Irish Competition Authority Decisions

1. Notification was made by Development Capital Corporation (DCC) on 30 September 1992 with a request for a certificate under Section 4(4) of the Competition Act, 1991 in respect of a shareholder agreement relating to shares in Capco Holdings Ltd. Following the issue of a Statement of Objections on 3 November 1995 an amendment was made to the notified arrangements to meet the concerns expressed by the Authority.

2. The notification concerns the shareholder agreement dated 28 November 1989 between Terence Hayden and Brian Craig (the covenantors), DCC (the subscriber) and Nikolaos Ltd (which was later renamed Capco Ltd) which was made for the purposes of regulating their relationship as the holders of shares in Capco Ltd.

3. (i) Capco Holdings Ltd, through a number of subsidiaries, is engaged in the sale and distribution of building products to contractors and other builders providers in Ireland and the UK. Other subsidiaries are painting contractors and manufacturers of office furniture. In the year ended March 1994 the turnover of the Group was £17.7m of which £11.6m related to turnover within the State. At the date of the agreement Capco had an issued share capital of 208,750 shares of 25p each.

(ii) Terence Hayden and Brian Craig are directors of Capco Holdings Ltd holding respectively 80,000 and 60,000 of the ordinary shares in Capco, or a combined total of 67% of the equity of the company.

(iii) DCC was engaged in the investment of venture and development capital. It is now a publicly quoted plc engaged in industrial investment holding with a broad range of investments including a number of subsidiary companies in the healthcare, oil distribution and office

automation sectors as well as investments in a number of publicly quoted companies and other unquoted companies.

4. Capco's principal business activity is the distribution of building products, particularly roofing and insulation materials, ceiling and partition systems, cladding, paint spray equipment and concrete repair products. Product is distributed to building contractors directly and to builders providers. The overall market for building materials has been estimated as £1.3bn. The 1992 census of Building and Construction by the Central Statistics Office shows an expenditure of £390m on building materials by large construction companies in 1992. The Annual Services Inquiry for 1991 by the Central Statistics Office shows that the 245 wholesale undertakings engaged in the sale of building materials had an annual turnover of £629m excluding VAT. Capco’s market share could therefore be estimated as 1.8% - 3%. The principal competitors of Capco include Cement Roadstone, Kingspan Group, Tegral and Irish Felts.

5. (i) The notified agreement was made on 28 November 1989 to replace an earlier shareholder agreement which had been terminated. Capco undertakes to fully enforce the employment agreements with the covenantors. The agreement contains standard restrictions relating to the future internal operation of the company and sets out various safeguards in that regard in favour of DCC.

(ii) The agreement also contains the following non-competition clause 2.01

"(a) As a further consideration for the Subscriber entering into this Agreement each of the Covenantors hereby covenants with the Subscriber that during the period commencing on the date hereof and terminating two years 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." This is defined as contracting and distribution to the building industrial and allied sectors.

6. The employment agreements between Capco Ltd and Terence Hayden and Brian Craig were executed on 23 September 1986 to regulate the term and conditions of their employment with the company. They contain a post- termination non-solicit restriction which prevents either

for a period of 1 year from cessation of employment from soliciting in competition with the company the custom of any person or firm who/which was, during the last year of his service, a customer of the company or any subsidiary.

7. DCC stated that it made its investment in Capco as part of a management buyout and the expertise of existing management was seen by DCC as absolutely critical to the future of the company. The ongoing commitment of management to the company was a necessary pre-condition to DCC's involvement in any investment. Therefore a reasonable restriction on the ability of existing management to compete with the company was absolutely necessary to cement the business partnership. DCC later added that the management of Capco have an important role in the day to day management of Capco and it is very possible that the role of individual members of management would continue at its present level if such members sold their shares in Capco. If such a member were to leave Capco that person would be capable of significantly damaging the goodwill of the company. It was therefore felt that some post-employment restriction was appropriate to protect DCC's very significant investment in shares in Capco. They believed that this instance could be distinguished from other cases such as Peter Mark and Apex where the employees had no financial interest in the employer other than normal employment related incentives. In Capco however the individuals involved have substantial shareholdings in the company.

(f) Subsequent Developments

8. Following the issue of a Statement of Objections on 3 November 1995 in which the Authority objected to the duration of the non-competition clause 2.01, DCC agreed to amend it by way of letters of waiver, which were executed on 11 December 1995 and transmitted to the covenantors, under which DCC agreed not to enforce the covenant for a period that was in excess of 2 years after a covenantor ceased to be a shareholder in the company.

