Irish Competition Authority Decisions

1. Notification was made by Goodbody Stockbrokers 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 the acquisition of shares in Elvetham Ltd.

2. The notification concerns a share subscription agreement in relation to the private placing, in conformity with the Business Expansion Scheme and managed by Goodbody Stockbrokers, of shares in Elvetham Ltd and the provision of a loan by Elvetham to The Grand Hotel Malahide Ltd.

3. The parties to the agreement are as follows:

(i) The Grand Hotel Malahide Ltd owns and operates the Grand Hotel in Malahide, Co. Dublin. At the time of the agreement it was a Grade A hotel with 48 bedrooms. Currently it is a 4 Star hotel with 97 bedrooms and a large conference centre catering both for local and overseas business. The holders of £1 shares in The Grand Hotel Ltd before and after the agreement were as follows:-

before agreement after agreement

Elvetham Ltd 10,409 A ordinary

Matthew /Maureen Ryan 2 B ordinary 9,000 B ordinary

Matthew/Maureen Ryan 1,000 Preference

total issued capital £2 £20,409

(ii) Elvetham Ltd is the majority shareholder of The Grand Hotel Malahide Ltd. At the date of the agreement it had an issued share capital of £2 represented by 2 B Ordinary shares of £1 each held by Matthew Ryan and Maureen Ryan. Following the agreement, 2.5 million new ordinary shares of £1 each were issued to Skerries Nominees Ltd.

(iii) Matthew and Maureen Ryan were the owners of the Grand Hotel which operated under their management for the 15 years preceding the agreement.

(iv) Skerries Nominees Ltd (Skerries) is a wholly owned subsidiary of Allied Irish Banks plc engaged in the holding of investments on behalf of nominees including the approximately 250 private investors which invested under the BES private placing.

(v) Goodbody James Capel (now named Goodbody Stockbrokers) are stockbrokers and are now a wholly owned subsidiary of Allied Irish Banks plc.

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. The investment may be made by way of direct subscription for shares in a qualifying company or by way of investment in a designated investment fund which places the investment in qualifying companies as nominee for the individual personal investor. 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.

(d) The Market

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 66 registered hotels in Dublin City and North County area with a total room capacity of over 4,000. 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 A hotels revenue from rooms represented 35%, with food contributing 38% and beverages 22%. On average Irish guests take up around 45% of hotel bed nights but the average for Dublin was 47%. Irish guests include a large proportion of the business guests who take up on average 44% of bed nights in the Dublin area. 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. While therefore the growth in tourism numbers has an important impact on the overall hotel business, the Grand Hotel Malahide is also heavily reliant on more locally based business in respect of which it competes with the other hotels, bars and restaurants in the North Eastern perimeter of Dublin City. The geographical market is therefore North County Dublin, but in the case of foreign visitors the hotel is, to some extent, competing with other hotels throughout the State.

6. (i) The overall arrangements were concerned with the raising of BES funds for investment in The Grand Hotel. They involved the raising of investment funds from around 250 personal BES investors by Goodbodys through Skerries Nominees Ltd which then subscribed for 2.5m £1 ordinary shares in Elvetham. Elvetham then subscribed for 10,409 A ordinary shares in its subsidiary, Grand Hotel and also provided a substantial cash loan. The loan was for a period of 5 years until 1 February 1995 and was covered by a bank guarantee. There was also provision made through a separate agreement for the exercise of Put and Call option for the acquisition by the Ryans of all the Skerries shares in Elvetham during 1995.

(ii) The notified agreement was made on 15 January 1990 for the purpose of regulating the future conduct of the business of Elvetham, regulating the relationship between Skerries and Matthew and Maureen Ryan as shareholders, and to deal with the raising of funds on behalf of Elvetham with Goodbodys seeking subscriptions for new shares up to a maximum of 2.5m A ordinary shares. Under clause 17 the provisions of the agreement were to remain in full force for as long as Skerries remains a shareholder in Elvetham.

(iii) The agreement provides for warranties by the Ryans in relation to Elvetham's and Malahide's financial status prior to the new investment. It provides that the Ryans will procure that the business of both companies will be carried on to best commercial advantage and be controlled by their respective boards of directors. It provides for adequate notice, minutes and agenda details to be given to Skerries prior to board meetings and the supply of regular information on each company's progress to the shareholders.

(iv) The agreement also lists a number of restricted transactions for which prior investor consent is required. These include changes to the company's Memoranda and Articles of Association, the grant of options on shares, the dilution or transfer of shares, grant of loans, borrowings or capital expenditure above certain limits and actions which could negative the BES status of the companies. The Ryans also will procure that without the prior consent of Skerries neither company will change the nature or content of its businesses. Under clause 11 each of the Ryans covenant not to sell or otherwise dispose of their shares in Elvetham.

(v) Clause 8 of the agreement contains the following restrictive covenant on behalf of the Ryans

"Each of the Shareholders will procure that he or it will not procure the incorporation of or promote or invest any monies in any company or other body whether incorporated or not with the objective of or, in the reasonable opinion of Skerries, the likely result of such company or other body carrying on business to the detriment of the Company or the Subsidiary save with the prior written consent of Skerries."

(vi) Clause 13 provided that Elvetham and the Ryans would procure that Matthew Ryan would enter into a service contract with Elvetham on terms already agreed.

7. Goodbody 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.

(g) Subsequent Developments

8. Goodbodys advised the Authority that the arrangements with the BES investors were concluded on 2 May 1995 when the put and call option held by Skerries Nominees Ltd was exercised and the BES investors paid the amounts due to them on foot of the transfer of shares arising from the exercise of the put and call option. It was also confirmed that no written service contract had been entered into between The Grand Hotel Ltd and Matthew Ryan.

