Irish Competition Authority Decisions

1. Arrangements for the acquisition of Gas and Oil Parts Limited (the company) by Heating Replacement Parts & Controls Ltd. (HRPC), were notified to the Competition Authority on 21 July, 1993. The arrangements included a number of non-compete clauses. The notification requested a certificate, or in the event of a refusal by the Authority to grant a certificate, a licence. The Authority informed the parties of its concerns with certain aspects of the arrangements on 7 February 1994. The parties agreed to amend the arrangements by letter dated 21 February 1994.

2. The notification relates to an agreement, dated 20 November 1992, between Mr. Thomas MacGee, Mr. Michael O'Reilly and Mr. Thomas Daly, (the vendors), HRPC, (the purchaser), Windsor Motors Limited (Windsor) and the company for the purchase by HRPC of the entire issued share capital of the company which is owned by the vendors. The arrangements included certain non-compete provisions which were amended.

3. HRPC is an English based company engaged inter alia in the distribution of spare parts for repair and maintenance of domestic central heating systems. It had no previous involvement in the Irish market. It is a subsidiary of Wolseley plc which is a holding company with subsidiaries engaged in the distribution of plumbing and bathroom materials, central heating equipment, pipes, valves and fittings in the UK, France and the US. It also distributes heavyside building materials and operates plant and tool hire centres in the UK. It also distributes timber based building materials in the US. In addition it has significant interests in the manufacture of electrical accessories, engineering and plastic products and in the distribution of tractor parts and accessories. Total turnover of the Group in 1992 was stg£1953.6m.

4. The company is an Irish incorporated company based in Dublin. It is a wholesale distributor of spare parts for domestic and commercial heating equipment. It does not manufacture such parts. It sells parts for contract heating appliances, boilers, gas fires, water heaters and warm air units, fuelled by natural gas, oil, solid fuel and LPG. It also distributes spare parts for all types of domestic cookers and commercial catering equipment and for all types of heating, ventilation and air conditioning.

5. The vendors were the only shareholders in the company. According to HRPC they presently have other business interests but not in the same business as that carried on by the company. Windsor Motors is a company which has as its main activity the sale and leasing of motor cars. Mr. Michael O'Reilly is its Chief Executive. It employs 110 people and had a turnover of £15m [1].

6. The company is engaged in the business of distributing spare parts for domestic and commercial heating equipment, including, inter alia , parts for contract heating appliances, boilers, gas fires, water heaters and warm air units, fuelled by natural gas, oil, solid fuel and LPG, spare parts for all types of domestic cookers and commercial catering equipment and for all types of heating, ventilation and air conditioning. The relevant market is that for these products. The buyers include undertakings engaged in the installation and maintenance of heating systems, gas and oil companies and companies and individuals maintaining their own heating systems. There are a number of competing suppliers active in this market. The parties have indicated that they believe that the company's market share is small. They have also claimed that the costs of entering the market are relatively low and that it is relatively easy to enter the market.

7. The agreement relates to the sale by the vendors of the entire issued share capital of the company to HRPC. The agreement includes a number of restrictive clauses. Clause 17.1.1 provides that the vendors shall not at any time after completion disclose any information concerning the business except as required by law and will use all reasonable efforts to prevent such publication or disclosure.

8. Clause 17.1.2 provided that the vendors would not for a period of three years within the State solicit anyone who had been a customer during the previous two years. Clause 17.1.3 provided that they would not engage in the same business as the company within a radius of 15 miles of any of its branches for a period of three years. (The company has only one branch in Rialto, Dublin). Clause 17.1.4 provided that they would not solicit, entice away or employ or engage any executive or employee of the company other than clerical or secretarial employees for a period of three years. This provision would not prevent them employing such an individual where that individual sought the offer of employment or where the individual's employment with the company had been terminated. Clause 17.1.5 requires the vendors to refer all enquiries relating to the business and all orders which they might receive for two years from completion. Under clause 17.1.6 the vendors agreed not to use any of the trade names or the names of the company or its subsidiaries within the State. Clause 17.1.7 provided that the vendors would not represent themselves as being interested, employed by or connected with the company unless they were actually employed by it after completion.

9. Clause 19.1 provides that none of the vendors shall at any time disclose or make public any confidential information which he has relating to the company's business unless authorised by the purchaser or required to do so by law.

10. The parties have claimed that the arrangements will not prevent, restrict or distort competition within the State. They stated that the company had only a relatively small share of the relevant market. They argued that the restrictions were no more than was absolutely necessary to ensure the complete transfer of the business to the purchaser. In particular they argued that as a new entrant previously based in the UK the duration of the restrictions was no more than was necessary to secure the transfer of the goodwill of the business. They cited a number of decisions of the Authority in support of their arguments.

