Irish Competition Authority Decisions

1. Notification was made by Allied Combined Trust Ltd (ACT) on 30 September 1992 with a request for a certificate under Section 4(4) of the Competition Act, 1991 in respect of a Share Subscription Agreement relating to Colour Books Ltd.

2. The notification concerns a share subscription agreement dated 11 April 1990 between John Harold, as covenantor, ACT, as subscriber and Colour Books Ltd, relating to the subscription by ACT for shares in Colour Books Ltd.

3. (i) Colour Books Ltd was incorporated in the State in October 1989 and is engaged in the business of book printing such as novels, guide books and work manuals. Its main customers are publishers but it also does some sub contract work for other printers and speciality printing for individual customers. At the date of the agreement it had an issued share capital of £1,375 in 5,500 B ordinary shares of 25p each which were beneficially owned by John Harold.

(ii) John Harold at the date of the agreement was director and secretary of Colour Books Ltd and owner of the company.

(iii) ACT is engaged in the business of venture capital investment and is part of the AIB Group, which is the largest bank in the State. Under the notified agreement ACT subscribed for 4,500 new B ordinary shares of 25p each in Colour Books Ltd at a substantial premium.

4. (i) The notified agreement was made on 11 April 1990 to provide for the subscription by ACT for 4,500 B ordinary shares in Colour Books Ltd and for the purpose of regulating the future conduct of the business of the company and its subsidiaries and the relationship between the shareholders. The agreement provides for the conditions precedent to the subscription and the arrangements for completion of the subscription for shares.

(ii) Under clause 4.03 John Harold covenants to maintain his shareholding in the company at not less than 50% of the aggregate of A ordinary and B Ordinary shares in issue for as long as ACT is a member of the company. In the event of the receipt by him of an offer for his shares he will procure a similar offer for ACT.

(iii) The agreement also provides for covenants concerning the investee company which apply as long as ACT or its permitted transferee hold shares in the company i.e., that the business will be carried on to best advantage and be controlled by Colour Book's board, that ACT and John Harold may nominate two directors each, that John Harold shall be chairman with no casting vote, that ACT's nominee directors may not be directors of any other competing company, that board meetings be held regularly and that directors be provided with full detailed financial and other information. Information requirements to be supplied to ACT on a regular basis are set out with free and full access by ACT to company records. Any invention/secret process discovered by Mr. Harold while in the service of the company or as shareholder shall belong to the company.

(iv) Restrictions are set on borrowings above specified limits. Capital expenditure above specified limits requires ACT's consent. Restricted transactions which require ACT's prior agreement include the issue of shares, dilution of share values, scheme of arrangement with creditors, entry into onerous contracts, disposal of substantial assets, issue of loans above limits, declaration of dividends beyond parameters agreed, a change in the nature of the company or its business and the removal of senior executives.

(v) The agreement also provides for the exercise of an option by the covenantor to obtain up to 5% of the company's entire issued shares from ACT if profits in 1992/3 exceed certain levels. If shareholders' funds fall below specified levels at any time prior to 30 April 1994 the covenantor shall resign as employee/chairman/managing director and support the appointment of ACT's replacement nominee.

5. Article 4.01(a) contains the following non-competition covenant by Mr. Harold viz.

" As a further consideration for the Subscriber entering into this Agreement the Covenantor hereby covenants with the subscriber that during the period commencing on the date hereof and terminating one year after the date upon which he shall cease to be a shareholder in or employed by any of the Companies (whichever is the later) he will not directly or indirectly, use his expertise knowledge or experience of the Relevant Businesses to compete with any of the Companies nor be interested or engaged in any business competing with any of the Companies in any of the Relevant Businesses."

6. ACT advanced the following Arguments in support of the request for the issue of a certificate

"ACT strongly believes that this arrangement does not have the object or effect of preventing, restricting or distorting competition in the State. This arrangement is one of a series of arrangements being notified to the Competition Authority where ACT invests in Irish companies and Irish management expertise in the hope of developing these companies into a major player in their respective sectors of the economy and a serious competitor in both the domestic and international markets. These investments bring together capital, considerable financial expertise and proven managerial skills so that a dynamic and viable entity is created within that particular sector of the economy. The guaranteed commitment and participation of both parties to the entity is essential to its eventual success. The long term commitment of both parties to the arrangement is guaranteed by the equity stake of ACT in a highly illiquid investment along with the commitment of critical management of the investee company to devote their full energies to the business of the investee company.

Since under the agreement ACT brings considerable capital and financial resources to the investee company, the investee company is made a more effective competitor in the market place. Furthermore, no restriction on competition takes place at shareholder level as ACT has no interest in this market other than through this investee company. There is no possibility of the arrangements being used to restrict competition in any relevant market.

