Irish Competition Authority Decisions

1. Notification was made by AIB Investment Managers Ltd (AIBIM) on 30 September 1992 with a request for a certificate under Section 4(4) of the Competition Act or, in the event of a refusal by the Competition Authority to issue a certificate, a licence under Section 4(2) in respect of a Share Subscription and Shareholders Agreement relating to shares in the Prince of Wales Hotel Ltd. Notice of intention to issue a certificate was published in the Irish Times on 9 December 1994.

2. The notification concerns a share subscription and shareholders agreement between John O'Gorman, O'Gorman Group (Athlone) Ltd, Dr. Ribeiro, Zanatti Investments Ltd, as covenantors, Business and Trading House Investment Company Ltd (BTHIC), AIB Investment Managers Ltd (AIBIM), Erin Executor & Trustee Co Ltd and Prince of Wales Hotel Ltd in relation to the subscription by two designated investment funds, one managed by AIBIM and the other managed by BTHIC, for new shares in Prince of Wales Hotel Ltd.

3. The parties to the agreement are as follows:

(i) Prince of Wales Hotel Ltd operates a 72 room 3 Star hotel at Athlone, Co. Westmeath. The holders of ordinary shares of £1 each in the company before and after the agreement were as follows:-

Before After

O'Gorman Group (Athlone) Ltd 56,625 56,625

Zanatti Investments Ltd 28,875 28,875

Tourism/Business Exp. Fund 30,000 30,000

AIBIM Fund - 45,455

BTH Fund - 7,954

Total issued capital £115,500 £168,909

(ii) AIBIM, a subsidiary of the AIB Group, is engaged in the business of corporate finance and is manager of a designated investment fund, the AIB Fund. Erin Executor & Trustee Co Ltd is the trustee of the fund. The AIB fund acquired 45,455 new ordinary £1 shares in Prince of Wales Hotel Ltd at a substantial premium under the agreement.

(iii)BTHIC is engaged in the business of corporate finance and in the promotion and management of designated investment funds. It is manager of a designated investment fund, the BTH Fund. The BTH fund acquired 7,954 £1 ordinary shares in the company at a substantial premium under the agreement. BTHIC is also manager of another designated investment fund, the Tourism and Business Expansion Fund, which subscribed for 30,000 shares in Prince of Wales Hotel Ltd in 1990. These latter shares were subject to a Put and Call option exercisable in 1995.

(iv) O'Gorman Group (Athlone) Ltd was a private company holding 56,625 shares in the Prince of Wales Hotel Ltd. A Receiver was appointed over the company in January 1994. O'Gorman Group Athlone Ltd In Receivership continues to be a covenantor to the agreement and a shareholder in Prince of Wales Hotel Ltd.

(v) John O'Gorman was a director of Prince of Wales Hotel Ltd and was the beneficial owner of the entire issued capital of O'Gorman Group (Athlone) Ltd. He resigned from the board of directors of Prince of Wales Hotel Ltd in April 1993.

(vi) Zanatti Investments is an Irish registered company holding 28,875 shares in the Prince of Wales Hotel Ltd.

(vii) Dr. Ribeiro, who had an address in Portugal was beneficial owner of the entire issued share capital of Zanatti. He ceased to be the beneficial owner of that company in May 1993.

The four parties at (iv) to (vii) above are covenantors to the agreement.

