Irish Competition Authority Decisions

1. Notification was made by Business and Trading House Investment Company Ltd (BTHIC) 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 Share Subscription and Shareholders Agreement dated 12 September 1990 relating to the acquisition of new shares in the Prince of Wales Hotel Ltd. A Statement of Objection was issued on 17 May 1995 but no views were expressed by the parties on the particular objections. A separate notification in relation to a Share Subscription and Shareholders Agreement dated 30 August 1991 in relation to the Prince of Wales Hotel was the subject of the Authority's decision on 25 April 1995 to grant a certificate for that agreement (Decision No. 396) ¹.

2. The notification concerns the share subscription and shareholders agreement in relation to the acquisition by a designated investment fund managed by BHTIC, the Tourism and Business Expansion Fund (the Fund) of new shares in the Prince of Wales Hotel Ltd between John O'Gorman, O'Gorman Group (Athlone) Ltd, Dr. Armando Ribeiro and Zanatti Investments Ltd (the owners of the company), BTHIC as manager of the Fund and Prince of Wales Hotel Ltd.

(i) Prince of Wales Hotel Ltd operates a 72 room 3 Star hotel at Athlone, Co. Westmeath. The holders of £1 ordinary shares 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 Expansion Fund ______ 30,000

Total Issued Share Capital £85,500 £115,500

(ii) BTHIC is engaged in the business of corporate finance and in the promotion and

management of designated investment funds. It is the manager of the Tourism and Business Expansion Fund (the Fund). Under the agreement the Fund acquired 30,000 new ordinary £1 shares in the investee company.

(iii) O'Gorman Group (Athlone) Ltd is 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.

(iv) 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.

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

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

The four parties at (iii) to (vi) above are covenantors to the agreement.

4. The market is described in the Authority's Decision No. 396 where the Authority concluded that the geographical market for the Prince of Wales Hotel is primarily the Athlone area although in the case of foreign tourists the hotel is to some extent competing with others located throughout the State. The position regarding investments by designated investment funds has also been outlined in that decision.

5. (i) The notified agreement was made on 12 September 1990 to provide for the subscription by the Fund for 30,000 new ordinary shares of £1 each in the Prince of Wales Hotel Ltd, and for the purpose of regulating the future conduct of the business of the investee company and the relationships between all the shareholders.

(ii) The agreement provides for preconditions for the investment and the completion arrangements including the necessary prerequisites such as warranties and indemnities by the covenantors. It also provides for the future regulation of the company's Board business, appointment of BTHIC nominee directors and arrangements for the provision of regular information on the company's progress to BHTIC, as Manager of the Fund. It lists restricted transactions which require the prior consent in writing of BTHIC. These include changes in the nature of the business carried on, issue of new shares, the making of loans, entry into onerous contracts, borrowing or capital expenditure above specified limits and changes in the company's Articles. The share subscription was to be applied towards the building of a 24 bedroom extension. There are provisions to protect the BES status of the company. There are also provisions for the exercise of Put and Call options after 5 years whereby the covenantors may be required or may opt to purchase the fund investors ' shares.

(iii) Clause 8 provides for termination as follows

"8.1 Subject as provided elsewhere in this Agreement, this Agreement shall continue in force until terminated in accordance with the provisions of this clause 8.00

8.2 This agreement shall automatically and absolutely cease and determine on the happening of any of the following:-

(a) if a Receiver is appointed to the Company or if the Company goes into liquidation for reasons of insolvency; or

(b) if any of the Covenantors or the Manager or the Subscriber cease to hold equity share capital in the Company then the Agreement shall terminate as regards that party; or

(c) if notice is served by the Manager in accordance with clause 8.4

8.3 The termination of this agreement shall be without prejudice to any rights that may have accrued hereunder to any party against any other before termination. Further, the termination of this Agreement shall not affect the continuance in force after such termination of such provisions as are by their nature capable of enforcement against any party by any party after the termination of this agreement."

Clauses 8.4 provides that the manager may by notice require the termination of the agreement in the event of serious breach of the agreement by any other party that is not remedied. In that event the covenantors may be required to purchase the Fund's shares at a particular price.

(iv) Clause 7 of agreement contains the following competition covenants by the original shareholders i.e O'Gorman Group, Zanatti, John O' Gorman and Dr. Ribeiro.

