Irish Competition Authority Decisions

CA/7/95 - Azinger Limited/Fispak Holdings Limited/Mr . George McNulty

CA/12/95 - Azinger Limited/Fispak Holdings Limited/Mr . Rory McNulty

CA/13/95 - Azinger Limited/Fispak Holdings Limited/Mr. Kieron Hayes

Decision No . 414

1. Four deeds of covenant between Azinger Limited (the purchaser) Fizpak Holdings Limited (the company) and Messrs. George McNulty, Rory McNulty, Kieron Hayes and David Gray (the covenantors), containing a number of restrictive clauses were notified to the Competition Authority on 21 March 1995. The notifications requested that a certificate be issued under Section 4(4) of the Competition Act, 1991.

2. The notifications relate to four deeds of covenant, each dated 5 October 1994 between Azinger Limited, (Azinger), Fispak Holdings Limited (Fizpak) and Messrs. George McNulty, Rory McNulty, Kieron Hayes and David Gray. The four covenantors were shareholders of Fispak. The deed of covenant is a standard agreement and similar agreements were entered into by all four individuals. The covenants were entered into pursuant to a share purchase agreement made on 5 October 1994 for the purchase by Azinger of 72% of the issued share capital of Fispak from the covenantors, Gogan Properties Limited and Linda Gray, (the vendors). The deeds of covenant contained a number of non-compete provisions.

3. Azinger is the holding company for a number of companies (including Allegro Limited) which are involved in the distribution of packaged foodstuffs and dry goods and the manufacture of certain foods and food chemical products. Fispak is engaged in the manufacture and sale of plastic materials and equipment for the purposes of packaging meats and foods. Its main product is food casings for processed meat products as well as barrier bags for fresh and processed meats and cheeses. At the time of the agreement the vendors owned the entire share capital of Fispak.

4. The products involved are plastic materials for the purposes of packaging meats and foods, mainly food casings for processed meats and barrier bags for fresh and processed meats and cheeses.

5. The notification relates to four deeds of covenant entered into pursuant to a share purchase agreement for the sale of 72% of the issued share capital of Fispak to Azinger. Of Fispak's total issued share capital of [ ] 1 shares, George McNulty held [ ], Rory McNulty [ ], Kieron Hayes [ ], David Gray [ ] and Linda Gray [ ]. Under the terms of the share purchase agreement George McNulty, David Gray and Linda Gray sold [ ] of their shares. Rory McNulty still holds [ ] of the equity of Fispak and Kieron Hayes [ ], having sold [ ] and [ ] of their shares respectively. Clause 4.5 of the share purchase agreement provided for a consultancy agreement between Azinger and George McNulty and a service agreement between Azinger and Rory McNulty.

6. The four deeds of covenant, each of which was the subject of a separate notification contained a number of non-compete provisions as follows:

Clause 5 provides that:

'The Covenantor covenants with the Companies that he shall not within the Prohibited Area for the Relevant Period unless with the prior consent in writing of the Purchaser (such consent to be withheld only so far as is reasonably necessary to protect the legitimate interests of the Companies):-

(a) be directly or indirectly engaged concerned or interested as director, principal, agent, partner, consultant, employee, financier or otherwise in any business

which is or is intended to compete with any of the Companies in any of the

Relevant Businesses;

(b) encourage, assist, finance or support any person or company (other than the Companies or any of them) in any of the Relevant Businesses;

(c) accept employment in any executive sales or consultancy capacity with any business concern which is or is intended to compete with any of the Companies in any of the Relevant Businesses;

(d) provide technical, commercial or professional advice to any business concern (other than to the Companies or any of them) which is or is intended to compete with any of the Companies in the Relevant Businesses;

provided that the provisions of paragraphs (a) to (d) inclusive of this Clause shall not restrain the Covenantor from engaging in or accepting employment with any business concern where his duties shall relate wholly to parts of the world outside the Prohibited Area or for the avoidance of doubt, from carrying out his duties as consultant to the Companies (or any of them) notwithstanding that certain of the Companies may compete with each other in the Relevant Businesses.'

