Irish Competition Authority Decisions

1. Notification was made by H&K International Inc. on 20 October 1994 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 Shareholding Agreement relating to H&K International Inc.

2. The notification concerns a shareholding agreement between Bill and Gerry Griffiths, Dan McGaw, David Massie, Flavius Ltd, Brian Ranalow, Hospital & Kitchen Holdings Corporation, Bill-Wil Holdings Ltd, Houri Holdings Ltd, Ger-Gay Holdings Ltd, Anjames Ltd, Frymount Ltd and H&K International Inc. in relation to a reorganisation of the H&K Group.

3. (i) H&K International Inc is an US company based in Delaware which through its subsidiaries is engaged in the manufacture and supply of specialist stainless steel catering equipment for fast food restaurants, almost exclusively for the McDonald's Corporation chain, throughout the world. It has a number of wholly owned subsidiaries in Texas, Canada, the UK and Ireland. A subsidiary based in Ireland, H&K Europe Ltd, does not trade but holds shares in two other wholly owned Irish subsidiaries, i.e., H&K Dublin Ltd which manufactures kitchen equipment and H&K Services Ltd. Most of the sales of the Irish subsidiaries were export sales.

(ii) Most of the shareholders in H&K International Inc are individuals or investment companies based in the US or Canada. The holders of common shares in the company, who are also primary shareholders under the agreement, are as follows:-

Bill Griffiths (Ontario) 28.12%

Gerry Griffiths (Texas) 14.06%

Dan McGaw (Texas) 14.06%

David Massie (Ontario) 14.06%

Flavius Ltd (Dublin) 22.2 %

Brian Ranalow (Dublin) 7.5 %

Flavius Ltd. is a company controlled by discretionary clients of Mercury Asset Management who are based in London with around 15 shareholders. Some of the shares in H&K International Inc, beneficially owned by a number of Irish individuals, are registered in the name of Frymount Ltd and are controlled by Flavius Ltd. Brian Ranalow is a director of H&K Europe Ltd and its 2 Irish subsidiaries.

The common shares of Bill Griffiths and David Massie are held through their investment companies Bill-Wil Holdings Ltd and Houri Holdings Ltd. Bill-Wil Holdings Ltd, Ger-Gay Holdings Ltd, Houri Holdings Ltd and Anjames Ltd are family investment companies based in Canada which hold special shares in H&K International Inc. Hospital & Kitchen Holdings Corporation is based in Ontario and also holds special shares in H&K International.

4.(1) The notified agreement was made on 31 December 1993 following a reorganisation of companies and partnership worldwide within the H&K Group to bring them within common ownership.

(ii) The agreement provides that each of the primary shareholders shall be entitled to have one representative on the board of directors provided they control 10% of the common shares (or 5% in the case of Ranalow). It provides for the arrangements for board meetings and for restrictions on changes in the company's articles, on stock options, on redemption of shares, on onerous contracts and on the issue of loans. Other restrictions unless approved by holders of 80% of common shares include those on declaration of dividends and borrowings above set limits, disposal of substantial assets, and capital expenditure above set limits.

(iii) The agreement also contains a number of restrictions on share disposals. Except for disposals by Irish shareholders to one another and by primary shareholders to their "Immediate Family" no shareholder may dispose of his shares without the prior consent of all the primary shareholders. If a primary shareholder transfers shares contrary to this provision the other primary shareholders may, after following certain set procedures including arbitration, elect to purchase all the shares of the defaulting shareholder at book value. A number of exceptions to this restriction are provided including a disposal by primary shareholders who control not less than 60% of the shares. After 31 December 1997 any primary shareholder may sell his shares.

(iv) The agreement also provides that in the event of control of Flavius being acquired by a person who is not a fund under the discretion of Mercury Asset Management or an Irish person who is not a shareholder in Flavius, the remaining shareholders may opt to acquire the Flavius shares. It also provides that in the event of Brian Ranalow's employment with H&K being terminated he will be deemed to have given a transfer notice to the other primary shareholders in relation to his shares.

(v) The agreement also contains the following non-compete and non-solicit clauses.

