Irish Competition Authority Decisions

1. The present arrangements involve a shareholders agreement which was notified to the Competition Authority on 22 September 1993. The shareholders agreement arose from a management buy out of Jones Engineering division which was previously part of the Jones Group. The notification requested a certificate, or, in the event of a refusal by the Authority to grant a certificate, a licence. On 14 September, 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. Jones Engineering responded in a letter dated 7 October, 1994, stating that they were amending the clauses which the Authority considered offensive.

2. The notification relates to a shareholders agreement in respect of Jones Engineering Ltd. (previously known as Sanara Ltd.), dated 21 April 1993, between Aldwych Investment Company Limited (Aldwych), Mr. Eric Kinsella, Mr. Des Collins, Mr. Jim Curley, Mr. Brendan Daly and Sanara Limited (Sanara). Aldwych and Mr. Kinsella each own 40% of the shares in Jones Engineering with the remaining 20% owned by Messrs. Collins, Curley and Daly.

3. Aldwych is a private limited company established for investment purposes. Its ultimate shareholders are the trustees of a trust set up by Mr. Christopher Jones, a director of the Jones Group plc who is also the chairman of Jones Engineering. Jones Engineering is a private limited company incorporated on 3 November 1992, through which the shareholders have acquired the engineering division of the Jones Group. This division consists of several companies, namely: H.A. O'Neill Limited, Patrick Lynch Limited, Climate Engineering Limited and Irish Sprinkler & Fire Protection Limited. These companies provide various mechanical and electrical contracting services and were all wholly owned by the Jones Group prior to their acquisition by Jones Engineering. Messrs. Kinsella, Collins, Curley and Daly are former managers of the Jones Group.

4. Jones Engineering, through its subsidiary companies, is engaged in the business of providing mechanical and electrical contracting services in the construction industry and in the design and installation of fire protection systems. Such work is carried out mainly on new and refurbished non-residential buildings. These include hotels, factories, hospitals, schools, office buildings, shopping centres and other premises. The companies which make up Jones Engineering bid for projects throughout the country. They stated that there was intense competition with at least 20 other companies capable of bidding for all major projects. For some major projects companies from other EU countries may also tender. The companies have a combined turnover of £30m and their market share was said to be less than 20%. According to the parties work is obtained mostly through a competitive tendering process.

5. Some information on activity in the various segments of the construction industry can be obtained from the Census of Building and Construction. The latest published Census data are for 1991. Summary details for the segment which includes mechanical and electrical contracting are given in the table below. The table shows that in 1991 there were 67 firms employing 20 or more persons engaged in this business. Between them these firms employed almost four thousand people, both directly and indirectly, and had a combined turnover of over £200m. Of this total £102m was due to work done as a principal contractor while a further £97m was due to work done as a sub-contractor.

1990 1991

Number of Firms 70 67

Persons Engaged ('000) 3.3 4.0

Turnover (£m) 166.3 203.2

* This consists of NACE industrial category 503 which is defined as comprising contractors engaged in plumbing, heating and electrical contracting together with other specialist installation contractors (including mechanical services contractors).

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

6. The arrangements involve a shareholding agreement dated 21 April 1993 between Aldwych, Messrs. Kinsella, Collins, Curley and Daly and Sanara for the purpose of regulating the management and control and the future conduct of the business of the company then known as Sanara and now known as Jones Engineering. Both Jones Group and Aldwych provided certain loan facilities to Jones Engineering and the subsidiary companies. The associated Share Purchase Agreement provides that for so long as Jones Group and Aldwych have shares/loans outstanding in Jones Engineering the Board of Jones Engineering will consist of three groupings each of which has one vote and all board decisions, with certain limited exceptions, are to be by majority vote. The three groupings are; A a Jones Group nominee, B Mr. Chris Jones and a Nominee and C comprising the other four shareholders.

7. Clause 2.2 of the agreement provides that immediately before completion each shareholder, (except in the case of Aldwych), would simultaneously subscribe in cash at par for a specified number of shares and enter into a Contract of Employment. The agreement includes a number of restrictions on the shareholders which are set out below. Clause 2.5 provides that each shareholder would not, without the consent of the other shareholders, for so long as he or it should remain a director or member of the company, be engaged or interested, either directly or indirectly, in any capacity in any trade, business or occupation, other than as a director/employee of the company or one of its subsidiaries. This restriction does not prohibit the shareholder holding quoted investments, provided such holdings do not exceed ten per cent of the shares or stock of any class of any one company. The expression occupation includes any public or private work which may hinder or otherwise interfere with the performance of the shareholders duties as director and employee.