"7.1 Competition Covenant

Each of the Covenantors hereby undertakes and covenants with the Manager (on behalf of itself and the Subscriber and as trustee for all others the beneficial owners for the time being of the Subscription Shares and on whose behalf the Manager manages the investment made in the Company hereunder) and the Company as follows:

(i) that otherwise than through the medium of the Company he or it will not for a period commencing on the date hereof and terminating five years from the date hereof or eighteen months from the date of his or its ceasing to be a shareholder in, a director of or employed by the Company whichever is the later either as principal, partner, agent, servant, assistant director or otherwise howsoever whether directly or indirectly carry on or help or assist in carrying on within Ireland the Relevant Business Provided However that this restriction shall not apply to the Shamrock Lodge Country House Hotel Limited;

(iv) that he or it will not either on his own behalf or on behalf of any person firm company or corporation competing or endeavouring to compete with the Company directly or indirectly solicit or endeavour to solicit or obtain the custom of any person firm company or corporation that is a customer of the Company or which at any time in the three years preceding the date of his ceasing to be a shareholder in or employed by the Company was a customer of the Company;

(v) that he or it will not at any time either on his own behalf or on behalf of any person firm company or corporation directly or indirectly solicit or endeavour to solicit or obtain the services of any person employed by the Company or use his or its knowledge or influence over any such customer or employee or any person firm company or corporation known to him as contracting with or having dealings with the Company to or for his or its own benefit or that of any other person, firm company or corporation in competition with the Company;

Relevant business is defined in the agreement as the business of hotel, restaurant, cafe, tavern and lodging house keepers and licensed victuallers, wine, beer and spirit merchants and publicans.

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. At the date of the notified agreement O'Gorman Group (Athlone) Ltd held 66% of the equity of Prince of Wales Hotel Ltd while Zanatti Investments held the other 34%. These companies were engaged for gain in hotel investment and are therefore undertakings. At the date of the agreement John O'Gorman was the beneficial owner of O'Gorman Group (Athlone) Ltd and Dr Ribeiro was the beneficial owner of Zanatti Investments Ltd and they were therefore undertakings. BTHIC are 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. 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.

9. The Share Subscription and Shareholders Agreement constitutes an agreement

whereby a designated investment fund has agreed to make a venture capital type investment to obtain a minority shareholding in the Prince of Wales Hotel Ltd. This, in effect, involved 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.

10. 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 DTHIC as manager of the Fund 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 also do not raise issues under the Competition Act.

11. The agreement also contains a list of restricted transactions which the company may not undertake without the prior written consent of BTHIC. These include actions such 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. As indicated in its decision No. 396, the Authority does not regard standard restrictions of this nature, designed to protect the minority shareholding position of the new investors, as offending against Section 4(1) of the Competition Act.

12. Section 7 of the agreement imposes non-compete and non-solicit restrictions on the original shareholders i.e on O'Gorman Group (Athlone) Ltd and Zanatti Investments Ltd and on the then owners of these two companies, i.e John O'Gorman and Dr. Ribeiro, which prevents any of them from

- other than through the medium of the company, being in any way involved in the business of hotel, restaurant, cafe, tavern, publican etc, within the State. This restriction applies for a period of 5 years from the date of the agreement or 18 months after he or it ceases to be a shareholder in, or a director of or employed by the company, whichever is the later. The restriction does not apply to the Shamrock Lodge Country House Hotel Ltd - non-compete clause 7.1(i).

- on his own behalf or on behalf of any competitor, soliciting customers or employees of the company. This restriction appears to apply for an indefinite period - non-solicit clauses 7.1(iv) and 7.1(v).

In their decision on Cambridge-ACT/Imari ² 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 and non-solicit restriction apply to the period when the covenantors effectively remain as shareholders in, or directors or employees of , the Prince of Wales Hotel Ltd these provisions do not offend against Section 4(1) of the Competition Act.

13. The non-compete clause 7.1(i) applies for a period of 5 years from the date of the agreement of 18 months from the date each covenantor ceases to be a shareholder in, or director of or employed by the company, whichever is the later. Taking into account the particular nature of the BES investment involved, the Authority considers that the setting of a 5 year non-competition period on the owners and majority shareholders of the investee company, where the duration of the non-compete clause equates with the estimated duration of the Fund's subscription to the company, does not offend against Section 4(1). To qualify for the tax concession, a BES investment must be for a minimum period of 5 years although a somewhat longer period may be deemed necessary to improve returns. For this reason investments by designated investment funds are generally pitched for a 5/7 year time span. While for tax reasons the investment is by way of subscription for shares, the combination of the Put and Call option provisions makes it more akin to a loan to the company owners for investment in the company. Considering the particular vulnerability of the small investor's position as a minority shareholder in an unquoted company, the Authority accepts that safeguards are necessary to ensure the continuing commitment of the original owner to his business for the period of a temporary investment and to prevent him competing directly with it to the detriment of the minority investor. Without safeguards over the 5 year period to ensure that the owner is not free to sever connections with his company and compete directly with it, it is unlikely that the BES investment would proceed. These considerations would also apply where the effective owners at the time hold their shares in the investee company through a wholly owned investment company. The Authority therefore considers that insofar as the non-compete clause applies for the period of 5 years it does not offend against Section 4(1).

