Irish Competition Authority Decisions

1. Arrangements for the acquisition by Rohcon Limited (Rohcon) of certain assets, including the goodwill, of Rohan Construction Limited (Rohan), were notified to the Competition Authority on 18 April 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 15 July 1993. The parties agreed to amend the arrangements by letter dated 31 August 1993. The arrangements had been notified to the Minister for Enterprise and Employment under the Mergers Acts and no Order was issued.

2. The notification relates to an agreement, dated 19 February 1993, between Rohan (the vendor), Mr. Kenneth Rohan, Rohcon (the purchaser) and Ascon Limited for the purchase by Rohcon of certain of the assets, including the goodwill, of Rohan. In addition to the goodwill of Rohan, the assets being purchased included equipment, vehicles and existing contracts. The arrangements included certain non-compete provisions which were amended.

3. Rohcon was incorporated in February 1993 for the specific purpose of acquiring the existing contracts and other assets of Rohan. It is a wholly owned subsidiary of Ascon, a private limited company established in Ireland in 1959, which is engaged in the construction industry, primarily in the business of civil engineering contractor. It had a reported turnover of £59m in the year to May 1993 [1]. Ascon in turn is wholly owned by a Dutch company which is part of the Hollandshe Breton group. Ascon has three operating divisions consisting of Ascon Ltd. which is engaged in civil engineering and heavy industrial construction, Rohcon which is engaged in building contracting and Ascon Excavation Ltd. which is engaged in site development and earthworks. Ascon had its own building division prior to the purchase of the Rohan business. This division was combined with Rohan in establishing Rohcon.

4. Rohan is a private limited company which was engaged in building and construction, in particular commercial and industrial building. It had a turnover in 1992 of £16m. It was part of the Rohan group of companies but the ultimate owner was Cabra Estates Limited (Cabra), a company incorporated in the UK which is now in liquidation. Mr. Rohan is a director and chairman of Rohan. Until 1987 he held a 13% shareholding in Rohan Group plc, Rohan's parent company. At that time the entire share capital of the Rohan Group was purchased by Phoenix Properties & Finance plc, a UK registered company. Since then he has held no shares in Rohan or the Rohan Group but continued to act as a director and chairman of the company. Mr. Rohan had an agreement with Cabra Estates, who subsequently purchased the share capital of the Rohan Group which entitled him to retain the name Rohan Construction Limited for future use.

5. The construction industry can be broken down into two broad categories, namely civil engineering and building. The former category includes construction of infrastructure such as roads, bridges and water and sewage systems. The latter includes the construction of all types of buildings ranging from private houses to factories and office buildings. Rohan was specifically engaged in the commercial and industrial building sector. Ascon was primarily engaged in civil engineering, although it had a building division with a very small market share. The relevant market in this instance is that for construction, specifically that for commercial and industrial building work.

6. Detailed information on the construction industry and on its principal components can be obtained from the Census of Building and Construction. The latest published Census data are for 1991. Summary details are given in Table 1.

Buildings* All Construction.

1990 1991 1990 1991

Number of Firms 150 149 296 295

Persons Engaged ('000) 6.6 6.9 15.6 16.0

Turnover (£m) 567.9 654.5 1202.7 1272.7

* This consists of NACE industrial category 501 which is defined as comprising the construction of flats, office blocks, hospitals and other buildings, both residential and non-residential. It is comprised mainly of general building contractors together with specialist contractors involved in construction of buildings, including scaffolding erectors. Only firms employing 20 or more are included.

Source: CSO, Census of Building and Construction 1991, Irish Statistical Bulletin, December 1993.

7. The table shows that in 1991 there were 149 firms employing 20 or more persons in the building sector. Between them these firms employed almost seven thousand people, both directly and indirectly, and had a combined turnover of almost £655m. Of this total £630m was due to work done as a principal contractor. It is also possible to get a breakdown of the latter figure which provides some further insight into the type of work done. Details for the building sector are given in Table 2.

Buildings All Construction.

1990 1991 1990 1991

Dwellings 138.5 222.5 173.9 250.4

Other Buildings 376.2 364.7 598.8 575.9

Other Work 18.7 29.4 216.2 230.7

Total 533.3 616.5 988.8 1056.9

Dwellings 2.8 0.6 20.9 36.4

Other Buildings 11.3 12.4 18.1 18.8

Other Work 0.4 0.8 2.2 6.4

Total 14.5 13.8 41.2 61.7

Overall Total 547.8 630.3 1030.0 1118.6

Source: As for Table 1.