8. Clause 2.6 provides that where the shareholder ceases to be an employee pursuant to his employment contract, the restriction in clause 10 of the employment contract should apply and the restrictions in clauses 2.5, 4.1 and 4.2 of the Shareholders agreement would not apply, unless for some reason the restrictions in clause 10 of the employment contract are in whole or part invalid, illegal or unenforceable. It further provides that the shareholder would not be subject to any restriction under either clause 10 of the employment contract or clauses 2.5, 4.1 or 4.2 once the relevant periods in clause 10 of the employment contract had expired. Clause 10 of the employment contract provides that for two years after termination of employment the director shall not solicit or accept business from any person, firm or corporate body that was a customer of the companies in the previous year. In addition clause 10 prohibits the director for one year after termination of employment from being concerned or interested either directly or indirectly in any business within the geographical area of Leinster in the business of mechanical and electrical contracting or any other business of a similar nature to the business of the companies at the date of termination of employment. These restrictions do not apply where the director is wrongfully dismissed or where the company serves notice on the director in accordance with clause 1(a) terminating employment on expiry of the notice.

9. Clause 4.1 provides that each of the shareholders shall not for a period of two years from the date on which they cease to be shareholders either on their own behalf or on behalf of anyone else, canvas or solicit orders in respect of goods or services competing with the business of the company or any of its subsidiaries from any person, firm or company who was a customer of the company at that time or during the previous 12 months. Clause 4.2 prohibits the shareholders for one year from the date they cease to be shareholders from being concerned or interested either directly or indirectly in any business within the geographical area of Leinster in the business of mechanical and electrical contracting or any other business of a similar nature to the business of the companies at that date.

10. Clause 5.1 provides inter alia that where a shareholder (a) ceases to be a director of the company or (b) ceases to be employed by it, the other shareholders shall be entitled to serve notice in writing requiring the first shareholder to sell all his shares. Clause 5.2 provides that in the event of any breach of the agreement by a shareholder the other shareholders may, within six months of learning of such a breach, require the shareholder to sell his entire shareholding in the company to the other shareholders, if he has failed to remedy the breach within 14 days of being notified of it.

11. Clause 7 provides that none of the shareholders shall divulge to any person any trade secret or manufacturing process or any confidential information concerning the business or finances of the company or its subsidiaries except in the proper course of his duties as director or employee.

12. The parties submitted that neither Aldwych nor any of the other shareholders were undertakings and that consequently the agreement did not constitute an agreement between undertakings. They argued that Aldwych was a holding company which did not own or control any undertakings and was not therefore an undertaking. They referred to the Authority's decision in AGF-Irish Life Holdings in support of this. [1] The parties then referred to the Authority's first decision in Nallen/O'Toole, [2] where it considered the question of whether individuals could be regarded as undertakings, and also to its decisions in ACT/Kindle [3] and Cambridge/Imari. [4] They also referred to the decision of the EU

Commission in Reuter/BASF [5] and the European Court of Justice decision in Remia [6] on this point. They argued that the Authority had erred in ACT/Kindle in that none of the individuals concerned could be shown to be more than a minority shareholder. They also argued that the situation in the present case differed from that in Cambridge/Imari as there was no sole shareholder/managing director. They argued that where a group of individuals controlled an undertaking each of them were not undertakings because it is only the group collectively which could be said to control the undertaking.

15. The parties argued that the restrictions under clause 2.6, on a shareholder who ceases to be an employee without necessarily ceasing to be a shareholder were reasonable given the management's financial services and personal resources commitments to the management buyout and were less restrictive than those provided in clauses 2.5, 4.1 and 4.2. In addition, they referred to the Authority's decisions in Scully Tyrrell/ Edberg [7] in support of the restrictions in clause 2.5 of the Shareholders Agreement. A number of arguments were also advanced in support of the request for a licence but these are not considered here.

16. The Authority issued a Statement of Objections to the parties on 14 September, 1994 indicating its intention to refuse a certificate or licence in respect of the notified agreement. By letter of 7 October, 1994 Jones Engineering stated that the provision concerning the post termination non compete clause in the employment agreements had been deleted and the period of the post termination non solicitation clause amended to one year. These amendments were given effect by means of a supplemental agreement dated 5 October, 1994.

17. 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.'

18. 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 Aldwych, Messrs. Kinsella, Collins, Curley and Daly and Jones Engineering (Sanara). Jones Engineering is a corporate body engaged in the construction business for gain and is therefore an undertaking within the meaning of the Act. Aldwych owns 40% of Jones Engineering. The Authority does not accept the parties claim that Aldwych is not an undertaking. Its purpose in holding 40% of the shares in Jones Engineering is to use that entity as a vehicle to engage in the provision of services which are provided for gain by Jones Engineering. As far as Messrs. Kinsella, Collins, Curley and Daly are concerned the Authority again rejects the parties claim that they are not undertakings. The Authority indicated in Nallen/O'Toole that individuals who were partners in a business which they jointly owned were undertakings. The Authority does not believe that where a partnership involves more than two people they could not be regarded as undertakings simply because no one of them could be said to control the business. The individuals concerned in this instance were formerly service managers of the Jones Group Engineering Division and have come together to effect a management buyout of the business; as a result of this they own a large shareholding in the business and are actively engaged in running that business jointly with the other shareholders and with the Jones Group and are therefore undertakings. The arrangements therefore constitute an agreement between undertakings.