There is a slight variation in this clause in the four deeds of covenant insofar as it relates to the person as employee, consultant or covenantor.

Clause 6 provides as follows:

'The Covenantor shall not reveal (save as he may be required by law so to do) to any person, firm, company or corporation any of the trade or financial secrets, operations, processes, dealings or other information concerning the organisation, business, finances, transactions, affairs or customers of any of the Companies of which he is now or may hereafter become aware and shall keep with complete secrecy all confidential information relating to the Companies, their customers, suppliers, or employees heretofore or hereafter entrusted to him and shall not use or attempt to use any such information in any manner which may injure or cause loss either directly or indirectly to any of the Companies or to their businesses or may be likely to do so. This restriction shall cease to apply to information or knowledge which may reasonably be said to have come into the public domain otherwise than through the wrongful disclosure of any party.'

In clause 7 the covenantor covenants with the companies:

'that he shall not within the Prohibited Area for the Relevant Period unless with the prior consent in writing of the Purchaser (such consent to be withheld only so far as is reasonably necessary to protect the legitimate interests of the Companies), directly or indirectly and whether on his own behalf or on behalf of any other business, concern, person, partnership, firm, company or other body which is or is attempting or is intended to be in competition with any of the Companies in any of the Relevant Businesses:-

(a) canvass, solicit or approach or cause to be canvassed, solicited or approached for orders in respect of any goods or services comprised in the Relevant Businesses, any person, company or enterprise who at the date hereof was a customer of or was negotiating with any of the Companies in respect of goods or services comprised in the Relevant Businesses;

(b) interfere or seek to interfere or take steps intended or likely

to interfere with the continuance of supplies to any of the

Companies (or the terms relating to such supplies) from any

suppliers who have been supplying components, parts, materials,

goods or services to any of the Companies at any time during the

one year period immediately preceding the date hereof;

(c) solicit or entice or endeavour to solicit or entice away from

any of the Companies any person employed by them in an

executive, technical or sales capacity at the date hereof.'

In the deed of covenant the terms 'Prohibited Area', 'Relevant Business' 'Relevant Period' and 'Companies' are explained as follows:

'"Prohibited Area", Ireland and the United Kingdom.

"Relevant Business", the manufacture, sale, purchase, distribution, import, export and marketing of specialised food packaging products of all types including multi-layered plastic packaging, vacuum packaging, shrink packages and presentation board products for use in food packaging and packaging equipment for the purposes of utilising the said packaging products.

"Relevant Period", The period shall be the greater of:-

(i) the period from the Effective Date up to and including the date which is two years from the date hereof; and

(ii) the period from the Effective Date up to and including the date which is two years from the date on which the Covenantor shall cease to be a shareholder in the Company.

"Companies", the Company, the Purchaser and all subsidiaries of each of them for the being and from time to time hereafter.'

7. Under the terms of the consultancy agreement Fispak appointed Gogan Properties Ltd. as consultants for the period up to 31 December 1996. The latter is owned by George McNulty. Clause 4 of the consultancy agreement provides that, as the consultant was likely to obtain knowledge or trade secrets of the business particularly in the field of specialised food packaging and in relation to the products and agencies of the company, it would not for one year after termination (a) solicit in competition with the business any person, firm or company for the same products and (b) compete with the business in relation to any product or products in which it was directly or indirectly involved.

8. Under the terms of the employment agreement, Mr. Rory McNulty was employed as a Director of Fispak. Clause 5 of the agreement contains a number of restrictions. Clause 5.1 provides that the Director shall not reveal any of the trade secrets, secret or confidential processes or dealings or any information concerning the organisation, business, finances, transactions or affairs of the company which come to his knowledge during his employment. The restriction is unlimited in time but ceases to apply in respect of information in the public domain. Clause 5.4 prevents the Director from using any information or trade secrets which the company may have obtained from a third party under an agreement including restrictions on disclosure. It also provides that for one year after termination, the Director will not solicit in competition with the company any person, firm or company who was a customer or was in the habit of dealing with the company. Clause 5.5 provides for the Director to enter into agreements with like provisions with other Group member firms if required.

