Irish Competition Authority Decisions

1. This decision involves a share purchase agreement and related deed of covenant and an agreement for discharge all dated 15 February 1996 between Cado Pvt. Ltd, (Cado), Tom O’Connor, CFP International Ltd and Andrew Beasley relating to the purchase of shares in Cado. The arrangements were notified on 19 March 1996 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).

2. The notification concerns a share purchase agreement of 15 February 1996 between Tom O’Connor, as vendor, and CFP International Ltd and Andrew Beasley, as purchasers, in relation to the sale by the vendor of his entire shareholding in Cado to the remaining shareholders. A deed of covenant dated 15 February 1996 between the same parties and a deed of discharge of the same date were also notified.

3. The parties involved in the arrangements are Cado, CFP International Ltd, Andrew Beasley and Tom O’Connor.

(i) Cado, a limited liability company incorporated in the State on 3 September 1991, is a joint venture company involved in the development and operation of a cinema at Douglas, Cork. The issued share capital of the company at the date of the agreement was £1,004 held as follows:

CFP International Ltd 502 A ordinary shares of £1 each

Tom O’Connor 251 B ordinary shares of £1 each

Andrew Beasley 251 B ordinary shares of £1 each

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Total 1,004

Under the share purchase agreement Tom O’Connor sold 167 B ordinary shares to CFP International Ltd and 84 B ordinary shares to Andrew Beasley.

(ii) CFP International Ltd is a shareholder in Cado and provided the finance required by the promoters/directors of Cado to enable them to develop a cinema complex at Douglas, Cork.

(iii) Andrew Beasley and Tom O’Connor were the original promoters, directors and shareholders in Cado. At the date of the agreement none of the parties was involved in any other cinema in the State.

4. The service and the market involved in this notification concerns the provision of cinema performances. The agreement relates to a five screen cinema complex located in Douglas which serves the southern and western suburbs of Cork city as well as the outlying areas. There is only one other cinema complex in Cork city namely the Ward Anderson Group cinema complex which is a six screen cinema located at Grand Parade, Cork. Following the earlier decline in cinema attendance numbers, there has been a resurgence of interest by the cinema going public in recent years, resulting in the development of the cinema complex at Douglas.

5. The arrangements comprise a share purchase agreement, a deed of covenant and an agreement for discharge, all of which are dated 15 February 1996. The share purchase agreement provides for the sale by Mr. O’Connor of his entire shareholding in Cado to the other shareholders i.e. 167 B ordinary shares to CFP International and 84 B ordinary shares to Andrew Beasley. The agreement also provides for the consideration payable, warranties and completion arrangements which include the delivery of Mr O’Connor’s resignation as director and secretary of Cado and a deed of covenant. The separate deed of discharge between Tom O’Connor, CFP International and the latter’s shareholders is an acknowledgement of final settlement between the parties for all actions, claims, etc.

6. The deed of covenant between the covenantor (Tom O’Connor) and the purchasers (Cado, Andrew Beasley and CFP International) is an agreement whereby the covenantor agrees (under clause 3) not to compete with the business of the company, that is not to own or operate a cinema, or be connected with such a business in any way, for a period of two years within the Prohibited Area namely a radius of three miles of Cinemaworld, Douglas, Cork or in the town of Carrigaline, Co. Cork. The covenantor also agrees not to solicit any person employed by the company in an executive, technical, purchasing or sales capacity at the date of the Deed for a period of two years within the Prohibited Area (clause 4).

7. The parties submitted, in support of their request for a certificate, that they were undertakings within the meaning of the Competition Act 1991. They stated that the consideration paid to Mr. O’Connor in return for his shareholding in Cado reflected considerable value for his share of the goodwill (he was one of the original promoters involved in establishing the operation of the cinema). The covenant was for a term of two years and related to a defined territory, i.e. a radius of three miles from Cinemaworld in Douglas, Cork city and the town of Carrigaline, Co. Cork, located five or six miles from the cinema. The Covenant did not have the object or effect of preventing, restricting or distorting competition in any part of the State. They maintained that the protection offered by the Covenant was merely for the purpose of preserving the goodwill of the business of the company and it was reasonable in terms of duration and geographical area and would not distort competition. They submitted that Mr. O’Connor would be free to establish a cinema business outside the Prohibited Area (which they understood he intends to do) and within that area on the expiry of the two year ban. In addition the company faced competition from the Ward Anderson cinema in Cork city, the only cinema in the city prior to the establishment of Cinemaworld in 1994. The market, both in its narrow and wider sense, was not restricted or distorted by the restrictions placed on Mr. O’Connor.