8. The figures in Table 2 show that the vast bulk of turnover of building firms is accounted for by new building. Almost 60% of such work is accounted for by non-residential building, 36% is attributable to construction of dwellings with the remainder due to other work. There is some degree of specialisation in the building sector with some firms concentrating largely or exclusively on house building while others would concentrate in the commercial end, which was the area where Rohan was principally involved. In effect therefore not all of the 149 firms classified as being engaged in building would operate in the non residential building sector. As against this Table 2 indicates that firms in the building category of the Census accounted for only 63% of non-residential building. A significant proportion (32%) was accounted for by firms classed in the Census as engaged in general building and engineering, of which there were 16 in 1991.

9. The agreement relates to the purchase by Rohcon of certain assets of Rohan. The assets being purchased include equipment, vehicles, existing contracts and goodwill. In effect the arrangement will result in Rohcon acquiring the on-going business of Rohan. Certain Rohan contracts were excluded from the arrangements. A number of non compete clauses were included in the notified agreement. In particular clause 14.1 provided that Rohan would not engage in the business of building contractors or otherwise compete directly or indirectly with Rohcon for an unlimited period of time from the completion date. Rohan also agreed to use its best endeavours to prevent the formation within the State of a company under the name of Rohan Construction Limited or any similar name, save where such company was formed by Mr. Rohan. Under clause 14.2 Mr. Rohan agreed that for a period of five years from completion he would not trade in Ireland or the UK using the name Rohan Construction Limited and would not enter the general contracting business in Ireland or the UK.

10. The parties stated that as result of the placing in liquidation of its parent company, Cabra, Rohan was unable to tender for new business. In particular it encountered extreme difficulty in securing the performance bonds which were essential for tenders in the construction industry. They argued that if the jobs of Rohan's employees were to be protected it was essential that Rohan be acquired by another building contractor, as otherwise Rohan would be perceived as having lost its ability to compete for contracts. Accordingly the directors and shareholders of Rohan had concluded that they had no option but to sell the business promptly as a going concern. Rohan itself would be wound up once work on outstanding contracts is completed. They argued that the non-compete provisions were justified by the fact that Rohcon could not acquire the goodwill of the business in its entirety if Rohan, or another party using its name, were to set up in business as a building contractor. It was claimed that Rohan was firmly identified in the public mind, and with those with whom it had done business over the past twenty years, with Mr. Kenneth Rohan. They pointed out that he was not a shareholder in Rohan but that Rohcon were not prepared to complete the agreement unless he agreed to limit his activities in the manner set out in clause 14.

11. The Authority wrote to the parties expressing its concern with the duration of the non-compete clauses in the agreement. Rohcon replied by letter dated 31 August 1993. They stated that, while they accepted that the period of two years normally considered sufficient by the Authority to secure the transfer of the goodwill of a business was adequate in most circumstances, they believed that a longer period was justified in this instance. They argued that Rohan had been engaged in the construction industry for 20 years and that, if Mr. Rohan were free to set up in business in competition with Rohcon after two years, his close association with Rohan would be likely to attract business which should properly accrue to Rohcon by virtue of it having purchased the goodwill of Rohan. They stated that goodwill in the construction business is reflected in the form of invitations to tender for projects. Rohan had been involved in major projects for clients who would not necessarily be involved in similar projects on an ongoing basis. It was therefore conceivable that a client who had previously employed Rohan would prefer them to Rohcon even after an interval of two or three years. Rohcon indicated, however, that they accepted that the goodwill would have substantially passed to them after four years, and they would be willing to undertake to waive the benefit of clause 14, to the extent that it provided that neither Rohan nor Mr. Rohan would compete with Rohcon for a period in excess of four years.

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 Rohcon, Ascon, Rohan and Mr. Rohan. Rohcon, Ascon and Rohan are corporate bodies which were engaged in the construction business for gain and are therefore undertakings within the meaning of the Act. Mr. Rohan is a director and chairman of Rohan. He ceased to be a shareholder of the company and its parent in 1987. He did not own or control the company. Although he may have enjoyed a considerable degree of managerial autonomy, ultimate control resided with Rohan's parent company. Consequently, Mr. Rohan is not, in the Authority's view, an undertaking.

14. The present arrangements therefore constitute an agreement between undertakings whereby Rohcon has purchased the assets of the business from Rohan. The Authority has indicated in previous decisions [2] that such a sale of business per se does not offend against Section 4(1). In the present case Rohcon's parent Ascon was active in the construction industry although primarily in the civil engineering side of the industry. It is clear, however, from the figures in Tables 1 and 2 that there are a large number of firms engaged in the relevant market. The combined market share of Rohan and Ascon in the commercial building market would appear to be relatively small when their turnover figures are judged against figures for total turnover in that market. The impact on market concentration would be relatively slight. In addition the Authority accepts that Rohan could not have continued as an independent competitor in the market given its inability to secure performance bonds which are essential to compete for business. Consequently the Authority does not believe that the sale of the business will have any anti-competitive effect on the relevant market and so it does not offend against section 4(1).

