Irish Competition Authority Decisions

1. Notification was made 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 a Subscription and Shareholders Agreement relating to Kleerex International Ltd (Kleerex Int). Following the issue of a Statement of Objections on 2 November 1995 certain waivers were executed by ICC.

2. The notification concerns the subscription and shareholders agreement dated 15 February 1991 between Frank Carroll, Gerard Higgins and Aidan Mc Morrow (shareholders), Kleerex Int, Erin Executor and Trustee Co Ltd (Erin) and ICC Bank plc (ICC) in relation to the subscription by ICC and Erin for new shares in Kleerex Int.

3.(i) Kleerex Int was incorporated within the State in June 1987. According to its abridged financial statements for the year ended 31 January 1994 filed with the Company's Registration Office, the company is connected to Carroll Products and Designs Ltd and to Kleerex Licensing Ltd. Kleerex Int is engaged in the manufacture of acrylic merchandising products under licence from Carroll Products and Designs Ltd. Its royalty payments to Carrolls were £512,406 in 1994.

The holders of £1 ordinary shares in Kleerex Int before and after the new subscriptions were as follows:

before agreement after new subscriptions

£1 ordinary shares £1 ordinary shares

Frank Carroll 24,400 24,400

Gerard Higgins 24,400 24,400

Aidan Mc Morrow 12,200 12,200

ICC Bank 18,300

Erin 21,350

total 61,000 100,650

issued share capital £61,000 £100,650

(ii) Messrs Carroll, Higgins, McMorrow were the owners and directors of Kleerex Int at the date of the agreement.

(iii) ICC is a State owned bank engaged in the provision of banking services and in the investment of venture and development capital. ICC also subscribed for shares in the related companies, Kleerex Licensing Ltd and Carroll Products and Designs Ltd and the agreements relating to these subscriptions, which were also dated 15 February 1991, are the subject of separate decisions by the Authority.

(iv) Erin is engaged in the holding of funds as trustee and is the trustee of the ICC Business Expansion Fund, a designated investment fund managed by ICC. The fund's shares in Kleerex Int. are now registered in the name of Gokin Ltd.

4. Kleerex Int is engaged in the design, development and manufacture of acrylic merchandising products for sale to shop fitters and retail outlets in the State and abroad. The products are designed to hold and display a large variety of retail products ranging from magazine racks to confectionery bins. Kleerex Int has an annual turnover of around [ ] but with 90% of its output exported, its share of the Irish market is small.

Subscription and shareholders agreement

5. (i) The notified agreement was made on 15 February 1991 to provide for the subscription by ICC for 18,300, and by Erin for 21,350, new £1 ordinary shares in Kleerex Int and for the purpose of regulating the future conduct of the business of the company and the relationship between the shareholders and the company. Completion was subject to the execution by the warrantors (Messrs Carroll, Higgins, and McMorrow) and Cormac O'Donoghue of service agreements in terms acceptable to ICC.

(ii) The agreement also contains standard provisions and restrictions related to the operation and internal management of the company designed to protect the minority shareholding positions of ICC and Erin. There are also provisions to safeguard the BES status of the company with an undertaking by the original shareholders not to dispose of their shares in the company for 5 years from the date of the agreement. The agreement terminates for Erin on the transfer of the Fund's shares to the BES subscribers or transferees nominated by Erin.

6. Clause 6.1 of the agreement contains the following competition covenants by the shareholders (Messrs Carroll, Higgins and McMorrow) viz.

" Each of the shareholders hereby undertakes and covenants with BES (Erin) as trustee for the subscribers the beneficial owners for the time being of the shares subscribed for pursuant to this agreement and on whose behalf it manages the investments made in the company hereunder and ICC and the Company as follows:

(i) that otherwise than through the medium of the Company they 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 their ceasing to be a Shareholder in, a director of or employed by the Company whichever is the earlier 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 the Republic of Ireland the Relevant Business (manufacturing, marketing and selling acrylic merchandising systems) or any business in direct competition therewith;

(iv) that they will not knowingly in relation to the Relevant Business or any business in direct competition therewith, either on their 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 year preceding the date of their ceasing to be a Shareholder in or employed by the Company was a customer of the Company.

(v) that they will not knowingly, at any time, either on their own behalf or on behalf of such persons as aforesaid, directly or indirectly solicit or endeavour to solicit or obtain the services of any person employed by the Company or use their personal knowledge or influence over any such customer or employee or any person firm company or corporation known to them as contracting with or having dealings with the Company to or for their own benefit or that of any other person, firm company or corporation in competition with the Company.”

7. Under clause 2.1(b) of the subscription and shareholders agreement, Messrs. Carroll, Higgins, McMorrow and a Mr. O'Donoghue were required to enter into service agreements with the company in terms agreed by ICC. The service contracts were executed on 15 February 1991 between each of the above named persons and 3 companies i.e., Kleerex Int, Kleerex Licensing Ltd and Carroll Products and Designs Ltd which are referred to in the agreement as "the Group". The agreements provide for the terms and conditions of each person's employment with the 3 companies. They each also contain the following restrictive clause 14:

" For a period of twelve months after the determination of the Director's employment hereunder in any way whatsoever, the Director shall not on behalf of himself or of any other person, firm or company directly or indirectly canvass or solicit or endeavour to canvass or solicit business from any person, firm or company, who shall at the time of determination have been a customer or the client of any company in the Group and shall not directly or indirectly be concerned in any business of similar nature to that of any of the companies in the Group for a period of six months after the determination of his employment hereunder."

