Irish Competition Authority Decisions

1. A shareholders agreement between IAWS Group plc (IAWS) and a number of other legal and natural persons for the establishment and operation of the First National Bakery Co. Ltd. (First National), was notified to the Competition Authority on 30 September 1992. The agreement provided for the establishment of First National and the acquisition by it of several companies involved in the baking industry in return for the issue of shares in First National. The agreement included certain non compete provisions. The notification requested a certificate or, in the event of a certificate being refused, a licence.

2. The notification relates to an agreement dated 11 August 1989 between IAWS, Mr. Thomas O'Connor, Mr. Andrew O'Connor, Mr. Matthew O'Connor, Mr. Michael O'Connor and Ms. Nellie Keady, (The Western Shareholders), Mr. Thomas P. Williams, Ms. Marie Williams and Mr. Brian Williams, (The Williams Shareholders), Kielys Bread Company (1970) Limited (Kielys 1970), Rahoon Bakeries Limited (Rahoon), First National, Snowfire Limited (Snowfire), Tommy Tucker (Wexford) Limited (Tommy Tucker), Kielys Bread Company Limited (Kielys), Rahoon Bakeries (Galway) Limited (Rahoon Galway), Brennans Wonderloaf Limited (Brennans) and P. Keane & Sons Limited. By virtue of the notified agreement, the parties established a company, First National, [1] in which each of them would participate for the purpose of carrying on the business of baking in the future. The agreement included some non-compete provisions. It was notified to the Minister for Industry and Commerce under the terms of the Mergers Act (1978) and no order was made.

3. IAWS is a public limited company quoted on the Irish Stock Exchange. It has, through its subsidiaries, been a major supplier of materials and services to the Irish agricultural and food industries for over 90 years. The group's principal operating businesses consist of fish processing, fertilisers, animal feed, energy products and food. Its turnover for the year ended 31 July 1993 was £402m. All of the parties other than IAWS were at or about the time of agreement, either directly or through companies owned by them, engaged in the business of baking bread.

4. The notification relates to a shareholding agreement, dated 11 August 1989. At the time of the agreement the parties, other than IAWS,were either directly or indirectly engaged in the business of baking at different locations within the State. Under the terms of the agreement they agreed to cease competing with one another and to transfer control of their respective baking businesses to First National which in turn acquired the entire trade and fixed assets of the companies involved. In return they received shares in First National. At the time of the notification IAWS held 50% of the shares in First National with the remainder being held by the various other parties. The Williams Shareholders ceased to be shareholders in First National on 3 January 1992, Rahoon ceased to be a shareholder on 6 March 1992 and Kielys 1970 ceased to be a shareholder on 28 April 1992.

5. Under clause 2 of the agreement each of the parties agreed that they would not during the period commencing on the date of the agreement and terminating two years after the date upon which they ceased to be shareholders in the company:

(i) in the Republic of Ireland directly or indirectly either on its own behalf or in conjunction with or on behalf of any other person, firm or company carry on any business in competition with the baking business of the company;

(ii) in relation to the business of the company either on their own behalf or in conjunction with or on behalf of any person firm or company, directly or indirectly solicit or endeavour to solicit or obtain the custom of any person firm company or corporation that is at any time during the specified period or in the 12 months prior to the agreement was a customer of the business or solicit or entice away any officers, manager or servant of the business. They also agreed to use every endeavour to ensure that their employees would also not do any of these things while they remained employed by them.

These restrictions were stated not to restrict, limit or curtail the Western Shareholders or Kielys in relation to their holding of shares in Crossguns Bakery Limited.