15. Clause 14 of the agreement, as notified, contained certain non-compete provisions. The Authority has stated on numerous occasions that such provisions in sale of business agreements do not offend against section 4(1), provided they are limited in terms of duration, geographic scope and subject matter to what is necessary to secure the transfer of the goodwill of the business being sold. It generally regards a period of two years as adequate for this purpose. Under clause 14.1, as notified, Rohan was prevented from competing in the construction business for an unlimited period of time. Such a restriction offended against section 4(1). Rohcon have now stated that they will waive that restriction to the extent that it prevents Rohan competing in the market for more than four years. The four year period exceeds what the Authority generally considers necessary to secure the transfer of the goodwill of a business although the Authority has accepted that a longer period of restriction may be necessary in certain circumstances.

16. The Authority notes that, while the EU Commission has generally adopted the view that non-compete clauses of more than two years would infringe against Article 85(1) of the Treaty of Rome, it also has accepted that a longer restriction may be justified in certain circumstances. Indeed it is clear from the Commission's decisions that the length of time necessary for the full transfer of the goodwill of a business will vary from industry to industry.

´In general, the assessment under Article 85(1) of non-competition obligations imposed on sellers of businesses will depend on the particular circumstances of each individual case and no universal rule can therefore be established as to the permissible duration of such clauses. [3]'

Thus what may be regarded as a reasonable length of time for a non-competition clause in one case may be regarded as excessive in another. In the former case such a clause would not be regarded as a breach of Article 85(1) whereas in the latter it would. In the Nutricia case the Commission indicated that among the factors to be taken into account in evaluating the duration of such clauses were:

(i) ´how frequently consumers in the relevant market change brands and type (in relation to the degree of brand loyalty shown by them)',

(ii) ´for how long, after the sale of the business, the seller, without a restrictive clause, would be able to make a successful comeback to the market and regain his old customers' [4].

The Authority agrees that such factors should be taken into account when considering the object and the effect of non-compete clauses in individual cases.

17. It remains firmly of the view, however, that a restriction of two years would provide adequate protection in the vast majority of cases. In this instance, however, the Authority accepts that buyers in the market only purchase the products in question infrequently and that having awarded a construction contract to a firm it may be several years before they seek to award further contracts. It therefore accepts that, in this market, the seller would be able to make a successful comeback to the market and regain his old customers, by virtue of the goodwill of the business previously owned, after a period of two years. In this instance the Authority considers that a period of four years is no more than is necessary to secure the transfer of the goodwill of the business being sold. Consequently it believes that the provision, as amended, no longer offends against section 4(1) [5].

18. Clause 14.2, as notified prevented Mr. Rohan from competing in the relevant market for five years after completion. As pointed out above, Mr. Rohan is not an undertaking. Clause 14.2 is, however, part of an agreement between undertakings. Rohcon have stated that they would not have purchased the business unless Mr. Rohan were restricted from competing by means of such a clause. Thus the restriction was essential to the agreement between Rohcon and Rohan for the sale of the business. The Authority believes that, if, as part of a sale of business agreement, the vendor ensures that certain of its employees become party to the non-compete provisions in an agreement, such clauses offend against section 4(1) if they go beyond what is necessary to secure the transfer of the goodwill of the business being sold. In this instance the Authority considers that a restriction for five years offended against section 4(1), but as in the case of clause 14.1 it accepts that a restriction for up to four years is necessary, and concludes that clause 14.2, as amended, does not offend against section 4(1).

19. In the Authority's opinion, Rohcon, Ascon and Rohan are undertakings within the meaning of Section 3(1) of the Competition Act, and the notified arrangements for the acquisition by Rohcon of the assets and goodwill of Rohan, constitute an agreement between undertakings. The Authority believes that in the light of the amendments proposed to the agreement in the letter of 31 August 1993, the restrictions in the agreement are no more than is necessary to secure the transfer of the goodwill of the business to Rohcon. The agreement of 19 February 1993 between Rohan Construction Limited, Mr. Kenneth Rohan, Rohcon Limited and Ascon Limited for the purchase by Rohcon of certain of the assets, including the goodwill, of Rohan, as amended by the letter of 31 August 1993, 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 19 February 1993 between Rohan Construction Limited, Mr. Kenneth Rohan, Rohcon Limited and Ascon Limited for the purchase by Rohcon of certain of the assets, including the goodwill, of Rohan Construction Limited, (notification no. CA/15/93), notified on 18 April 1993 under Section 7, and amended by the letter of 31 August 1993, does not offend against Section 4(1) of the Competition Act, 1991.

For the Competition Authority

Patrick Massey

Member

25 March 1994.