9. 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.

10. 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".

11. Elvetham Ltd and its subsidiary, The Grand Hotel Malahide Ltd, are engaged in the operation of a hotel for gain and are therefore undertakings. At the date of the notified agreement Matthew and Maureen Ryan were the beneficial owners of The Grand Hotel Malahide Ltd and were therefore undertakings. Skerries is engaged in the holding of investments on behalf of nominees for gain and is also an undertaking. Goodbody Stockbrokers is engaged in the provision of stockbroking services and the placing of investment funds for gain and is also an undertaking. The notified agreement is an agreement between undertakings. The agreement has effect within the State.

12. The Share Subscription Agreement constituted an agreement whereby Skerries agreed to raise funds for a venture capital type investment, through a number of vehicles, in The Grand Hotel Malahide Ltd. This, in effect, involved an investment by a large number of personal investors for a combined majority stake in the company with provision for redemption of the investment after 5 years. Such an agreement is not, per se , anti-competitive and does not offend against Section 4(1) of the Competition Act.

13. The agreement contained 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 provided for a number of obligations on each of the parties governing the management of the companies including the information requirements to keep Skerries informed of the company's progress. These were matters internal to the management of the company designed to protect the new investors and do not raise issues under the Competition Act.

14. The agreement also contained a list of restricted transactions which the company could not undertake without the prior written consent of Skerries. These included 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. Skerries was effectively engaged in the management of a form of a venture capital fund and was acting on behalf of many personal BES investors who subscribed for shares in Skerries as a vehicle to make a tax driven investment in The Grand Hotel Malahide Ltd. This investment included 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 Skerries was dependent on the Ryans for the day to day management and supervision of the business. As indicated in Cambridge - ACT/Imari1, 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 Malahide Hotel were designed to protect that investment and may be regarded as no more than was necessary to achieve that object. In any event the restrictions were 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.

15. Clause 8 of the agreement imposed non-compete restrictions on the original shareholders i.e. Matthew and Maureen Ryan for the term of the agreement which prevented either of them from procuring the incorporation, promotion or investment in any enterprise, which in the opinion of Skerries would be to the detriment of Elvetham or The Grand Hotel Malahide Ltd, save with the written consent of Skerries. As indicated in their decision on Cambridge-ACT/Imari, the Authority regards any such restriction 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 was necessary to achieve this.

16. In its 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 applied to the period when the covenantors remained shareholders in the company these provisions therefore did not offend against Section 4(1) of the Competition Act.

17. The non-compete restrictions applied for as long as Skerries held shares in the company and under certain circumstances, therefore, the restrictions could have continued to apply to the covenantors after a disposal of their shares in the company. These circumstances could have arisen if for some reason Skerries agreed, or had to agree, to a disposal of the shares by the Ryans to another person under clause 11 of the agreement, either before the Put and Call options were due, or in a situation where the options could not be exercised. Goodbodys claimed 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 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 walking away from their company and setting up in competition with it. While for tax reasons the notified agreement involved a subscription for shares in Elvetham which then made the loan to, and equity investment in, the Grand Hotel, the overall arrangements were such as to be virtually identical to that of a loan. Under the notified agreement substantial free capital had been put into the company with provision for its redemption by the company's principals after 5 years. It was not a purchase of business agreement. The principal objective of Skerries was to be able to redeem the investments as soon as possible after the end of the BES statutory period of 5 years and pass the proceeds on to the subscribers. The agreement was intended to apply only for a limited time. If during this time the original owners had been able to withdraw from the business, and were then free to open another business in competition with it, the business of The Grand Hotel Malahide Ltd could have been severely damaged putting the investment in jeopardy. The Authority believes that the application of the non-compete restriction, for the term of the agreement, was 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. The restriction in clause 8 did not, therefore, offend against Section 4(1) of the Competition Act. 1991.

18. 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 Ryans had covenanted that, without the prior written consent of Skerries, he or she will not sell or otherwise dispose of shares in Elvetham. The restriction continued for the duration of the agreement i.e. for as long as Skerries held shares in the company.

19. The Authority is satisfied that this restriction did not have the object of preventing, restricting or distorting competition. Under the notified arrangements a large number of small investors 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 restriction on share disposals was solely to reduce these risks. Prior to the BES investment, The Grand Hotel Malahide Ltd was owned and operated by the Ryans. 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 have been most unlikely to proceed.

20. Neither does the Authority believe that the restriction on share disposals had the effect of preventing, restricting or distorting competition to any significant extent. The original owners derived real benefit from the BES investments with the injection of free capital for the company's development over a 5 year period after which they were able to regain full control of their company. There was no restriction on The Grand Hotel Malahide Ltd, from expanding its operations apart from the need for the consent of Skerries. The Authority therefore considers that the restrictions on the covenantors, from withdrawing from the arrangements for the term of the agreement, did not offend against Section 4(1).

21. In the Authority's opinion, Elvetham Ltd, its subsidiary The Grand Hotel Malahide Ltd, Matthew and Maureen Ryan, Skerries Nominees Ltd and Goodbody James Capel (now Goodbody Stockbrokers) 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 did not offend against Section 4(1) of the Competition Act, 1991.

22. 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 Elvetham Ltd, its subsidiary, The Grand Hotel Malahide Ltd, Matthew and Maureen Ryan, Skerries Nominees Ltd and Goodbody James Capel (now Goodbody Stockbrokers) notified under Section 7(2) on 30 September 1992 (notification no. CA/453/92E) did not offend against Section 4(1) of the Competition Act, 1991.

For the Competition Authority.

Des Wall

Member

22 June 1995.

1. Decision No. 24 21 June 1993