"13.1 Non-competition. Each Shareholder covenants and agrees with the other parties bound

hereby and with H&K International:

(a) that he will not, while he is a Shareholder of H&K International, and for a period of 2 years thereafter (without the prior written consent of H&K International and the other parties bound hereby), directly or indirectly, in any manner whatsoever, including without limitation, either individually or in partnership or jointly, or in conjunction with any other Person as principal, agent, shareholder, employee or in any other manner whatsoever, carry on or be engaged in the type of business carried on by H&K International and/or its subsidiaries as of the date of this Agreement (a "Competitive Business"), or be concerned with or interested in or lend money to, guarantee the debts or obligations of or permit his name or any part thereof to be used by any Person engaged in or concerned with or interested in a Competitive Business within countries specified in Schedule D hereto and such other geographical areas as may be Approved by 60% of the Shareholders from time to time.

(b) that he will not except in the normal course of business or as otherwise provided in this Agreement (without the prior written consent of H&K International and the other parties bound hereby), so long as he is a Shareholder and for a period of two years thereafter:

(i) divulge to any Person the name of any customer or client of H&K International or its

subsidiaries;

(ii) knowingly solicit, interfere with or endeavour to entice away from H&K International

or its subsidiaries any customer or client dealing with H&K International or its

subsidiaries; and

(iii) interfere with or knowingly entice away or otherwise attempt to obtain the withdrawal

of any employee of H&K International or its subsidiaries.

13.2 Confidentiality.

(a) All confidential records, material and information and copies thereof, and all trade secrets (and without restricting the generality of the foregoing, including inventions, discoveries and methods of manufacturing and production) concerning the business or affairs of H&K International and its subsidiaries (collectively, "Proprietary Information") shall remain the exclusive property of H&K International and its subsidiaries. Except as otherwise permitted by this Agreement, while a Shareholder of H&K International or at any time thereafter, the Shareholder shall not divulge the contents of such Proprietary Information to any Person (except to H&K International, H&K International's qualified employees or H&K International's legal or accounting advisers or bankers), and the Shareholder shall not, at any time, use the contents of such Proprietary Information for any purpose whatsoever, except for the exclusive benefit of H&K International.

This section 13.2 shall not prevent a Shareholder from carrying on business after the provisions of section 13.1 have expired subject to the confidentiality obligations of such Shareholder contained herein".

5. In its submission H&K International stated

"The parties consider that the restrictions imposed in the Shareholders' Agreement are reasonable and necessary in the circumstances for the protection of their legitimate business interests. All of the shareholders involved would be intimately involved with the affairs of the Company and could do severe damage to the Company if they were to set up in business whilst a shareholder. We would submit that a 2 year restriction after they cease to be a shareholder is reasonable for the protection of the Company. In addition it should be noted that it has been specifically provided in the Agreement that the provisions as to confidentiality will not be used to prevent a shareholder from carrying on business after the time limits in Section 13.1 have expired. We would also respectively submit that the geographical area is reasonable in the circumstances bearing in mind that it is the geographical area within which the Company operates and we submit that the restrictions go no further in terms of geographical area and duration than is reasonably necessary to protect the legitimate business interests of the parties to the Shareholders' Agreement and for the effective performance of the Shareholders' Agreement. You might also note that in Clause 13.3 the shareholders specifically acknowledge that the terms of the Shareholders' Agreement are reasonable.

We refer to the reasoning of the Competition Authority in its decision in Cambridge-ACT/Imari. We submit that the primary purpose of the Shareholders' Agreement is legitimate under the Competition Act, 1991 and accordingly the relevant clauses do not offend against Section 4(1). The provisions are essential to preserve the goodwill of the business and must be considered as part of the broader business arrangement of the parties hereto. The terms of the relevant provisions do not exceed what is necessary to preserve the goodwill involved, in terms of its duration, geographic coverage and subject matter along the lines of your reasoning in the Chemical International Finance Limited/Irish Life Assurance plc decision .

As this Shareholders Agreement arose purely out of an internal reorganisation of the companies it will not have any affect or result in a "diminution of competition" as regards third parties.

The Applicant believes that the non-competition clauses are not in breach of Section 4(1) of the Competition Act, 1991 and do not have as their object or effect the prevention, restriction or distortion of competition in trade in any goods or services in the State or part of the State because the said clauses are fair and reasonable. The geographical extent of the restriction corresponds with the extent of the market in which the Company and its subsidiaries operates. Further the period of two years from the date of ceasing to be a shareholder as specified in the Shareholders' Agreement is reasonable in the circumstances".