4. Under the BES scheme (Relief for Investments in Corporate Trades as introduced in the 1984 Finance Act with subsequent amendments) taxpayers may obtain tax relief in respect of subscription for shares in companies engaged in qualifying trades. The shares must represent new issued ordinary shares in an unquoted company and must be held for a minimum period of 5 years. Similar tax relief is also given where the subscription is made to a designated investment fund (designated by the Revenue Commissioners) where the monies subscribed are invested on the taxpayer's behalf in qualifying companies. The Designated Investment Funds Act 1985 declares that a designated investment fund is not a unit trust and requires that a prospectus should be prepared in respect of each such fund which must be first approved by the Minister for Enterprise and Employment. Approval may not be given unless the Minister is satisfied that satisfactory statements on a number of specified issues are included in the prospectus including details of the manager and of the separate trustee, that the holder of any shares issued to the Fund will be registered as nominee for a particular participant and particulars of the arrangements for transfer of the shares into the participant's name after 5 years. In practice each designated investment fund is governed by a trust deed which provides for the holding of the monies subscribed by a trustee, in whose name shares purchased by the Fund are initially registered as nominee for each particular subscriber, and the management of the fund by a manager, who has responsibility for selecting the investments and safeguarding the subscribers' interests in the investee companies. There are generally provisions in the trust deed for disposal of the shares after 5 years by the trustee/manager either by way of sale (with each subscriber getting his share of the proceeds) or transfer into the subscriber's name. Mechanisms may be included to facilitate the sale or redemption of the shares including Put and Call options whereby the original shareholders of the investee companies after a period of 5 years may opt to or can be required to purchase the Fund's shares. If however the shares in an investee company cannot be satisfactorily disposed of, there are provisions for their transfer some time after into the subscriber's name and the trust ends. Unlike an UCIT or investment company, the individual subscriber does not hold units in the Fund but holds the beneficial interest in his proportion of the shares acquired through the fund. According to the Bord Failte Report for 1992, £37m was raised in BES funding in 1991 for tourism related projects. Following an amendment in the Finance Act 1991 the eligibility of hotel, guesthouse and self catering projects under the BES scheme was removed.

5. According to the 1992 Review of the Irish Hotel Industry there were 668 hotels in the State in 1991 with 21,967 rooms. The current Bord Failte Guide shows that there are 6 registered hotels in Athlone with a total room capacity of 202, including 118 rooms in two 3 star hotels, Hodson Bay and Prince of Wales, and 26 rooms in the 2 star Shamrock Lodge Hotel. The 1992 Review shows that, in 1991, on average, sales of food made up 38% of hotel revenues with revenue from rooms accounting for 33% and bar receipts 25%. For Grade B* hotels revenue from rooms represented 27%, with food contributing 39% and beverages 31.5%. On average Irish guests take up around 45% of hotel bed nights but the average for Grade B* hotels was 48.8%. Irish guests include a large proportion of the business guests who take up on average 28% of bed nights. The ratio for Irish guests is higher than average in Leinster (excluding Dublin) where it was 66% in 1991. According to the Statistical Bulletin issued by the Central Statistics Office, the number of overseas visits to the State increased from 2.345m in 1988 to 3.3m in 1993 with visitor spending (excluding international fares) increasing from £566m to £980m. It appears however that the impact of this increase on hotel occupancy has been much less significant particularly outside Dublin. While therefore the growth in tourism numbers has an important impact on the overall hotel business, the Prince of Wales Hotel is also heavily reliant on more locally based business in respect of which it competes with the other hotels in the locality of Athlone. The geographical market is therefore primarily the Athlone area, although in the case of foreign tourists the hotel is to some extent competing with others located throughout the State.

6.(i)The notified agreement was made on 30 August 1991 to provide for the take up by the AIB and BTH funds of new ordinary shares in the Prince of Wales Hotel Ltd (the Company) and to regulate the relationship between the various shareholders and the future conduct of the company. The agreement continues as long as the BTH/AIBIM managed funds continue to hold shares in the company.

(ii) The agreement provides for preconditions for the investment, warranties by the covenantors and the subscription arrangements. It also provides for covenants regarding the operation of the company in an efficient businesslike manner including regulation of the Board's business, appointment of BTH/AIBIM nominee directors and arrangements for the provision of information to the new investors. It lists restricted transactions which require the prior consent in writing of the new investors. Under clause 8.1 the covenantors are restricted from disposing of their shares in the company except with the consent in writing of the new investors and no covenantor may transfer his shares unless the proposing transferee has entered into a deed of adherence to bind him to the agreement. The covenantors agree to protect the BES status of the company. Provision is made for the exercise of Put and Call options on the new shares, which are exercisable after the 5th and before the 10th anniversary of the agreement, whereby the covenantors may, or may be required, to purchase the AIBIM and BTH Funds' shares in the company at a profit or asset related price.