9. Azinger submitted that the deeds of covenant had been drafted in line with the recommendations of the Competition Authority in decisions relating to similar agreements in the past. They submitted that as the four individuals concerned effectively owned the company and were actively involved in its day to day operations prior to the sale, the non-compete covenants were necessary to ensure an effective transfer of the goodwill of the Company. They stated that the restrictions were not, in their opinion, more than what was absolutely necessary to ensure an effective transfer of the goodwill of Fispak. Consequently, it was submitted that the arrangements qualified for a certificate under the Competition Act, 1991.

10. The Authority expressed its concerns at what it considered the unlimited restriction on the use of technical know-how in clause 6 of the deed of covenant. In a letter to the Authority dated 2 August 1995, Azinger indicated that following the expiry of three years after the relevant period, i.e. five years from the date of disposal of shares, the provisions of clause 6 would not be used to prevent any of the covenantors from using technical know-how to compete with the purchaser. The relevant shareholders were informed accordingly.

11. Section 4(1) of the Competition Act states that 'all agreements between 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'.

12. 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'. The parties to the present agreements are Azinger, Fispak and each covenantor. Azinger is engaged for gain insofar as it is a holding company for a number of companies which are involved in the distribution of packaged foodstuffs and dry goods and the manufacture of certain foods and food chemical products. Fispak is engaged for gain in the manufacture and sale of plastic packaging for meats, cheeses and other food products. At the time of the agreement the four covenantors, namely George McNulty, Rory McNulty, Kieron Hayes and David Gray, were engaged for gain as they were the owners of Fispak.

13. The present arrangements therefore constitute a number of agreements between undertakings whereby the covenantor has agreed not to compete with the business of the companies for two years from the date of the agreement or two years from the date on which he ceases to be a shareholder of the company, whichever is the greater, not to solicit customers or employees of the company for a like period and not to disclose confidential information relating to the companies at any time.

14. The notified deeds of covenant were completed pursuant to a sale of business agreement and therefore they cannot be considered in isolation but must be examined in the context of the broader sale of business arrangements. This is consistent with the Authority's view in Chemical International Finance Ltd./Irish Life Assurance plc. ² The Authority considers that the notified agreements are part of an arrangement for the transfer of ownership of a business. It has indicated on numerous occasions in the past that a sale of business per se does not offend against Section 4(1). The indications are that the transfer of the business in this case would not lead to any diminution of competition. Neither would it result in any concentration in the relevant market. It is relevant that prior to the acquisition the Azinger Group was not involved in the relevant market.

15. Clause 5 of each deed of covenant provided that the covenantor would not become involved in any way in a competing business within Ireland and the United Kingdom for two years from the date of the share purchase agreement, or the date on which he ceases to be a shareholder in the Company, whichever is the greater period. Similarly, Clause 7 of the agreement provided that the covenantor would not solicit customers or employees of the Companies for a similar period within the same area. He also undertook not to interfere with any suppliers of the Companies.

16. The Authority has considered similar restrictions in a number of previous decisions and it does not consider that it is necessary to restate its views at length in this instance. The Authority considers that, in general, a restriction on a vendor competing with the purchaser of a business is necessary to protect the goodwill of the business being sold and where such a restriction does not exceed what is necessary for the protection of that goodwill in terms of duration, geographic coverage and subject matter, it does not offend against Section 4(1). It has stated that it would normally regard a period of two years as being adequate for this purpose. It has also stated that restrictions on soliciting customers and employees for a like period do not offend against Section 4(1). The Authority does not believe that the restrictions on the vendors in clauses 5 and 7 exceed what is necessary in terms of duration, subject matter and geographic coverage. Therefore, in the Authority's opinion, they do not offend against Section 4(1).

