Irish Competition Authority Decisions

1. Arrangements for the purchase of the entire issued share capital of Rushmore Investment Company (Rushmore) by Sutcliffe Ireland Ltd. (Sutcliffe) from Messrs. Michael Mac Cormac, Brian Devlin, Vincent Poklewski-Koziell and Edward Redden (the vendors) by means of a share purchase agreement dated 11 May 1993, were notified to the Competition Authority on 2 June 1993 Rushmore is a holding company which owns Amstel Limited, a property holding company and National Catering Limited. The notification requested a certificate, or in the event of a refusal by the Authority to grant a certificate, a licence. After the Authority had expressed its concerns about certain aspects of the agreement, the parties agreed to amend the agreement in a letter dated 12 January 1994.

2. The notification relates to an agreement, dated 11 May 1993, between the shareholders and directors of Rushmore (the vendors) and Sutcliffe (the purchaser) for the sale and purchase of the entire issued share capital of Rushmore. The agreement included certain non-compete clauses.

3. The vendors, who are individuals resident in Ireland, were formerly the owners and directors of Rushmore, each holding 25% of the company's issued share capital. Rushmore owns 100% of the share capital of Amstel and National Catering.

4. Sutcliffe Ireland Limited is a private limited company incorporated in Ireland. It is a wholly owned subsidiary of the Sutcliffe Catering Group which in turn is wholly owned by the Granada Group p.l.c.. The Sutcliffe Catering Group is engaged inter alia in the business of providing catering services in the UK. The Granada Group p.l.c. has interests in a number of businesses in the entertainment and leisure sectors. Sutcliffe also owns Carrolls Catering which it acquired in October 1992 [1].

5. Rushmore is a holding company which owns and controls National Catering, which is engaged in the business of providing on-site catering facilities on a contract basis to schools, hotels, restaurants, prisons and businesses as well as offering catering consultancy services. Essentially National Catering enters into an agreement to provide catering services on the client's premises for the staff and/or customers of the user. Typically such contracts are for a period of three years. Under such contracts it provides catering facilities, employing all the staff required for such services. National Catering has customers located throughout the State. There are several other firms engaged in this business. Many institutions and firms choose to provide their own in-house catering facilities. The market is that for the provision of on-site catering to offices, schools and factories and other establishments. The notifying parties have estimated the breakdown of market shares as follows.

%

Carrolls Catering 4.5 (13.6)

National Catering Services Ltd 5.0 (15.2)

Campbell Catering Ltd. 10.0 (30.3)

Gardner Merchant Ltd. 7.0 (21.2)

Management Catering Ltd. 2.5 ( 7.8)

Others (approx.) 4.0 (12.1)

In-house 67.0

Figures in parentheses indicate market shares excluding in-house catering business.

6. The parties' figures indicate that catering firms account for only one third of the market. This is because they consider that where such services are provided by businesses or institutions themselves, such operations should also be considered to be a part of the relevant market. Essentially any organisation which wishes to provide catering services to its staff or clients may either appoint a specialist firm to provide such services on a contract basis or may choose to employ its own staff to do so. In addition some businesses provide their employees with luncheon vouchers which can be used to purchase meals in cafes and restaurants as an alternative to arranging for catering services to be available on the premises. National Catering operates on a nationwide basis with clients distributed throughout the State. Consequently the relevant geographic market is the State.

7. The agreement relates to the sale by the vendors of the entire issued share capital of Rushmore and therefore of National Catering to Sutcliffe. The agreement notified included in clauses 10 and 11 a number of non-compete provisions. Clause 10 provided that:

Each of the vendors hereby covenants with the Purchaser.....that each of the vendors shall not (without the previous consent in writing of the Board of each Group Company [2]

1. for the period of three years after Completion either on their own account or for any other person, firm or company,

(a) transact business dealings with; or

(b) solicit or endeavour to entice away from any Group Company

any person, firm, or company who or which within the preceding one year shall have been a customer of or in the habit of dealing with the Company.

2. for the period of two years after Completion either on their own account or for any other person, firm, or company, solicit or endeavour to entice away from the Company any person who or which within the preceding one year shall have been an employee of a Group Company.

3. for a period of two years after Completion within the Republic of Ireland.... engage or be concerned or interested whether as principal, director, manager, employee, agent, shareholder, partner, consultant, or otherwise in or provide funds (whether by way of loan, investment, gift or otherwise) to or for any trade or business or body corporate owning or operating such trade or business being carried on by National at Completion.

The clause also provided that the vendors should not make use of the names National or Catering in the course of a business being carried on by National at Completion. The Authority has already indicated in previous decisions that it does not consider such provisions offend against Section 4(1) [3].

8. Clause 11, as notified, restricted the vendors for an unlimited time from using or disclosing any confidential information used by the Company including but not limited to:-

´(a) information used in the production of goods or the provision of services;

(b) information relating to marketing including customers' names and market surveys

unless the use or disclosure of such information does not cause any damage or injury to the company.'

In the annex to the notification Sutcliffe stated that it would not invoke clause 11 in such a way as to prevent the resumption by the vendors of the activities set out in subclauses (1), (2) and (3) of clause 10 after the expiry of those subclauses.

9. Sutcliffe referred to the submissions made in support of its request for a certificate in its notification concerning the acquisition of Carroll's Catering. It stated that the various non-compete clauses had been tailored to anticipate the Authority's views on that notification. The notification also gave reasons to support the grant of a licence but these were not considered in the context of the present decision.

10. The Authority expressed its concerns to the parties regarding certain aspects of the non-compete clauses. The parties indicated by letter dated 12 January 1994, that they would amend a number of the restrictive provisions in the sale agreement by means of a supplemental agreement.