8. The parties pointed out that the Authority had indicated in a number of decisions that it generally considered a non-compete period of two years as being sufficient to ensure the complete transfer of goodwill in a sale of business agreement. They referred to the Authority’s decisions on Nallen/O’Toole [1] and Cambridge/Imari [2], to the EC Commission decisions on Reuter/BASF(case no.76/743/EEC) and Remia BV v Commission [1985] ECR 2545 and to the decision of the High Court in RGDATA v Tara Publishing [1985] ILRM 453 as being relevant. The parties also submitted arguments in support of their request for a licence but these are not considered here.

9. Section 4(1) of the Competition Act states that '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 are prohibited and void'.

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.' Cado is engaged for gain in the operation of cinemas and is an undertaking. Tom O’Connor and Andrew Beasley were the original promoters and directors of Cado and collectively held 50% of its equity. They are therefore regarded as undertakings. CFP International Ltd is engaged for gain by means of the provision of financial investment in business. Consequently, they are all undertakings within the meaning of Section 3(1) of the Competition Act. The agreements are therefore agreements between undertakings.

11. The share purchase agreement provides for the sale of Tom O’Connor’s shares in Cado to the other shareholders i.e. CFP International and Andrew Beasley and this poses no competition issues. The agreement also relates to the conditions for completion of the transaction, and to general provisions relating to warranties and undertakings, but none of these relate to competition matters and consequently the share purchase agreement does not offend against Section 4(1) of the Act. The agreement for discharge acknowledges the final settlement of all claims or actions between the vendor and the purchasers of the shares and likewise it does not offend against Section 4(1) of the Act.

12. The deed of covenant imposes a number of restrictions on the covenantor following the completion of the transaction, namely the purchase by CFP International and Andrew Beasley of Tom O’Connor’s shareholding in Cado. Clause 3 of the deed restricts Tom O’Connor from competing with the business of the company, that is not to own or operate a cinema, or be connected with such a business in any way, for a period of two years within a radius of three miles of Cinemaworld, Douglas, Cork or in the town of Carrigaline, Co. Cork. The covenantor is also restricted, under clause 4, from soliciting any person who was employed by the company in an executive, technical, purchasing or sales capacity at the date of the deed, for a period of two years within the Prohibited Area. The purpose of these restrictions is to protect the goodwill of the company following the departure of one of the original promoters and shareholders of Cado. Mr. O’Connor held 25% of the shares in Cado and was also a director and secretary of the company.

13. In this case the restrictions on the departing shareholder/director are limited to two years from the date of the transaction and they are limited both in terms of geographical coverage to a radius of three miles of the cinema in Douglas, Cork city and the town of Carrigaline, Co. Cork. These restrictions, in the Authority’s view, do not exceed what is necessary to protect the goodwill of the business. Consequently, clauses 3 and 4 of the deed of covenant do not offend against Section 4(1) of the Act.

14. In the opinion of the Authority, Cado Pvt. Ltd, Tom O’Connor, Andrew Beasley and CFP International Ltd are all undertakings within the meaning of Section 3(1) of the Competition Act 1991 and the notified Deed of Covenant, Share Purchase agreement and Discharge are agreements between undertakings. In the Authority’s opinion, the notified agreements do not offend against Section 4(1) of the Competition Act, 1991.

15. 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 Deed of Covenant, the Share Purchase Agreement and the Discharge between Cado Pvt. Ltd, Tom O’Connor, Andrew Beasley and CFP International Ltd of 15 February 1996, notified under Section 7 on 19 March 1996, (notification no. CA/9/96), do not offend against Section 4(1) of the Competition Act, 1991.

For the Competition Authority

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Patrick Massey

Member

23 May 1996.