6. 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.

7. 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".

8. H&K International Inc. is a manufacturer and supplier of stainless steel catering equipment and is an undertaking. Messrs Bill and Gerry Griffiths, Dan McGaw, David Massie and Brian Ranalow collectively hold, or control through investment companies, 77.8% of the common shares in H&K International and are effective owners of the corporation. They are therefore undertakings. Flavius Ltd, Frymount Ltd and the other corporate shareholders are investment companies engaged for gain. They are therefore undertakings. The notified agreement is an agreement between undertakings. The agreement has effect within the State.

9. The notified agreement constitutes a shareholders agreement between all the shareholders in H&K International Inc. made for the purpose of regulating the future conduct of the business of the corporation and the relationship between the shareholders and the corporation. The agreement provides for a number of provisions relating to the entitlements of each shareholder as well as a number of standard restrictions on the corporation's behaviour vis a vis the shareholders. These restrictions are related to measures designed to protect the minority shareholding position of each shareholder and are concerned with the internal running of the company. The Authority does not regard such an agreement per se as raising any issues under the Competition Act.

10. Clause 13.1 of the agreement imposes a number of non-compete and non-solicit restrictions on the shareholders which effectively prevent any of them from competing with, or being engaged or interested in, a business competing with H&K International or soliciting its customers or employees while they are shareholders in H&K International and for a period of two years thereafter. In their decision on Cambridge-ACT/Imari ¹ 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, therefore as the non- compete or non-solicit restrictions apply to the period when the shareholders continue to hold shares in the company these provisions do not offend against Section 4(1) of the Competition Act.

11. A similar view is taken in relation to the non-compete or non-solicit restrictions which apply for a period after a disposal of shares provided that the restrictions do not exceed what is necessary to enable the purchaser to secure the goodwill of the business which would, effectively, be sold by the disposal of shares. In considering these restrictions the Authority has regard both to the duration of the restriction, and its scope, including its geographic scope. Under the notified agreement the non-compete and non-solicit restrictions apply for a period of 2 years after disposal of shares which is the period the Authority generally finds acceptable. The geographical extent of the restrictions corresponds with the extent of the market in which the company and its subsidiaries operate. It covers inter alia the USA, Canada, Europe and some South American and Middle Eastern countries. The Authority is only concerned with competition as it applies in the State under the Competition Act, 1991. It considers that in the light of the country wide market for the product, the geographical restriction insofar as it applies to the State, does not offend against Section 4(1) of the Act.

12. Clause 13.2 is designed to prevent the shareholders from making use of confidential information. The Authority has accepted in Act/Kindle ² and Budget Travel/Phil Fortune ³ that a restriction on disclosure of confidential information is not generally regarded as a breach of Section 4(1). Moreover the agreement states that clause 13.2 shall not be used to prevent a shareholder from carrying on business after the provisions of Clause 13.1 have expired subject to the confidentiality obligation. In the circumstances the Authority considers that Clause 13.2 does not offend against Section 4(1) of the Competition Act.

13. In the Authority's opinion Bill and Gerry Griffiths, Dan McGaw, David Massie, Flavius Ltd, Brian Ranalow, Hospital & Kitchen Holdings Corporation, Bill-Wil Holdings Ltd, Houri Holdings Ltd, Ger-Gay Holdings Ltd, Anjames Ltd, Frymount Ltd and H&K International Inc. are undertakings within the meaning of Section 3(1) of the Competition Act, 1991 and the notified shareholding 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.

14. 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 shareholding Agreement between Bill and Gerry Griffiths, Dan McGaw, David Massie, Flavius Ltd., Brian Ranalow, Hospital & Kitchen Holdings Corporation, Bill-Wil Holdings Ltd, Houri Holdings Ltd, Ger-Gay Holdings Ltd, Anjames Ltd, Frymount Ltd and H&K International Inc. notified under Section 7(1) on 20 October 1994 (notification no CA/27/94), does not offend against Section 4(1) of the Competition Act, 1991.

For the Competition Authority

Des Wall

Member

10 May 1995.

1. Decision No. 24, 21 June 1993

2. Decision No. 8, 4 September 1992

3. Decision No. 9, 14 September 1992