Irish Competition Authority Decisions

1. An agreement between Ove Arkil A/S (Ove Arkil) and Messrs. James Kelly and Patrick Kennedy (the Vendors) for the purchase and sale of the entire issued share capital of Tarmak Company Limited (Tarmak) containing a non-compete clause, was notified to the Competition on 22 January 1993. The notification requested a certificate or, in the event of a certificate being refused, a licence. On 27 June 1994, the Authority issued a Statement of Objections to the parties indicating its intention to refuse a certificate or a licence in respect of the notified agreement. Ove Arkil responded in a letter dated 25 July 1994, stating that they were amending the clauses which the Authority considered offensive.

2. The notification relates to an agreement dated 25 November 1991 between Ove Arkil and the Vendors, whereby the Vendors agreed to sell the entire issued share capital of Tarmak to Ove Arkil. The agreement also contained a non-compete provision and provided that the vendors enter into service agreements.

3. Ove Arkil A/S is a Danish company which forms part of the Ove Arkil Group whose main activities are building and construction as well as production and laying of asphalt road materials. Tarmak Company limited is a company registered in Ireland engaged in the manufacture and sale of tarmacadam and other related products. Prior to the completion of the agreement, it was wholly-owned by Messrs. Kelly and Kennedy.

4. The relevant market is the business of mining, quarrying and manufacturing, producing, distributing, marketing and selling tarmacadam, asphalt and aggregates and derivative products of or similar products to any of the foregoing. Tarmak Company Limited operates within a fifty mile radius of its quarry at Rathangan, Co. Kildare. According to the parties, there are at least thirty entities operating in the market, the largest being Roadstone and South of Ireland Asphalt Company (S.I.A.C.). There are no barriers to entry into the market although new suppliers may encounter difficulties in attracting customers due to the large number of existing suppliers and the custom generated by them.

5. The notification relates to an agreement, dated 25 November 1991, for the sale by the Vendors of the entire share capital of Tarmak to Ove Arkil. Clause 8.1(a) of the agreement contained a non-compete clause which prevented the vendors from competing in the business for a period of five years from the date of the agreement. Clause 8.1(b) of the agreement prevented the vendors, also for a five year period, from conducting business with any person or company who was a customer of Tarmak in the two year period preceding the date of the agreement. Clause 8.1(d) prevented the vendors, also for a five year period, from soliciting, enticing or offering employment to any person who was in the employment of Tarmak in the two year period immediately preceding the date of the agreement. Clause 8.1(e) also prevented the vendors, for a five year period, from engaging as consultants or advisers, employees or other persons who had been engaged as consultants or advisers in the two years prior to the date of completion. In further consideration for the sale of business, the vendors became employees of the purchasing company and have entered into service agreements with it. Clause 5.1(A) (xii) made it a condition of the sale that the vendors enter the service agreements. Clause 5.1 of these agreements contained a restrictive covenant, preventing the vendors from competing in the business for the duration of their employment and for a period of one year following cessation of such employment and from soliciting customers or employees for a like period.

6. The Authority wrote to the parties on 8 July 1993 expressing concerns at the excessive duration of the non-compete clauses and the inclusion of post-employment restrictions on Messrs. Kelly and Kennedy. In a letter of reply dated 9 August 1993, solicitors for the purchaser indicated that if they were to reduce the duration of the non-compete clause of the sale agreement from five years to two years, it would not offend against section 4(1). They also stated that the service agreement constituted an agreement between an employer and an employee as described in the Authority's notice in relation to employee agreements [1] and did not, therefore, come within the scope of the Competition Act until such time as the employee became an undertaking. On 27 June 1994 the Authority issued a Statement of Objections indicating its intention to refuse a certificate or licence in respect of the notified agreement. On 25 July 1994 the purchaser indicated that the restrictions in clause 5.1 of the service agreements would be limited to the period of employment. They also confirmed the undertaking given in the letter of 9 August 1993, to reduce the duration of clauses 8.1(a), (b), (d) and (e) from five years to two.

7. 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'.

8. 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.' Ove Arkil A/S is a limited company registered in Denmark. It forms part of the Ove Arkil Group which is engaged for gain in the building and construction industry. It is therefore an undertaking within the meaning of the Act. Tarmak Company Limited is a limited company registered in Ireland. It is engaged for gain in the manufacture and sale of tarmacadam and related products. At the time of the agreement, Messrs. Kelly and Kennedy were the beneficial owners of Tarmak. They are, therefore, also undertakings within the meaning of the Act. The arrangements therefore constitute an agreement between undertakings.

