concern. The present arrangements will not greatly increase the four firm concentration ratio. Nevertheless the Authority believes that in a highly concentrated market a merger which results in even a relatively small increase in the market share of one of the larger firms merits closer examination. It follows from this that, if the four firm concentration ratio following a merger is less than 40 percent, the Authority would regard it as unlikely that the merger would prevent, restrict or distort competition and hence offend against Section 4(1).

55. An alternative measure of market concentration is the Herfindall-Hirschman Index (HHI). The HHI is the sum of the squares of the shares of all firms in a market. THE HHI is used by the US Department of Justice to evaluate mergers and its guidelines classify markets into three categories. [13] Where the post-merger HHI is below 1000 the market is regarded as unconcentrated and mergers in such markets are considered unlikely to have adverse effects on competition. Where the post merger HHI lies between 1000 and 1800 the market is regarded as moderately concentrated. Mergers which increase the HHI by more than 100 points in such markets are considered to potentially raise significant competitive concerns depending on other factors. When the HHI exceeds 1800 the market is regarded as highly concentrated, although even in this case, a merger raising the HHI by less than 50 points is considered unlikely to have adverse competitive consequences.

56. The Table 2 figures indicate that, in the loss adjusting market, this merger will increase the HHI by about 130 points to over 1600. Clearly this places it within the range where a merger would be subject to further examination under US Department of Justice guidelines. Thus the data on both the four firm concentration ratio and the HHI suggests that the present arrangements merit further examination. The Authority recognises that in a small economy such as Ireland market concentration ratios in many sectors may be high relative to those which exist in much larger economies. Nor is the Authority stating that where market concentration following a merger is found to be relatively high the merger is likely to restrict competition. It is merely stating that, in considering a merger notified to it, where the degree of concentration in a market post-merger is relatively high it will conduct a more detailed examination of the agreement than would otherwise be the case. While recognising that the thresholds applied in this instance were developed for larger economies it nevertheless considers that they provide a useful guide. [14]

57. It is also relevant in this instance that the merger is not simply one involving a large domestic firm and a much smaller competitor. RDI is a subsidiary of a large multinational organisation with an extensive involvement in loss adjusting throughout the world. Thus both RDI and, more importantly, its parent, must be regarded as a major potential competitor in the Irish market. According to its latest Annual Report, RHL employs 369 loss adjusters compared with an estimated total of 117 employed by all firms in Ireland.

58. RDI has been operating in the loss adjusting market in Ireland since September 1985. During this time it has failed to secure more than a very small share of the Irish market. It had accumulated losses of £400,000 in the period to end December 1991. During this period other firms have successfully established themselves in the market. The Authority accepts therefore, that RHL had sought to enter the market in its own right.

59. It has been submitted by the parties that the loss adjusting market in Ireland is highly competitive. The quality of service and the prices charged are stated by the parties to be the key considerations when obtaining business from insurance companies. As stated earlier, the Authority has confirmed with several major insurance companies that they believe prices quoted by loss adjusting firms are competitively determined.

60. The parties have also submitted that the market for loss adjusting services is a highly contestable one, that there are no barriers to entry and that the costs of entry are relatively low and are unlikely to deter new entrants. The Authority noted in Nallen/O'Toole [15] that recent theoretical developments in the economics literature indicated that in ´contestable markets' the threat of entry by new firms was sufficient to ensure that the market operated competitively. The Authority noted, however, that before such arguments can be relied upon it was necessary to establish that a market was in fact contestable. The experience of RDI, a subsidiary of a major multinational, is not, at first sight, consistent with a view that the loss adjusting market is contestable. As stated earlier, however, five firms, other than RHL, have successfully entered this market since 1984. Some of these have grown to become quite significant in the market within a relatively short period of time. Indeed it would appear that one of these is now the second largest in the market. These firms have indicated to the Authority that entry costs, in their view, did not constitute a significant entry barrier.