(iii) Clause 7.1 of the agreement contains the following competition covenants

"7.1 Competition Covenant

Each of the Covenantors hereby covenants with and undertakes to each of the Manager (on behalf of itself and the Subscriber as trustee for the AIB Fund Investors) and BTH (on behalf of itself and the Trustee as trustee for the BTH Fund Investors) and the

Company during the continuance of this Agreement that he or it shall not, and shall procure that no Connected Person of he or it or shall, either on its own account or jointly with or on behalf of any person, and whether as principal, agent, partner, director, employee, consultant, shareholder or otherwise howsoever and whether directly or indirectly:-

(i) carry on or assist or be engaged concerned or interested (except as the holder or beneficial owner for investment purposes of not more than 5% in nominal value of any class of a company's securities listed or dealt on a recognised stock exchange)in any business within Ireland which competes with the Business of the Company provided however that this restriction shall not apply to any interest in the Shamrock Lodge Country House Hotel Limited;

(ii) canvass or solicit or endeavour to canvass or solicit the custom of or endeavour to entice away from the Company any person who was at any time during the continuance of this Agreement a supplier to or customer of or in the course or habit of dealing with the Company in relation to the Business;

(iii) solicit or entice away or endeavour to solicit or entice away any employee or executive of or consultant to the Company whether or not such person would commit a breach of contract by reason of leaving the employment or service of the Company."

7. AIBIM in its submission stated that the restrictive covenants in the agreement are the standard clauses which are found in most loan, share subscription and BES agreements for corporate institutions. The covenants seek to ensure that:

- the investment made in the Company is not undermined by parties to the agreement

- the goodwill of the company is maintained

- the expert knowledge built up by the Company is available for the duration of the agreement.

8. Section 4(1) of the Competition Act 1991 prohibits and renders void 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.

9. 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".

10. At the date of the notified agreement O'Gorman Group (Athlone) Ltd held 49% of the equity of Prince of Wales Hotel Ltd while Zanatti Investments held 25%. They were the original owners of the company and held options to acquire the remaining shares in the company after 4/5 years. These companies were engaged for gain in hotel investment and are therefore undertakings. John O'Gorman was the beneficial owner of O'Gorman Group and Dr. Ribeiro was the beneficial owner of Zanatti and they were therefore undertakings. AIBIM and BTH are each engaged in corporate finance and are managers of designated investment funds for which they are in receipt of fees and commission. They are therefore undertakings. Erin Executor & Trustee Co Ltd is also engaged in corporate finance and is an undertaking. Prince of Wales Hotel Ltd is engaged in the hotel business and is an undertaking. The notified agreement is an agreement between undertakings. The agreement has effect within the State.

11. The Share Subscription and Shareholders Agreement constitutes an agreement whereby

two designated investment funds have agreed to make venture capital type investments to each obtain a minority shareholding in the Prince of Wales Hotel Ltd. This, in effect, involves an investment by a large number of small personal investors for a combined minority stake in the company. Such an agreement is not per se anti-competitive and does not offend against Section 4(1) of the Competition Act.

12. The agreement contains continuing contractual commitments arising from the agreement including the warranties given by the original shareholders to the new investors and the Put and Call options. These do not raise issues under the Competition Act. The agreement also provides for a number of obligations on each of the parties which will govern how the company will be managed including such matters as the composition of the Board of Directors, the frequency of board meetings and the information requirements to keep the managers of the AIBIM and BTH Funds informed of the company's progress. These are matters internal to the management of the company which are designed to protect the minority shareholding position of the new investors and do not raise issues under the Competition Act.

13. The agreement also contains a list of restricted transactions which the company may not undertake without the prior written consent of AIBIM and BTH. These include such actions as a change in the nature of the business carried on, the issue of new shares or options, entering into onerous or unusual contracts, capital expenditure above specified limits, disposal of substantial assets and excessive borrowing. AIBIM and BTHIC are each engaged in the management of a form of a venture capital fund, albeit a tax driven designated investment fund, and are acting on behalf of many personal BES investors who hold the beneficial interest in the Funds' shares in the company. Neither AIBIM or BTH are engaged in the hotel business as such but as Fund managers they have a duty to safeguard the interests of the BES subscribers for whom the shares in Prince of Wales Ltd are held in trust. With no particular expertise in the Athlone hotel business AIBIM and BTH are dependent on the majority shareholders for the day to day management and supervision of the business. As indicated in Cambridge - ACT/Imari [1] the Authority takes the view that providers of venture or development capital are entitled to take steps to protect their investment. The restrictions on transactions imposed on the operation of Prince of Wales Hotel Ltd are designed to protect that investment by ensuring that the assets of the company are not substantially (or even artificially) diluted without their knowledge. They may be regarded as prudent protection of the minority shareholder interest and no more than is necessary to achieve the object of protecting the investment. In any event the restrictions are more related to the internal running of the company rather than its trading activities. The Authority does not therefore regard these restrictions as offending against Section 4(1) of the Competition Act.