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". Capco is engaged in the distribution of building materials for gain and is therefore an undertaking. Terence Hayden and Brian Craig collectively held 67% of the equity of Capco. They were the majority shareholders and directors of the company and are therefore regarded as undertakings. DCC is an industrial holding company engaged in investment for gain and is therefore an undertaking. The notified agreement is an agreement between undertakings. The agreement has effect within the State.

11. The shareholders agreement constitutes an agreement between the majority shareholders and a minority investor to regulate the future internal management and operation of the company. The Authority considers that such an agreement is not per se anti-competitive and does not offend against Section 4(1). The agreement also contains standard provisions designed to protect the minority shareholding position of DCC which the Authority has decided in a number of decisions do not offend against Section 4(1).

12. Under clause 2.01 each of the covenantors covenanted that for a period commencing at the date of the agreement and terminating two years after the date he ceases to be a shareholder in, or employed by, the company (whichever is the later) he will not compete against the companies or be involved in the business of contracting or distribution to the building industrial and allied sector. 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 as the non-compete restrictions apply for the period when the covenantors remain as employees, directors or shareholders in the company these provisions do not offend against Section 4(1) of the Competition Act.

13. A similar view is taken in relation to the 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 restrictions apply for a period of 2 years after a disposal of shares by each covenantor which is the period that the Authority generally regards as acceptable. The scope of the restriction extends to where competition with any of the Capco companies arises and the Authority considers therefore that the scope of the restriction does not offend against

Section 4(1) of the Competition Act. The Authority has stated in previous decisions that a post-shareholding non-compete provision is not justified where the shareholding is a nominal one or is held for investment purposes. For purposes of clarity the Authority does not believe a post-shareholding restriction would be justified in this instance if an individuals shareholding was 5% or less. In such circumstances the Authority would propose to revoke the certificate under Section 8.

14. The non-compete restrictions also applied for a period of 2 years after the date a covenantor ceased to be an employee of the company if this was later than the date he ceased to be a shareholder. The Authority has consistently taken the view such a provision could have the effect of extending the non-compete period far beyond the period necessary for the transfer of the business and that it therefore offended against Section 4(1). DCC submitted that some distinction should be made between this case and other cases where the employee had no financial interest in the employer other than employment related incentives. However the issue had been dealt with in some detail by the Authority in its decision on Cambridge-ACT/Imari where a clause of this nature was considered to offend against Section 4(1). A similar view had been maintained by the Authority in a number of subsequent decisions on purchases of businesses and shareholding agreements. DCC has now agreed not to enforce the non-compete provision beyond the period of 2 years after each covenantor ceases to be a shareholder in the company and has executed and transmitted a waiver to that effect to each covenantor. As this reduces the period of non-competition to the period which the Authority generally finds acceptable, the provision no longer offends against Section 4(1) of the Competition Act.

15. Under the terms of their employment agreements each of Terence Hayden and Brian Craig are prevented for a period of 1 year after cessation of employment from soliciting the custom of customers of Capco. In its Decision No. 20 [2], the Authority has accepted that some restriction on the soliciting of customers, after termination of employment, could be necessary to protect the legitimate interests of the company. The Authority considers that a one year restriction is justifiable in this case and that this provision does not offend against Section 4(1) of the Competition Act.

16. In the Authority's opinion Terence Hayden, Brian Craig, Development Capital Corporation Ltd and Capco Holdings Ltd are undertakings within the meaning of Section 3(1) of the Competition Act, 1991 and the notified shareholders agreement is an agreement between undertakings. In the Authority's opinion the notified agreement, as amended by way of waivers dated 11 December 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 Shareholders Agreement dated 28 November 1989 between Terence Hayden,

Brian Craig, Development Capital Corporation Ltd and Capco Holdings Ltd, notified under Section 7 on 30 September 1992 (notification no. CA/788/92E), and as amended by way of the waivers dated 11 December 1995, does not offend against Section 4(1) of the Competition Act, 1991.

For the Competition Authority.

Isolde Goggin

Member.

11 March 1997

[ ]   ¹Decision No. 24, 21 June 1993

[    ]²Apex Fire Protection Ltd/Noel Murtagh, Decision No. 20, 10 July 1993