61. The parties also stated that there were no legal or other qualifications required for entry and that not all the individuals engaged as loss adjusters were members of the relevant professional body (CILA). The Authority does not believe, however, that virtually anybody could enter this business. Insurance claims inspectors who carry out similar work in-house for their employers, albeit involving smaller claims, could, however, set up in the market since they would have both relevant experience of the business and some contacts among the principals who employ loss adjusters. It would appear that such individuals, together with existing employees of loss adjusting firms, and CILA members currently resident in the UK, together constitute a significant source of potential competition to incumbent firms. The Authority also considers that overseas based loss adjusting firms could enter the market either by establishing subsidiaries in Ireland or by offering their services directly to Irish insurance companies.

62. It is also relevant, as the parties have argued, in assessing the present arrangements to take account of the position of users of loss adjusters' services, namely insurance companies. There were 32 insurance companies operating in the fire and property risk business in Ireland according to the 1990 Blue Book. Many of these are large companies, including subsidiaries of overseas firms. Data on premium income suggests that this market is also fairly concentrated, implying in turn that the bulk of loss adjusters' business would be accounted for by a relatively small number of insurers. In such circumstances it would appear that the users of loss adjusting services would have considerable bargaining power and that this would impose significant pressure on loss adjusting firms to compete.

63. In addition insurers already obtain some of these services in-house, as their own claims inspectors perform a similar function in respect of claims below a certain level. Insurers therefore have the option of increasing the extent to which such services could be obtained in-house and presumably would do so if such a move made commercial sense. In-house services are therefore, to some extent, a substitute for the services provided by loss adjusters and this is also likely to ensure that adjusters are forced to compete with each other.

64. Taking all of these factors into account the Authority believes that, in spite of the highly concentrated nature of the market, the merger of STC and RDI is unlikely to lessen competition in the market. Consequently it believes that the overall arrangement does not offend against Section 4(1).

65. In the light of its decision in Woodchester, the Authority wishes to point out that, while it believes that a merger is not automatically outside the scope of Section 4(1), this is not the same as stating that a merger offends against Section 4(1). The present decision seeks to clarify the Authority's views in this area. In general, the Authority believes that a merger, per se , between competitors would not prevent, restrict or distort competition and thereby offend against Section 4(1) unless the market is, or will as a result of the merger become, highly concentrated.

If the market were highly concentrated following the merger the Authority believes that it would be unlikely to prevent, restrict or distort competition where

- there were no significant impediments preventing new competitors from entering the market, and/or,

- there was effective competition from overseas suppliers.

66. Many of the restrictive provisions included in the STC Agreement were repeated in the Service Agreements of the Vendors. Accordingly, the same arguments can be applied to both sets of provisions. Consideration is given to the effect of these restrictions below.

67. Collectively the Vendors have retained a significant shareholding (38%) in Edberg Limited as part of the agreement for the sale of STC. RHL have acquired the option to buy this shareholding from the Vendors in 1995. In the interim, it is proposed that the Vendors be employed in Edberg for an initial period of three years under clause 2.2 of the Service Agreement. Their employment may be terminated thereafter by either party giving not less than six months written notice to the other.

68. If any of the Vendors terminated their employment contract before the initial three years had expired, they would have been deemed to have breached that contract and RHL could have exercised the right to acquire their shares in Edberg within three months. The consideration payable to the vendor in these circumstances would have been £1.

69. Clause 12 of the STC Agreement set out restrictions on the future activities of the Vendors. 12.1 contained a non-competition clause which applied to the Vendors for a period of the longer of (i) 3 years from completion and (ii) a second period. The second period was 2 years from termination of the vendor's employment with the purchaser if such termination occurred within 3 years of completion. This non-competition provision was also included in Clause 14.1 of the Service Agreement. After the initial 3 year period had elapsed there would be no second period if the vendor's employment was terminated by the purchaser in breach of the terms thereof. The second period would be six months if the vendor's employment was terminated by notice in accordance with Clause 2.2 of the Service Agreement.