6. IAWS submitted detailed arguments in support of the issue of a certificate. These may be briefly summarised here. They argued that at the time of the agreement the parties had not anticipated the enacting of legislation prohibiting anti-competitive agreements. They argued that the agreement was not anti-competitive and that the restrictive provisions went no further than was necessary to protect the legitimate business interests of the parties. They argued that the Competition Act should not have retrospective effect with regard to agreements concluded prior to the coming into operation of the Act but containing non-competition covenants which continued to run. They referred to the Authority's decisions in Nallen/O'Toole, [2] Chemical International Finance Limited/Irish Life Assurance plc [3], and Cambridge/Imari [4], together with the EC Commission decision in Reuter/BASF in support of their arguments.

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.' IAWS is a corporate body engaged for gain in a wide variety of business activities. All of the other parties were, at or about the time of this agreement, either directly or indirectly engaged in the production of bread and other confectionery products for gain and were therefore undertakings. The notified arrangements constitute an agreement between undertakings.

9. Although described as a shareholding agreement, the arrangements were in many respects akin to a sale of business since they resulted in First National acquiring control of the baking operations owned by the other parties. The transactions whereby First National acquired the assets and goodwill of the baking businesses of the parties other than IAWS had been discharged by performance before the Act commenced. The property which was the subject of the agreement had been transferred. In the Authority's view, the prohibition in Section 4(1) only applies to a current or continuing contractual commitment or one entered into subsequent to the coming into force of the Act. As the transfer of the assets was discharged prior to the commencement of the Act, that aspect of the arrangements does not come within the scope of Section 4(1).

10. Such arguments do not, however, apply to the non-compete clauses which continued to operate after the Act came into force. These clauses which have been described above operate from the date of the agreement until two years after any shareholder disposed of its shares in the joint venture. The Authority has stated in a number of previous decisions that it believes that a restriction on competing with the business for a period is not anti-competitive provided it is for no longer than is necessary to secure the transfer of the goodwill of the business. It has indicated that in general it considers a period of two years as adequate for this purpose. Such considerations also apply where a partner in a business disposes of his shareholding to the other partners. The parties, in their notification, referred to the arrangements as a joint venture. Van Bael and Bellis [5] point out that under EU competition law, in the case of a joint venture, non-compete restrictions which continue after the termination of the joint venture are regarded as infringements of Article 85(1) and have generally been refused an exemption. The Authority believes that the present arrangement is more akin to a sale of business or merger than a true joint venture. For this reason it considers that the two year restriction on the shareholders competing with the business after they cease to be shareholders does not offend against section 4(1).

11. In the Authority's opinion, IAWS and the various other parties to the notified agreement are undertakings within the meaning of Section 3(1) of the Competition Act, and the notified shareholders agreement constitutes an agreement between undertakings. The Authority believes that, as the arrangements which resulted in the acquisition by First National of the baking businesses of the parties other than IAWS were effectively completed prior to the commencement of the Competition Act, that aspect of the agreement does not come within the scope of Section 4(1) of the Act. The non-compete provisions were ancillary to the main agreement and do not offend against section 4(1).

12. 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 shareholders agreement between IAWS Group plc, Mr. Thomas O'Connor, Mr. Andrew O'Connor, Mr. Matthew O'Connor, Mr. Michael O'Connor and Ms. Nellie Keady, (The Western Shareholders), Mr. Thomas P. Williams, Ms. Marie Williams and Mr. Brian Williams, (The Williams Shareholders), Kielys Bread Company (1970) Limited (Kielys 1970), Rahoon Bakeries Limited (Rahoon), The First National Bakery Company, Limited, Snowfire Limited (Snowfire), Tommy Tucker (Wexford) Limited (Tommy Tucker), Kielys Bread Company Limited (Kielys), Rahoon Bakeries (Galway) Limited (Rahoon Galway), Brennans Wonderloaf Limited (Brennans) and P. Keane & Sons Limited for the establishment, operation and control of The First National Bakery Company Limited, (notification no. CA/689/92E), notified to the Competition Authority on 30 September 1992 under Section 7, does not offend against Section 4(1) of the Competition Act, 1991.

For the Competition Authority

Patrick Massey

Member

21 November, 1994