19. The shareholding agreement constitutes an agreement between the parties to engage in business together. The individuals involved had previously managed the business concerned when it was a subsidiary of the Jones Group. Such an agreement is not per se anti-competitive and does not offend against section 4(1) of the Competition Act.

20. The agreement imposes a number of restrictions on the shareholders. Clause 2.5 prevents them engaging in any other trade, business or occupation for so long as they remain a

director or member of the company. The Authority has stated in Scully Tyrrell that:

´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.'

In the Authority's view clause 2.5 is designed to ensure that each of the parties devote all of their efforts to the successful operation of the business. It does not, in its view, offend against section 4(1).

21. Clauses 4.1 and 4.2 provide that, if and when any of the shareholders cease to hold shares in the company, they will not, for two years from that date solicit customers of the business and, for one year, be engaged in any way in a competing business within Leinster. Again the Authority does not regard such a restriction as offending against section 4(1) as it believes it to be no more than is absolutely necessary, in terms of its duration, geographic scope and subject matter, to protect the goodwill of the business in the event of a shareholder disposing of his shares. It has already indicated in Scully Tyrrell that in such a situation a restriction on a shareholder competing with a business for so long as he remains a shareholder and for up to two years thereafter does not offend against that section, but that such considerations would not apply where only a nominal shareholding was involved, or in respect of shares held purely for investment purposes. The Authority does not believe that the latter considerations arise here.

22. Clause 2.6 then provided that, where a shareholder ceased to be employed by the business, the restrictions in clause 10 of their employment contract would apply instead of those in clauses 2.5, 4.1 and 4.2. The employment contract was, in the Authority's view, an integral part of the shareholding agreement since it was a requirement of the agreement that the parties enter into such an agreement, and because the Shareholders Agreement provided for clause 10 of the employment agreement to operate in specific circumstances. In fact clauses 10(a) and (b) of the employment contract were almost identical to clauses 4.1 and 4.2 of the Shareholders Agreement. If the individual concerned ceases to be an employee of the business then, by virtue of clause 5 the other shareholders are entitled to purchase his shares in which case clauses 4.1 and 4.2 would apply. Thus clause 10 could be regarded as imposing the obligations of clause 4.1 and 4.2 on a shareholder who ceased to be employed by the firm where the other shareholders decline to exercise the right to buy out his shares. In such circumstances clause 2.5 would not apply so that once the periods specified in clause 10 had expired, the individual could compete with the business whilst remaining on as a shareholder. On the other hand the individual could be retained as an employee after he had ceased to be a shareholder. In that case he would first of all be bound by the provisions of clause 4.1 and 4.2 and could then be subsequently bound by clause 10 if and when his employment ceased. The Authority's view on post-term non-compete clauses in situations such as this have been made clear in a number of previous decisions. It believes that such a restriction offends against section 4(1). A restriction on soliciting customers for up to 12 months after cessation of employment is not considered to offend against section 4(1). [8] Nonetheless in the present circumstances clause 10 of the employment contract and hence clause 2.6 of the Shareholders Agreement offended against section 4(1) in the Authority's opinion. The parties have now amended the employment agreements by means of a supplemental agreement deleting the post termination non compete provision and by amending the period of post termination non solicitation to one year. Consequently, these clauses no longer offend against Section 4(1) of the Act.

23. In the opinion of the Competition Authority, the shareholders agreement in respect of Jones Engineering Ltd. (previously known as Sanara Ltd.), dated 21 April 1993, between Aldwych Investment Company Limited (Aldwych), Mr. Eric Kinsella, Mr. Des Collins, Mr. Jim Curley, Mr. Brendan Daly and Sanara Limited (Sanara), (notification no. CA/60/93), notified on 29 September 1993, under Section 7, constitutes an agreement between undertakings. The Authority considered that the restriction in clause 2.6 of this agreement and the associated restriction in clause 10 of the employment agreements, offended against section 4(1) of the Competition Act and did not satisfy the requirements for a licence under section 4(2). As the offensive provisions have now been amended the agreement no longer offends against Section 4(1).

24. 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 21 April, 1993 in respect of Jones Engineering Ltd (previously known as Sanara Ltd) between Aldwych Investment Company Ltd, Mr. Eric Kinsella, Mr. Des Collins, Mr. Jim Curley, Mr. Brendan Daly and Sanara Ltd, (notification no. CA/60/93), notified on 29 September, 1993, under Section 7, and amended by the supplemental agreements of 5 October, 1994, does not offend against Section 4(1) of the Competition Act, 1991.

For the Competition Authority

Patrick Massey

Member

28 October, 1994.