70. It is evident that termination by the Vendors of their employment within the first three years was not a feasible option in the light of the return on their shareholding provided for under the Option Agreement. The Vendors were therefore tied to Edberg for an initial period of three years. In these circumstances the additional six months provided for under Clause 12.1(b) of the STC Agreement (the second period) meant that the duration of the non-competition clause was effectively a minimum of three and a half years.

71. In relation to the duration of the non-competition clause, the purchasers had stressed the importance of customer/client loyalty built up over the years by the Vendors. They argued that the duration of the clause was the minimum that was objectively necessary for Edberg to assume, by active competitive behaviour, the place in the market previously occupied by the Vendors through STC. They added that ´the duration of the covenants in Clause 12 may potentially, in certain circumstances, exceed three years since the ´Second Period' of protection afforded by Clause 12 was equally objectively necessary to protect and preserve the value of the investment by SGS and Edberg in the STC business in view of the nature of the business as a service business where customer/client loyalty was invaluable and persisted for a period which might well exceed three years.'

72. The Authority's view on the duration of non-competition clauses in the case of the sale of a business has been stated in several previous decisions. Its view is that some restriction on the seller is generally necessary in order to ensure the complete transfer of the goodwill of the business. It stated that provided the restriction was limited in terms of its duration, geographical coverage and subject matter to that which was necessary for the complete transfer of the goodwill, then the restriction did not offend against Section 4(1) of the Act. Most recently in General Semiconductor, the Authority indicated that, having had an opportunity to consider a number of such agreements, it would generally consider a non-competition clause exceeding two years in a sale of business agreement to offend against Section 4(1). [16]

73. Given its previous decisions, the Authority regarded the non-competition clauses in the notified arrangements, which were effectively for a minimum of three and a half years, as being more than was necessary to secure the complete transfer of goodwill. It is relevant that insurers would be dealing with the firm frequently and in such circumstances a period of two years was considered sufficient for the new owners to acquire the complete goodwill. It must also be considered that figures for commission paid to the Vendors in respect of fee income earned by them in 1991, indicated that a lot of the company's business was attributable to its other employees.

74. In this case it was not clear that the arrangements could be viewed as a simple sale of business, since the Vendors are to remain on as shareholders and employees following the sale. This raised the question of the date from which the non-compete clause should have effect. The arrangements could be viewed as akin to the creation of a partnership involving RHL and the Vendors. An agreement between parties to engage in business together could not operate if the parties were free to compete with the business or with each other. The Authority believes that individuals could not jointly engage in business together if they were free to compete with each other. It is clear, even if it is not explicitly stated, that an agreement between parties to carry on business together implies that they will not compete against the business or against each other so long as they remain in business together.

75. Where individuals agree to engage in business together as part of a single economic entity and not to compete with one another, the Authority believes there is a case for not regarding such arrangements, of themselves, as offending against Section 4(1). Indeed such arrangements may be pro-competitive in that the combined entity may be in a better position to compete with other undertakings in the relevant market. The position changes, however, if the parties are prevented from withdrawing from such arrangements. If a party wishes to withdraw from such arrangements then measures designed to prevent him doing so may restrict competition. In the event that one of the parties to such an arrangement decides to withdraw then, given the Authority's views in Nallen/O'Toole, where one partner bought out the other partner's share in the business, a provision which restricts the vendor from competing with the business for a time may be justified in order to allow the purchaser obtain the goodwill of the business for which he had paid.

76. In the present case Edberg has purchased the business of STC from the Vendors, who are to become shareholders in, and employees of Edberg. The Authority believes that in such circumstances the Vendors could not be expected to compete with Edberg for so long as they continue to be significant shareholders and enjoy a degree of control over the running of the business and that in such circumstances any agreement not to compete does not offend against section 4(1). The Authority does not believe that such a restriction would be acceptable if the shareholding was held for purely investment purposes or if it was part of an artificial arrangement which had the object or effect of evading the prohibition contained in Section 4(1).