11. The Authority wrote to the parties on 7 February 1994 expressing its concern with the duration of the non-compete clauses in the agreement. The parties replied by letter dated 21 February 1994 indicating their intention to amend certain of these clauses. In particular the parties have stated that they are prepared to reduce the duration of clauses 17.1.2, 17.1.3, 17.1.4 and 17.1.6 from three years to two.

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 HRPC, the vendors, Windsor and the company. HRPC, Windsor and the company are corporate bodies engaged in the provision of goods and services for gain and are therefore undertakings within the meaning of the Act. The vendors owned and controlled the company at the time of the agreement and are also currently engaged in other business activities. They are also undertakings within the meaning of the Act [2].

14. The present arrangements therefore constitute an agreement between undertakings whereby HRPC has purchased the company from the vendors. The Authority has indicated in previous decisions [3] that such a sale of business per se does not offend against Section 4(1). In the present case HRPC was not previously active in the Irish market while the company held only a relatively small market share. The level of market concentration is therefore not affected by the arrangements. In addition the Authority accepts that there are a number of competing firms active in this market and HRPC will constitute a significant new entrant. Consequently it does not believe that the sale of the business will have any anti-competitive effect on the relevant market.

15. Clause 17 of the agreement, as notified, contained a number of non-compete provisions some of which may be disposed of briefly. Clause 17.1.6 restricted the Vendors from using certain trade names previously used by the business which is being sold. The Authority has already indicated in previous decisions that it does not consider that such provisions offend against Section 4(1) [4]. In fact it does not believe that such a restriction needs to be subject to a specific time limit.

16. Clauses 17.1.2, 17.1.3 and 17.1.4 provided that the vendors would not for a period of three years:

(i) solicit within the State anyone who had been a customer during the previous two years;

(ii) engage in the same business as the company within a radius of 15 miles of any of its branches; and

(iii) solicit, entice away or employ or engage any executive or employee of the company other than clerical or secretarial employees although this provision would not prevent them employing such an individual where that individual sought the offer of employment or where the individual's employment with the company had been terminated.

The Authority has stated its views on non-compete provisions such as these on numerous occasions indicating that provided they are limited in terms of duration, subject matter and geographical scope to what is necessary to secure the transfer of the goodwill of the business being sold, it does not regard them as offending against section 4(1). It has stated that it normally regards a period of two years as sufficient for this purpose. The restrictions as notified were for a period of three years and so, in the Authority's opinion, offended against section 4(1) and could not be licensed, since they went beyond what was necessary to secure the transfer of the goodwill. As the parties have reduced the length of the restriction to two years, the Authority believes that these provisions no longer offend against section 4(1).

17. Clause 17.1.5 requires the vendors to refer all enquiries relating to the business and all orders which they might receive for two years from completion. The Authority does not believe that such a provision offends against section 4(1) since the vendors are legitimately prevented from operating in the market for that period of time.

18. Clause 17.1.1 and clause 19.1 provides that the vendors shall not at any time after completion disclose any information concerning the business except as required by law and will use all reasonable efforts to prevent such publication or disclosure. The Authority has stated in previous decisions that a restriction on the vendor using or revealing to anyone any confidential information relating to the business being sold are acceptable provided that they are not used to prevent the vendor re-entering the relevant market once a legitimate non-competition clause has expired [5]. Were it to be used in such a way the Authority would regard it as offending against section 4(1).

19. In the Authority's opinion, HRPC, the Vendors, Windsor and the company are undertakings within the meaning of Section 3(1) of the Competition Act, and the notified arrangements for the acquisition by HRPC of the company, constitute an agreement between undertakings. The Authority believes that in the light of the amendments proposed to the agreement in the letter of 21 February 1994, the restrictions in the agreement are no more than is necessary to secure the transfer of the goodwill of the business to HRPC. The agreement of 20 November 1992 for the acquisition of Gas & Oil Parts Ltd. by Heating Replacement Parts & Controls Ltd. between Heating Replacement Parts & Controls Ltd., Mr. Thomas MacGee, Mr. Michael O'Reilly and Mr. Thomas Daly, Windsor Motors Limited and Gas & Oil Parts Ltd., as amended by the letter of 21 February 1994, does not, in the Authority's opinion, offend against Section 4(1) of the Competition Act, 1991.

20. 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 20 November 1992 for the acquisition of Gas & Oil Parts Ltd. by Heating Replacement Parts & Controls Ltd. between Heating Replacement Parts & Controls Ltd., Mr. Thomas MacGee, Mr. Michael O'Reilly and Mr. Thomas Daly, Windsor Motors Limited and Gas & Oil Parts Ltd., (notification no. CA/36/93), notified on 21 July 1993 under Section 7, and amended by the letter of 21 February 1994, does not offend against Section 4(1) of the Competition Act, 1991.

For the Competition Authority

Patrick Massey

Member

11 March 1994.