14. As indicated in para. 12 the Authority does not consider the non-compete restriction for the period that the covenantors continue effectively to hold shares in the company as offending against Section 4(1). A similar view would be taken in relation to non-compete 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 would have regard both to the duration of the restriction, and its scope, including its geographic scope. Under the notified agreement the non-compete restriction applies for a period of 18 months after disposal of shares which is within the period which the Authority generally finds acceptable.

15. The Authority however considers that the scope of the restriction, both geographically and in subject matter, which applies for 18 months from the date of a disposal shares, exceeds what is necessary to secure any transfer of the hotel business at Athlone. Under clause 7.1(i) the covenantors are prevented for 18 months from engaging not only in the business of hotel within the State but also from being engaged in the business of restaurant, cafe or tavern owners, licensed victuallers, wine, beer and spirit merchants and publicans anywhere in the State. It is hard to see how engaging in these latter activities, well outside the Athlone area, could adversely affect the goodwill of the Prince of Wales Hotel business. The Authority therefore takes the view that the object of this clause is to prevent, restrict or distort competition and the clause therefore offends against Section 4(1).

16. The non-compete clause also applied to John O'Gorman and Dr. Ribeiro for 18 months after the date each ceased to be a director of, or employed by, the Prince of Wales Hotel Ltd, if that event were to occur after the period of 5 years or 18 months from the date of disposal of shares also referred to in clause 7.1(i). In those circumstances, this restriction, if applied after cessation in employment or as a director, could have had the effect of extending the non-competition period beyond the period generally acceptable to the Authority for a transfer of the goodwill of the business. In the event, Dr. Ribeiro had disposed of his effective shareholding in the company and John O'Gorman has ceased his employment and directorship well before the end of the initial 5 year period, which the Authority found acceptable, with the result that this restriction cannot now have any effect on competition. Nevertheless the Competition Act prohibits agreements which have as their object or effect the prevention, restriction or distortion of competition within the State. The words object and effect are to be interpreted disjunctively. The Authority therefore considers that the object of this restriction was to prevent, restrict or distort competition and that it therefore offends against Section 4(1) of the Competition Act.

17. Clause 7.1(iv) of the agreement prohibits each covenantor from soliciting custom from persons who were customers of the hotel during the 3 years preceding the date of their ceasing to be a shareholder or employee of the company. While for the reasons explained in paragraphs 13 and 14, the Authority would accept such a restriction for the 5 year period for the BES investment or for 18 months after cessation of the shareholding, if later, the restriction applies for an indefinite period of time and therefore offends against Section 4(1). A similar situation applies to the restriction at clause 7.1(v) of the agreement in relation to the soliciting of employees which is also of indefinite duration and therefore also offends against Section 4(1).

18. Under Section 4(2), the Competition Authority may grant a licence in the case of any agreement or category of agreements 'which in the opinion of the Authority, having regard to all relevant market conditions, contributes to improving the production of goods or provision of services or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit and which does not -

(i) impose on the undertakings concerned terms which are not indispensable to the attainment of those objectives;

(ii) afford undertakings the possibility of eliminating competition in respect of a substantial part of the products or services in question.'

No arguments have been put forward to justify the grant of a licence. In the opinion of the Authority however, the notified arrangements do not fulfil all the conditions provided for in Section 4(2).

19. Since the Authority considers that the restrictions in clause 7.1 in the agreement exceed what is necessary to protect the valid interest of the minority shareholders, these restrictions cannot be regarded as indispensable to the attainment of the objectives of the agreement and so do not satisfy the requirements for a licence.

20. In the Authority's opinion John O'Gorman Group (Athlone) Ltd, Zanatti Investments Ltd, Dr. Ribeiro, 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 share subscription and shareholders agreement notified under Section 7(2) on 30 September 1992 (Notification No. CA/1070/92E) is an agreement between undertakings. In the opinion of the Authority the notified agreement has the object of preventing, restricting or distorting competition, and it offends against Section 4(1) of the Act and does not satisfy the conditions set out in Section 4(2). Consequently the Authority refuses to issue a certificate or grant a licence in respect of the notified share subscription and shareholders agreement.

For the Competition Authority

Des Wall

Member

8 September 1995

1. Decision No. 396, 25 April 1995

2. Decision No. 24, 21 June 1993