14. Clause 7 of the agreement imposes non-compete and non-solicit restrictions on the original shareholders, i.e. on John O'Gorman, O'Gorman Group (Athlone) Ltd, Dr.Ribeiro and Zanatti Investments Ltd for the term of the agreement which prevents any of them from

- being in any way involved in a business within the State competing with Prince of Wales Hotel Ltd. The restriction does not apply to an interest in the Shamrock Lodge Hotel, Athlone

- soliciting to entice away any customer, supplier or employee of the company

As indicated in their decision on Cambridge-ACT/Imari, the Authority regards such restrictions as ancillary to the agreement to invest provided that it meets the test that the non-competition clauses are necessary to protect the investment and, if so, that their content and purpose does not go beyond what is necessary to achieve this.

15. In their decision on Cambridge-ACT/Imari the Authority indicated that, in general, a restriction on parties in a business competing with it for so long as they remain part of the business, does not offend against Section 4(1). Insofar as the non-compete or non-solicit restrictions apply to the period when the covenantors remain shareholders in the company these provisions therefore do not offend against Section 4(1) of the Competition Act.

16. The non-compete and non-solicit restrictions apply as long as either Fund holds shares in the company and under certain circumstances, therefore, the restrictions continue to apply to a covenantor after an effective disposal of it or his shares in the company. AIBIM claim that the restrictions in the agreement are found, inter alia, in most corporate loan agreements. The Authority accepts that in the case of a loan agreement it is not anti-competitive to have, as a condition of the loan, a restriction on the principals, for the duration of the agreement, from leaving their company and setting up in direct competition with it and soliciting its customers and employees. While for tax reasons the notified agreement involves a subscription for shares, the overall arrangements are such as to be similar to that of a loan. Under the notified agreement substantial free capital has been put into the company with provision for its redemption by the company's principals after 5 years. It is not a purchase of business agreement. The principal objective of the Fund managers is to be able to redeem the investments as soon as possible after the end of the BES statutory period of 5 years, pass the proceeds on to the subscribers and wind up the trust. The agreement applies only for a limited time. If during this time the covenantors were able to withdraw from the business, and were then free to open another business in direct competition with it and solicit staff, customers and suppliers from it, the business of the Prince of Wales Hotel Ltd could be severely damaged putting the investment in jeopardy. The Authority believes that the application of the non-compete or non-solicit restriction, for the term of the agreement, is in these circumstances necessary to protect the interests of the minority shareholders without which the investment would not have been made and the restriction does not, therefore, offend against Section 4(1) of the Competition Act, 1991.

17. In the Authority's opinion John O'Gorman, O'Gorman Group (Athlone) Ltd, Zanatti Ltd, Dr. Ribeiro, AIB Investment Managers Ltd, Erin Executor & Trustee Co Ltd, Business and Trading House Investment Company Ltd, and Prince of Wales Hotel Ltd are undertakings within the meaning of Section 3(1) of the Competition Act, 1991 and the notified share subscription and shareholders agreement is an agreement between undertakings. In the Authority's opinion the notified agreement does not offend against Section 4(1) of the Competition Act, 1991

18. 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 Share Subscription and Shareholders Agreement of 30 August 1991 between John O'Gorman, O'Gorman Group (Athlone) Ltd, Dr. Ribeiro, Zanatti Investments Ltd, AIB Investment Managers Ltd, Erin Executor & Trustee Co.Ltd, Business and Trading House Investment Company Ltd and Prince of Wales Hotel Ltd notified under Section 7(2) on 30 September 1992 (notification no. CA/431/92E) does not offend against Section 4(1) of the Competition Act, 1991

For the Competition Authority.

Des Wall

Member.

25 April 1995