11. Clause 10(1) of the Principal Agreement was amended to provide that each of the vendors would not (without the previous consent in writing of the Board of the Company) for the period of two years after Completion either on their own account or for any other person, firm or company, transact business dealings with any person, firm, or company who within two months prior to the date of Completion shall have been a customer of or in the habit of dealing with the Company. The restriction on soliciting former customers would continue to operate for a period of three years from Completion but was restricted to anyone who had been a customer within two months prior to the date of completion. In addition the undertaking given in respect of clause 11 (see above) was incorporated into the supplemental agreement.

12. 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.'

13. 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 the present agreement are Sutcliffe and the vendors. Sutcliffe is a body corporate which has acquired the business of Carroll Catering with the intention of providing a service for gain. Consequently it is an undertaking within the meaning of section 3(1) [4]. The vendors were at the time of the Agreement the owners of the business of Rushmore and through it of National Catering. The Authority has previously stated in identical circumstances that, in its view, the owners of a business are undertakings within the meaning of Section 3(1) [5]. The vendors are therefore undertakings. The present arrangement is, in the Authority's, view an agreement between undertakings.

14. The present arrangements therefore constitute an agreement between undertakings whereby Sutcliffe has purchased Rushmore from the vendors and, as a consequence, has acquired control of National Catering. The Authority indicated in Scully Tyrrell that in considering whether an agreement for the sale of business had the effect of preventing, restricting or distorting competition within the State or any part of the State, it would consider its effect on the degree of market concentration.

15. If the definition of the relevant market were limited to the actual provision of catering services to firms and institutions by specialist catering firms, the market could be deemed to be highly concentrated. In the Authority's view it is unlikely that contract catering firms either individually or collectively are in a position to exercise market power. It seems likely that, if they attempted to do so, users of catering services would respond by providing such services in-house. In the Authority's view the costs of switching to in-house provision of such services would not represent a deterrent. Consequently the Authority believes that self operated catering services are sufficiently close substitutes for bought in catering services for them both to be regarded as part of the same market in the context of the present agreement [6]. The Authority believes that the acquisition of Rushmore by Sutcliffe is highly unlikely to have any anti-competitive effects in the relevant market as there is no indication that the level of market concentration after the merger will pose any threat to competition. In its opinion the sale of the business does not offend against Section 4(1). This is consistent with the view expressed by the Authority in respect of the acquisition by Sutcliffe of Carroll's Catering. The Authority was aware prior to taking that decision that Sutcliffe had acquired National Catering.

16. Clause 10 of the agreement, as notified, contained a number of non-compete provisions. The Authority has stated its views on such restrictions in a number of previous decisions, (including that cited by the parties in their submission). Where such a restriction does not exceed what is necessary for the protection of the goodwill being transferred in terms of its duration, geographic coverage and subject matter, then it does not, in the Authority's opinion, offend against Section 4(1). 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) [7]. It repeated this view in Carroll's Catering where it stated that:

´In the light of its General Semiconductor decision the Authority believes that a restriction of more than two years would offend against Section 4(1), unless there were compelling reasons to justify a longer restriction. Consequently it will be extremely reluctant to certify that a sale of business agreement with a non-compete clause of more than two years does not offend against section 4(1), where only a transfer of goodwill is involved [8].'

17. Clause 10(1), as notified, restricted the vendors from transacting business with or soliciting customers of Carrolls Catering for three years from completion. The duration of this provision went beyond what was necessary to secure the complete transfer of the goodwill of the business and, in the Authority's view, offended against Section 4(1). The duration of clause 10(1) has been left at three years in respect of soliciting customers of the business but has been reduced to two years in respect of doing business with such customers. The Authority has already accepted such a provision in Carrolls Catering. In terms of its geographical scope and subject matter the provision does not go beyond what is necessary to secure the transfer of the goodwill of the business. Consequently in the Authority's opinion clause 10.1 as amended no longer offends against Section 4(1).

18. Clause 10.2 provides that for a period of two years after Completion the vendors would not solicit or entice any employee of the company. The Authority has previously stated that a restriction on soliciting employees for two years from the completion of a sale of business was not anti-competitive. Consequently, in its view, clause 10(2) does not offend against section 4(1). Clause 10(3) prevents the vendors engaging in a business carried on by National Catering at the time of completion for two years from that date. Again this is no more than the Authority considers necessary to secure the transfer of the goodwill of the business and so, in its opinion, this clause does not offend against Section 4(1).

19. The restrictions in clause 11 relate to the disclosure of know-how and confidential information. The Authority has already considered such restrictions in previous decisions [9]. As the clause has been amended to provide that it will not be used to prevent the vendor re-entering the market once the non-compete provisions have expired, it no longer offends against section 4(1).

20. The agreement between Sutcliffe (Ireland) and the vendors for the sale of the entire issued share capital of Rushmore is an agreement between undertakings, since the parties to the agreement are undertakings. The agreement, as amended by the Supplemental Agreement of 31 January 1994, does not, in the Authority's opinion offend against section 4(1).

21. 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 of 11 May 1993 between Sutcliffe Ireland Ltd. and Messrs. Michael Mac Cormac, Brian Devlin, Vincent Poklewski-Koziell and Edward Redden (the vendors), for the purchase of the entire issued share capital of Rushmore Investment Company, (notification no. CA/19/93), notified on 2 June 1993 and amended by the Supplemental Agreement of 31 January 1994, does not offend against Section 4(1) of the Competition Act, 1991.

For the Competition Authority

Patrick Massey

Member

4 February 1994.