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, 1991 or, in the event of a refusal by the Competition Authority to grant a certificate, a licence under Section 4(2) in respect of a Share Subscription Agreement relating to shares in Hamptoncove Holdings Ltd (Hamptoncove).

2. The notification concerns a share subscription agreement between Padraic and Janet Tracey, Erin Executor & Trustee Co. Ltd (Erin), Killarney Park Hotel Ltd (KPH), Hamptoncove, The Ross Hotel (Killarney) Ltd (RHK) and AIBIM in relation to the subscription by Erin and RHK for shares in Hamptoncove.

3. The parties to the agreement are as follows:

(i) KPH was incorporated on 20 December 1990 with an authorised share capital of £1,000,002 of which 2 ordinary shares of £1 each were issued at the date of the agreement and registered in the name of nominee companies. The sole business of KPH was stated to be the holding of shares in its subsidiary, Hamptoncove, and the making of loans to Hamptoncove.

(ii) Hamptoncove owns and operates the 55 bedroom Killarney Park Hotel, at Killarney Co. Kerry. It also operates the 35 bedroom Ross Hotel in Killarney. At the date of the agreement Hamptoncove had an authorised share capital of £750 (represented by 50 ordinary shares, 500 A ordinary shares and 200 B ordinary shares) of which 2 £1 ordinary shares were issued with Padraic and Janet Tracey holding one each.

(iii) Ross Hotel (Killarney) Ltd (RHK) is owner of the Ross Hotel which is on short lease to Hamptoncove.

(iv) Padraic Tracey and Janet Tracey were the owners of Hamptoncove. They are also directors of Killarney Park Hotel Ltd, Hamptoncove and RHK. A company owned by the Tracey's has entered into a Put and Call option agreement with Erin exercisable after 5 years in relation to the AIB Fund's shares in KPH.

(v) AIBIM, a subsidiary of the AIB Group, is engaged in the business of Discretionary Investment Management and is manager of a designated investment fund (the AIB Fund).

(vi) Erin Executor & Trustee Co Ltd is also engaged in corporate finance and is the trustee of the AIB fund.

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 participants 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 investee companies and safeguarding the subscribers' interests in these 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 could 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 subscribers 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.

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 around 60 registered hotels in County Kerry with around 3,300 rooms, of which 31 hotels with around 1850 rooms are located in Killarney itself. The hotel business in County Kerry is largely dependent on tourism both from abroad and from other parts of the State. The geographical market is therefore the State.

6.(i) The notified agreement was made on 11 June 1991 to provide for a number of share subscriptions and other transactions as outlined under and to regulate the future conduct of the business of KPH and Hamptoncove and the relationships between the shareholders of both companies. The share subscriptions and other transactions provided for were as follows:-.

- the issue of 1m shares of £1 each in KPH to the AIB Fund

- the subscription for and issue of the following shares in Hamptoncove viz

- to KPH 500 A ordinary shares

- to Padraic Tracey 24 ordinary shares

- to Janet Tracey 24 ordinary shares

- to RHK 200 B ordinary shares

Immediately after the Hamptoncove shares are allotted, a loan was to be made by KPH to Hamptoncove.

(ii) The agreement provides for preconditions for the investment, warranties by the covenantors, arrangements for the regulation of the Board's business and appointment of AIBIM nominee directors to the boards of both KPH and Hamptoncove, and arrangements for the provision of information to the new investors. It also lists restricted transactions which require the prior consent in writing of the new investors. Under clause 5.08 neither Padraic or Janet Tracey may dispose of nor reduce their shareholding in Hamptoncove.

(iii) Section 4 of the agreement contains restrictive covenants on the original owners and shareholders of Hamptoncove i.e., on Padraic and Janet Tracey, as follows:-

"4.02 Undertakings by Shareholders

(a) Each of the shareholders hereby agrees and covenants with each of Erin and AIBIM for the protection of Erin's investment in the Company:-

(i) that for so long as Erin is a shareholder in the Company each of them will (allowing only for medically certified illness and annual leave) devote substantially the whole of their time and attention, during normal business hours, to the business of Hamptoncove;

(ii) that for so long as Erin is a shareholder in the Company, for whatever reason, either on their own behalf or on behalf of any other person, firm or company, neither of them shall within the Territory (defined as County Kerry) be interested or engaged in any business competing with any of Hamptoncove provided always that if that part of the business of Hamptoncove currently carried on at Ross Hotel, Killarney should revert to RHK, then nothing in this clause shall prevent or be deemed to have prevented the Shareholders from being interested in or engaged in the business of the Ross Hotel, Killarney.

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. Hamptoncove is engaged in the operation of two hotels in Killarney and is therefore an undertaking. At the date the agreement was made, Padraic and Janet Tracy were the sole shareholders and owners of Hamptoncove. They were also directors of Hamptoncove, RHK and Killarney Park Hotel Ltd. They controlled the operation of the two hotels involved. In line with the several decisions the Authority has already taken, that individuals who own or control a business are undertakings for the purposes of Section 3 of the Competition Act, the Authority regards Padraic and Janet Tracey as undertakings. Killarney Park Hotel Ltd is engaged in the investment of funds. RHK is the owner of Ross Hotel which is leased to Hamptoncove. AIBIM and Erin Executor & Trustee Co. Ltd are engaged for gain in corporate finance. All these companies are therefore undertakings. The notified agreement is an agreement between undertakings. The agreement has effect within the State,