9. Ove Arkil has purchased the business of Tarmak from the vendors. The Authority indicated in Scully Tyrrell/Edberg [2] 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. Ove Arkil was not previously active in the Irish market so the arrangement has no impact on the actual number of competitors or their market shares. Consequently the degree of market concentration, however measured, is unaffected by the arrangements. The Authority believes that the acquisition of Tarmak by Ove Arkil 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).

10. Clause 8.1(a) of the agreement contained a non-compete clause which prevented the vendors from competing in the business for a period of five years from the date of the agreement. Clause 8.1(b) of the agreement prevented the vendors, also for a five year period, from conducting business with any person or company who was a customer of Tarmak in the two year period preceding the date of the agreement. Clause 8.1(d) prevented the vendors, also for a five year period, from soliciting, enticing or offering employment to any person who was in the employment of Tarmak in the two year period immediately preceding the date of the agreement. Clause 8.1(e) also prevented the vendors, for a five year period, from engaging as consultants or advisers, employees or other persons who had been engaged as consultants or advisers in the two years prior to the date of completion. The Authority has indicated in a number of previous decisions that it generally considers a non-compete period of two years as being sufficient to ensure the complete transfer of goodwill in a sale of business agreement. This can be extended to five years where the sale involves the transfer of technical know-how. However, the Authority does not believe, on this occasion, that the notified arrangements contained any degree of technical know-how and consequently they offended against Section 4(1). The purchaser has now given an undertaking to reduce the duration of the non-compete clause from five years to two. As this does not exceed what the Authority has previously considered acceptable, the clause, as amended, does not offend against section 4(1).

11. It was a condition of the sale that the vendors become employees of Tarmak and enter into Service Agreements with the purchaser. These agreements contained a clause preventing the vendors from competing with the business for the duration of their employment and for a period of one year following cessation of such employment and from soliciting customers or staff for a like period. The parties argued that the Service Agreements represented agreements between an employer and employees and for this reason did not come within the scope of the Competition Act until such time as the employment was terminated. However, as previously stated [3], the Authority considers that where a vendor enters into a service agreement with the purchaser, it is an important part of the overall sale of business agreement and must be considered part of that agreement between undertakings. This is reinforced by the fact that it was a condition of the sale agreement that the vendors enter into the service agreements. Furthermore, the Authority has previously indicated [4] that in these circumstances, a restriction on competing after employment ceases offends against section 4(1) of the Competition Act since it goes beyond what is necessary to secure the transfer of the goodwill of the business. A prohibition on soliciting customers for one year after cessation of employment does not offend. This is in line with the Authority's decision in Apex/Murtagh. In the Authority's opinion, therefore, clause 5.1 of the service agreements as notified offended against section 4(1), but as it has been amended it no longer offends.

12. In the Authority's opinion, Ove Arkil A/S and Messrs. James Kelly and Patrick Kennedy are undertakings within the meaning of Section 3(1) of the Competition Act, and the notified arrangements for the purchase and sale of the entire issued share capital of Tarmak Company Limited constitute an agreement between undertakings. For the reasons given above, the Authority believes that the arrangements had the effect of preventing, restricting or distorting competition within the State. The agreement of 25 November 1991 between Ove Arkil and the Vendors for the purchase and sale of the entire issued share capital of the Tarmak Company Limited offended against Section 4(1) of the Competition Act, 1991. As the offensive provisions have now been amended the agreement no longer offends against section 4(1).

13. 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 25 November 1991 between Ove Arkil and James Kelly and Patrick Kennedy, for the purchase by Ove Arkil A/S of the entire issued share capital of Tarmak Company Limited, (CA/3/93), notified on 22 January 1993 under section 7, and amended by the letters of 9 August 1993 and 25 July 1994, does not offend against section 4(1) of the Competition Act, 1991.

For the Competition Authority

Patrick Massey

Member

6 September 1994

Decision No. 12 - Scully Tyrrell & Company/Edberg Limited, 29 January 1993

Decision No. 20 - Apex Fire Protection Ltd./Mr Noel Murtagh, 10 June 1993