77. The original restrictions went beyond what was necessary to secure the complete transfer of the goodwill of the business to the extent that they did not just prevent the Vendors competing with the business while they remained involved in it, but sought to tie them to the business for a minimum period of time. The Vendors were effectively tied to Edberg for at least three years by virtue of the service and option agreements. In addition they would have been prevented from competing with Edberg for a further six months if they then left. The combined effect of the non-compete clauses, the option agreement and related provisions therefore was to exclude potential competitors - the Vendors - from the market for at least three and a half years. This period exceeded what the Authority generally regards as necessary to secure the transfer of the goodwill of a business and the Authority therefore considered that the effect of the arrangements was to prevent competition. The restrictions, therefore, offended against Section 4(1).

78. Clause 12.2(a) of the STC Agreement prevented the Vendors canvassing orders from clients of Edberg. This restriction applied for the ´longer of a period of three years from completion or a period of 2 years from termination of the relevant vendor's employment with the purchaser....' As already explained, it was not in the Vendors' interests to break their three year service contracts. Therefore, the duration of this clause was effectively a minimum of five years. Given the nature of the business, in particular the relatively small number of users of loss adjusters' services, the Authority believes that a restriction on canvassing former clients would make it extremely difficult if not impossible to compete in this market. In the Authority's opinion, this clause would have served to reinforce the duration of the other non-competition provisions in the arrangements and would have had the effect of preventing the Vendors from competing with Edberg for an excessive period of time. Clause 14.2 of the Service Agreements also included this restriction. The Authority concluded that both of these clauses offended against Section 4(1) of the Act for the reasons outlined in the previous paragraph.

79. On balance the Authority believes that in a case such as this a restriction on competition should be limited to the period during which the Vendors remain as shareholders, employees and enjoy a degree of control over the business. Should they sell their shareholding at some stage then a restriction on their competing with the business may be justified to enable the purchaser to acquire the remaining goodwill of the business. Such a restriction generally ought not to exceed two years from the time of such sale.

80. In a Supplemental Agreement dated 18 December, 1992, the parties amended the offending provisions of the agreement. Under the amended agreement the Vendors agree not to compete with Edberg for so long as they remain shareholders and/or employees of Edberg and for a period of 2 years after they dispose of their shareholding in accord with the terms of the option agreement. In addition the Option Agreement has been amended to provide that, in the event that the Vendors leave Edberg before 31 December 1994, the buy out price pursuant to clause 3.2 (a) of that agreement would be ´such sum as equals the price determined by the auditors of Edberg to be the market value on the basis of a willing seller and a willing buyer and on the basis that the relevant shares constitute a minority shareholding less an agreed discount of 5 percent.'

81. The Authority believes that while the Option Agreement as amended means that there may still be some disincentive for the Vendors to leave the business before 31 December 1994, this is not now so great as to effectively exclude such a possibility. The Authority considers that a restriction on the Vendors competing with the business for so long as they remain employees and shareholders and for a further 2 years after they dispose of their shareholding is acceptable in such circumstances as being no more than is necessary to secure the transfer of the goodwill of the business to the purchaser. For these reasons the Authority considers that the amended provisions do not offend against Section 4(1).

82. The Authority wishes to make clear that the restrictions contained in the arrangements as amended were acceptable in the context of the parties having agreed to engage in business together as part of a single economic entity. As stated above, in its view a restriction on individuals competing with a business in which they were shareholders would offend against Section 4(1) where such shareholding was purely for investment purposes or was an artificial arrangement whose object or effect was to evade the prohibition contained in that Section. It would take a similar view of an employment contract that was an artificial arrangement whose object or effect was to evade the prohibition contained in that Section.

83. The scope of Clause 12.1 is limited to the business of loss adjusting. Accordingly, the scope of the restriction does not offend against Section 4(1) of the Competition Act, 1991. It applies to Ireland, Northern Ireland, England, Wales, Scotland, the Channel Islands and the Isle of Man. In view of the fact that insurance loss adjusting services can be easily provided across international borders, the Authority is satisfied that the geographical impact of the clause is limited to that which is necessary for the transfer of the goodwill of STC.