11. The Share Subscription Agreement constitutes an agreement whereby a designated investment fund has made a venture capital type investment through a number of companies in The Killarney Park Hotel. This, in effect, involves an investment by a large number of small personal investors for a combined majority stake in the company to be held for a 5 year period after which the original owners can regain 100% of the shares 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 investor. 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 the information requirements to keep AIBIM informed of the company's progress. These are matters internal to the management of the company which are designed to protect 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. These include such actions as 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 is engaged in the management of a form of a venture capital fund and is acting on behalf of many personal BES investors who subscribed to the Fund. The Fund's investment in Hamptoncove and, indirectly, in KPH includes a very substantial loan at interest rates which would not be economic for the investors in the absence of the BES tax relief. With no particular expertise in the hotel business AIBIM is dependent on the Tracey's 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 the Hamptoncove and KPH 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 new investor 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 4.02 of the agreement imposes non compete restrictions on the original shareholders i.e. Padraic and Janet Tracey for the term of the agreement which prevents either of them, within the County of Kerry, from being engaged or interested in any business competing with Hamptoncove. As indicated in their decision on Cambridge-ACT/Imari, the Authority would regard such restrictions as ancillary to the agreement to invest provided that it meets the test that the non-competition clause is necessary to protect the investment and, if so, that its 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 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 restrictions apply as long as the AIBIM fund holds shares in KPH and under certain circumstances, therefore, the restrictions could continue to apply to the covenantors after a disposal of their shares in the company. These circumstances could arise if for some reason AIBIM agreed, or had to agree, to a disposal of the shares by the Tracey's to another person, either before the Put and Call options were due, or in a situation where the options could not be exercised. Such an event would not be likely to occur except in a situation where the covenantors might not be able to meet, or might seek to avoid, financial obligations under the agreement. AIBIM claim that the restrictions in the agreement are found, inter alia, in most corporate loan agreements. The Authority could accept that in the case of a loan agreement it would not be anti-competitive to have, as a condition of the loan, a restriction on the principals, for the duration of the agreement, from withdrawing from their company and setting up in competition with it. While for tax reasons the notified agreement involves a subscription for shares in KPH which then makes the loan to and equity investment in Hamptoncove, the overall arrangements are such as to be virtually identical 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 AIBIM is to be able to redeem the Fund investment as soon as possible after the end of the BES statutory period of 5 years, pass the proceeds on to the subscribers and wind itself up. The agreement is intended to apply only for a limited time. If during this time the original owners were able to withdraw from the business, and were then free to open another business in competition with it the business of Hamptoncove could be severely damaged putting the investment in jeopardy. The Authority believes that the application of the non-compete restriction, for the term of the agreement, is in these circumstances necessary to protect the interests of the providers of the new loan and equity capital, 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 its Cambridge-ACT/Imari decision the Authority had indicated that the position regarding non-compete restrictions changes if parties are prevented from withdrawing from such arrangements saying that if a party wishes to withdraw from such arrangements then measures designed to restrict him doing so may restrict competition. In this instance each of the Tracey's is prevented from disposing of his or her shares in KPH. The restriction continues for the duration of the agreement, i.e. for as long as Erin, on behalf of the Fund, holds shares in the company.

18. The Authority is satisfied that this restriction does not have the object of preventing, restricting or distorting competition. Under the notified arrangements a large number of small investors has, through investment vehicles, provided substantial additional capital on very favourable terms to the hotel company. There are substantial risks involved in investing in an unquoted company with limitations on the marketability of its shares. The Authority believes that the object of the restrictions is solely to reduce these risks. Prior to the BES investment, The Killarney Park Hotel was owned and operated by the Tracey's. An essential prerequisite for the venture capitalist taking a shareholding in a small company, and advancing substantial loan finance to it on very favourable terms, is to ensure the continued commitment by the existing owners to the business. The investor is investing not only in bricks and mortar but in entrepreneurial flair and expertise as evidenced by the previous track record of the owners. If such a commitment cannot be ensured the investment risks increase with the possibility that any conflicting interests of the original owners may lead to a diversion of business or even the possibility of a diversion of the company's funds. In the absence therefore of a full commitment by the owners the outside investment would be most unlikely to proceed.

19. Neither does the Authority believe that the restriction has the effect of preventing, restricting or distorting competition to any significant extent. The original owners derive real benefit from the BES investment with the injection of free capital for the company's development over a minimum 5 year period and they have the prospect of regaining full control of their company after the end of that period. There is no restriction on Hamptoncove from expanding its operations apart from the need for the consent of AIBIM. As there are over 30 hotels, with over 1,800 bedrooms, in Killarney alone, any restriction on the covenantors from opening another hotel in County Kerry would have little impact on competition in the area. The Authority considers that the restrictions on the covenantors from withdrawing from the arrangements for the term of the agreement do not therefore offend against Section 4(1).

20. In the Authority's opinion, Hamptoncove Holdings Ltd and its subsidiary Killarney Park Hotel Ltd, Padraic and Janet Tracey, Erin Executor and Trustee Co Ltd, The Ross Hotel (Killarney) Ltd, and AIB Investment Managers Ltd are undertakings within the meaning of Section 3(1) of the Competition Act, 1991 and the notified share subscription 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

21. 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 Agreement between Hamptoncove Holdings Ltd and its subsidiary Killarney Park Hotel Ltd, Padraic and Janet Tracey, Erin Executor and Trustee Co Ltd, The Ross Hotel (Killarney) Ltd, and AIB Investment Managers Ltd notified under Section 7(2) on 30 September 1992 (notification no. CA/454/92E) does not offend against Section 4(1) of the Competition Act, 1991

For the Competition Authority.

Des Wall

Member

26 April 1995