17. Rory McNulty and Kieron Hayes did not sell all of their shares and continued to be shareholders of Fispak. Therefore the effect of clause 5 would be to prevent them from competing with the business for two years from the date on which they ceased to be shareholders of Fispak. In Scully Tyrrell 3 the Authority indicated that a restriction on the vendors for the period during which they continued to be shareholders and for up to two years after they disposed of their shares would not be anti-competitive provided that the shareholding was not held for investment purposes or was not simply an artificial arrangement to extend the duration of the non-compete clause in a sale of business agreement. The Authority believes that these latter considerations do not arise in this instance and the provisions do not offend against Section 4(1).

18. Clause 6 prevented the covenantor from revealing any confidential information relating to trade or financial secrets, operations, processes, dealings or other information concerning the business of the companies, their customers suppliers and employees. The Authority has previously stated that a restriction on revealing confidential information is acceptable provided it is not used to prevent the vendor from re-entering the market once a legitimate non-competition clause has expired. However, the Authority believes that this restriction not only concerns confidential commercial information but that the 'operations' and 'processes' referred to could also involve technical know-how. The Authority dealt with the area of technical know-how at length in ACT/Kindle. 4 In that decision it concluded that to afford the purchaser an unlimited protection against the use of technical know-how by the seller would, in its opinion, restrict competition since such an unlimited restriction would go beyond what is necessary to secure the complete transfer of goodwill of the business to the purchaser. The Authority has accepted the view of the EU Commission that a restriction for a period of five years on the use of technical know-how would be acceptable where the transfer of a business also involves the transfer of goodwill and know-how. Therefore the Authority considered that the restriction in clause 6, insofar as it related to technical know-how, offended against section 4(1) since it went beyond what is necessary to secure the transfer of the goodwill of the business being sold. As the parties have indicated that clause 6 will not be used to prevent the covenantors from using technical know-how after the expiry of five years from the date of the agreement or from the date of disposal of shares by a covenantor if later, it no longer offends against Section 4(1).

19. The Authority considers that the consultancy agreement is a genuine agreement for the provision of consultancy services. It considers that the restrictions in clause 4 are necessary to protect the goodwill of the business and consequently do not offend against Section 4(1). In the case of the employment agreement, the Authority has previously indicated that a restriction on soliciting customers after termination is not offensive provided it is for a relatively short period of time. In this case the restriction is for one year and is not offensive. The Agreement also prevents the Director from revealing information regarding the company's business and operations obtained during his employment and from using information obtained under agreements with third parties. Such information is the property of the company, it is entitled to protect it and such a restriction is not anti-competitive.

20. In the Authority's opinion, Azinger, Fispak and George McNulty, Rory McNulty, Kieron Hayes and David Gray are undertakings within the meaning of Section 3(1) of the Competition Act, 1991 and the arrangements constitute agreements between undertakings. In the Authority's opinion, the notified arrangements, as amended, do not have as their object or effect, the prevention, restriction or distortion of competition and do not offend against Section 4(1).

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 deeds of covenant of 5 October 1994, between Azinger Limited, Fispak Holdings Limited and each of Messrs. George McNulty, David Gray, Rory McNulty and Kieron Hayes (notification nos. CA/7/95, CA/11/95, CA/12/95 and CA/13/95), notified on 21 March 1995 under Section 7 and amended by the letter of 2 August 1995, do not offend against Section 4(1) of the Competition Act, 1991.

For the Competition Authority

Patrick Massey

Member

25 August 1995.

1 [ ] denotes commercially sensitive information which is a business secret.

2 Competition Authority Decision no. 17, Chemical International Limited/Irish Life

Assurance plc, CA/10/93, 29 April 1993.

3 Scully Tyrrell & Company and Edberg Limited, decision no. 12, 29 January 1993.

4 ACT Group plc and Kindle Group Limited, decision no. 8, 4 September 1992.