The restrictions on the freedom of the parties to take independent commercial decisions (as outlined) simply do not restrict competition but are absolutely essential to create a powerful business partnership between diverse parties bringing different skills and resources to this venture. Under the agreement, ACT exercises a certain measure of control over the activities of the company. This enables it to protect the value of its investment and to provide some financial advice and assistance to the company. Finally, the agreement must commit both parties to the long term future of the company. To this end, it is critical that ACT take an equity stake in the investment company. This ensures a congruity of interests between the business partners in the long term success of the company. In addition, the expertise of existing management is seen by ACT as absolutely critical to the future success of the company. To that end, the ongoing commitment of management to the company is a necessary pre-condition to ACT's involvement in any investment. Therefore, a reasonable restriction on the ability of existing management to compete with the company is absolutely necessary to cement this business partnership."

7. Following an expression of the concern of the Authority in relation to the duration of the non-compete clause 4.01, ACT by way of a waiver dated 15 September 1995 indicated to Mr Harold that it would not enforce the non-compete covenant for a period that was in excess of 1 year after he ceased to be a shareholder of the company.

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. The parties to the notified agreement are Colour Books Ltd, John Harold and the subscriber, ACT. Colour Books Ltd is engaged for gain in the printing of books and is therefore an undertaking. John Harold was a director and owner of Colour Books Ltd and in line with previous Authority decisions is therefore regarded as an undertaking. ACT is engaged in the business of investing venture capital and is therefore an undertaking. The notified agreement is an agreement between undertakings. The agreement has effect within the State.

11. The Share Subscription Agreement constitutes an agreement whereby ACT agreed to make a venture capital type investment by way of subscription for a minority equity shareholding in Colour Books Ltd. The Authority considers that the investment of venture capital by a venture capital company to obtain a minority shareholding in a company is not, per se , anti-competitive and does not offend against Section 4(1) of the Competition Act. The agreement also contains standard provisions relating to the future internal management and operation of the company designed to protect the minority shareholding position of the new investor. The Authority has decided in a number of decisions that such standard provisions do not offend against Section 4(1).

12. Clause 4.01(a) of the agreement imposes a non-compete restriction on the original shareholder and covenantor, John Harold, which effectively prevents him from competing with or being engaged or interested in a business competing with Colour Books for the period from the date of the agreement and ending one year after the date he ceases to be a shareholder in, or employed by Colour Books or any of its subsidiaries, whichever is the later.In its 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 restriction applies to the period when the covenantor remains as a shareholder in, or employed by, the company, this provision does not offend against Section 4(1) of the Competition Act.

13. A similar view is 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 has 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 1 year after disposal of shares which is within the period which the Authority generally finds acceptable. The scope of the restriction covers the whole of the State but in the light of the country wide market for printing the Authority considers that the restriction does not offend against Section 4(1).

14. Under the agreement the non-compete restriction applied for the period of 1 year after the date the covenantor ceased to be a shareholder in, or employed by the company whichever is the later. If, therefore, the covenantor continued to be employed by the company after he had disposed of his shares the non-compete clause would have continued to apply until 1 year after he ceased in his employment. This could have had the effect of extending the non-competition period far beyond the period necessary for the transfer of the goodwill of the business and the provision therefore offended against Section 4(1) of the Competition Act, 1991. ACT has now agreed not to enforce the non-compete provision beyond the period of 1 year after the covenantor ceases to be a shareholder in the company and has executed and transmitted a waiver to that effect to the covenantor. In the Authority's opinion such a provision does not offend against Section 4(1) of the Competition Act.

15. Under clause 4.03 of the agreement John Harold undertakes to maintain his shareholding in Colour Books at not less than 50% of the total A and B ordinary share on issue as long as ACT remains a member of the company. This effectively prevents John Harold from withdrawing from the company as long as ACT is a shareholder. Colour Books is a small company operating in a specialist field and is heavily reliant on the expertise and business contacts of the original owner. An essential prerequisite for the venture capitalist taking a minority shareholding in a small company is to ensure the continued commitment by the existing owner to the business. The investor is investing not only in fixed assets but in entrepreneurial flair and expertise as evidenced by the previous track record of the owner. The original owners derive real benefit from the venture capital investment with the injection of capital for the company's development. If their commitment to the company they effectively own cannot be assured, the investment risks increase with the possibility that any conflicting interests of the original owner 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 venture capital investment would be less likely to proceed. The Authority therefore considers that this provision does not offend against Section 4(1).

16. In the Authority's opinion Colour Books Ltd, John Harold and Allied Combined Trust 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, as amended by way of the waiver dated 15 September 1995, does not offend against Section 4(1) of the Competition Act, 1991

17. 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 dated 11 April 1990 between Colour Books Ltd, John Harold and Allied Combined Trust Ltd, notified under Section 7 on 30 September 1992 (notification no. CA/355/92E), and as amended by way of the waiver dated 15 September 1995, does not offend against Section 4(1) of the Competition Act, 1991

For the Competition Authority.

Des Wall

Member

19 October 1995