84. Clause 12.2(b) of the STC Agreement prevents the Vendors using the words ´Scully' or ´Tyrrell' or ´Scully Tyrrell' as a trade name or mark in the relevant market. It is necessary to prevent the possibility of the Vendors passing themselves off to their customers or suppliers as representing STC in the event that they should decide to compete against the purchasers. This restraint does not involve any restriction on competition within the State or any part of the State and does not offend against Section 4(1).

85. Clause 15 of the STC Agreement, clause 14.1 of the Shareholders Agreement and Clause 11.1 of the Service Agreements involve undertakings by the Vendors concerning the disclosure or use of confidential information and related matters. These clauses prevent the Vendors from disclosing or making use of trade secrets. There is no time limit on these clauses. The Authority has considered the question of preventing the use of non-technical know-how in Budget Travel. As in that case, the Authority was concerned that such a clause should not be used to impede any possible re-entry into the market by the Vendors once the non-competition clauses had expired. The parties indicated by letter dated 23 November 1992 that the confidentiality provisions in clause 15 of the STC Agreement, clause 14.1 of the Shareholders Agreement and clause 11.1 of the Service Agreements ´are not intended or designed to prevent the Vendors from competing with the business carried on by Edberg but rather are intended and designed simply to prohibit a Vendor from using or abusing information that is confidential to Edberg or any of the Edberg shareholders.' In these circumstances, the Authority finds that these clauses do not offend against Section 4(1) of the Act.

86. Edberg, RHL and the Vendors are undertakings within the meaning of Section 3(1) of the Competition Act and the notified arrangements for the sale of the business of STC to Edberg constitute an agreement between undertakings which applies within the State.

87. The Authority believes that the agreement for the purchase and sale of STC does not offend against Section 4(1) of the Competition Act.

88. The Authority has previously stated that, in the case of a sale of business, some restriction on the seller competing with the purchaser is normally justified in order for the purchaser to acquire the complete goodwill of the business. A non-competition clause which is limited in terms of duration, geographic coverage and subject matter to what is necessary to secure the complete transfer of the goodwill of the business does not prevent, restrict or distort competition within the meaning of Section 4(1) of the Competition Act. In this instance the Vendors have decided to remain on and effectively agreed to engage in business with the purchaser as part of a single economic entity. The Authority believes that, in such circumstances, an agreement by the Vendors not to compete with Edberg for so long as they remain shareholders and employees of that company does not offend against Section 4(1) of the Competition Act, provided the shareholding is not held for purely investment purposes and provided that the arrangements are not an artificial construction whose object or effect is to evade the prohibition contained in that Section.

89. The Authority believes that the restriction on the Vendors competing with Edberg for 2 years after they sell their shares is limited in terms of duration, geographic coverage and subject matter to what is necessary to secure the complete transfer of the goodwill of the business following such a sale. In the Authority's view the restrictions contained in the various agreements, as amended by the Supplemental Agreement of 18 December, 1992, together with the undertaking in respect of the confidentiality clauses in the letter of 23 November, 1992, do not prevent, restrict or distort competition in the State or any part of the State.

90. The present agreement for the transfer of ownership of Scully Tyrrell & Co. between Robins Holdings Ltd, Edberg Ltd and Messrs Scully, Tyrrell, Crawford, Herbert, Sleater, Conroy, O'Donoghue and Putman does not, in the Authority's opinion offend against Section 4(1) of the Competition Act, 1991.

91. The Competition Authority has issued the following certificate:

The Competition Authority certifies that in its opinion, on the basis of the facts in its possession, the agreement between Robins Holdings Ltd, Edberg Ltd and Messrs Scully, Tyrrell, Crawford, Herbert, Sleater, Conroy, O'Donoghue and Putman, for the transfer of ownership of Scully Tyrrell & Co., (notification no. CA/57/92), notified on 31 July 1992 under Section 7, as amended by the Supplemental Agreement of 18 December, 1992, together with the undertaking in respect of the confidentiality clauses in the letter of 23 November, 1992, does not offend against Section 4(1) of the Competition Act, 1991.

For the Competition Authority.

Patrick Massey

Member

29 January, 1993.