8. In a submission, made on 27 October 1995, ICC proposed amendments to the agreements. When issuing a Statement of Objections on 2 November 1995 the Authority indicated that the amendments proposed by ICC would meet the Authority's concerns provided that all the parties, to whom the benefits of the offensive provisions in the notified arrangements enured, were parties to the respective waivers required for the appropriate amendments to the agreements. On 8 December 1995 copies of waivers executed by ICC and addressed to each of Frank Carroll, Aidan Mc Morrow, Gerard Higgins and Cormac O'Donoghue were supplied under which ICC waived the following

(i) Their rights to enforce the covenants under clauses 6(iv) and 6(v) of the subscription and shareholders agreement not to solicit customers or employees to the extent that these covenants enured beyond the period of 18 months following any future disposal of the covenantors shares in the company.

(ii) Their rights to enforce the covenant in clause 14 of each covenantor's contract of employment with the Group not to compete with any company in the Group to the extent that the covenant enured for a period of 6 months after any possible future termination of employment. This was without prejudice to ICC's right to enforce the covenant not to compete with the company for 18 months following cessation as a shareholder.

The Authority pointed out to ICC that as the benefits of these covenants also enured to Erin and Kleerex Int similar waivers from those parties were necessary to meet the Authority's concerns. No evidence that such waivers have been executed has been furnished.

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". Kleerex Int is engaged for gain in the manufacture and sale of acrylic merchandising products and is therefore an undertaking. Frank Carroll, Gerard Higgins, and Aidan Mc Morrow were the owners and directors of Kleerex Int and are also undertakings. ICC is engaged in the provision of banking services and in investment for gain and is also an undertaking. Erin is engaged in the provision of trustee services for gain and is also an undertaking. The notified agreement is an agreement between undertakings. The agreement has effect within the State.

11. The subscription and shareholders agreement constitutes an agreement whereby a State bank, involved in the investment of venture capital, and a Designated Investment Fund managed by ICC have made venture capital type investments by way of subscriptions for minority shareholdings in Kleerex Int. 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 relating to the future internal management and operation of the company designed to protect the minority shareholding position of the new investors. The Authority has decided in a number of decisions that such standard provisions do not offend against Section 4(1).

12. Under clause 6.1(i) each of the original shareholders covenant not to carry on, otherwise than through the company, the business of manufacture and sale of acrylic merchandising systems. The restriction is for the period commencing on the date of the agreement and terminating 5 years from that date, or 18 months after ceasing to be a shareholder in, a director of or employed by the company whichever is the earlier. 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 restriction applies for the period that a covenantor remains as a shareholder, director or employee this provision therefore does not offend against Section 4(1).

13. A similar view is taken in relation to the 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 this instance the non-compete restriction terminates 18 months after a disposal of shares and in the Authority's opinion this clause therefore does not offend against Section 4(1).

14. Under clauses 6.1(iv) and 6.1(v) the covenantors are also prevented at any time from soliciting the customers or employees of Kleerex Int. For the reasons given in paras. 11 and 12 these provisions do not offend insofar as they apply for the period when the covenantors remain as employees, directors or shareholders or for the period of 2 years after a disposal of shares. Similarly, on the basis of previous decisions, the Authority would also consider a non-solicit period of up to 1 year from cessation of employment, if later than the date of disposal of shares, as acceptable. In this case the non-solicit restrictions continue indefinitely. As this goes beyond the period necessary to protect the goodwill of the business and the interests of the new investors, these provisions offend against Section 4(1). ICC has waived its rights to enforce this covenant insofar as it would apply beyond the period of 18 months from the date of cessation as a shareholder. However the benefit of these clauses also enure to Erin and Kleerex Int and continues in force insofar as they are concerned. The clauses therefore continue to offend against Section 4(1).

15. Since the employment contracts were required under the notified agreement they form part of the arrangements. Clause 14 of each employment agreement prevents each director for a period of six months after the determination of his employment from being directly or indirectly concerned in any business of a similar nature to that of any of the companies in the group. In the event of any of the directors disposing of his shares and continuing to remain as a director this clause would have the effect of extending the non-compete provisions beyond the period necessary to protect the goodwill of the business. It therefore offends against Section 4(1). ICC has agreed not to enforce this clause. However the employment contract is between the employees and Kleerex Int and continues in force as far as the company is concerned. The clause therefore continues to offend against Section 4(1).

16. 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.

17. The Authority considers that the non-solicit restrictions under clause 6.1(iv) and 6.1(v) in the subscription and shareholders agreement and the post-termination non-compete restriction in clause 14 of the employment agreement, insofar as the benefit of these restrictions enure to Erin Executor and Trustee Company Ltd and to Kleerex International Ltd, cannot be regarded as indispensable to the attainment of the objectives of the agreement and so do not satisfy the requirements for a licence.

18. In the Authority's opinion the subscription and shareholders agreement dated 15 February 1991 between Frank Carroll, Gerard Higgins and Aidan Mc Morrow, Kleerex International Ltd, Industrial Credit Corporation plc and Erin Executor and Trustee Co Ltd in relation to the subscriptions for shares in Kleerex International Ltd notified on 30 September 1992 (notification no. CA/857/92E) constitutes an agreement between undertakings. The Authority considers that clauses 6.01(iv) and 6.01(v) of the notified agreement and clause 14 of the related employment agreements, insofar as they enure to the benefit of Kleerex Int and Erin Executor and Trustee Company Ltd, have the object and effect of preventing, restricting or distorting competition, that they offend against Section 4(1) of the Competition Act 1991, and that they do not satisfy the requirements for a licence under Section 4(2) of the Act. Consequently the Authority refuses to issue a certificate or grant a licence in respect of the notified agreement.

For the Competition Authority

Isolde Goggin

Member

6 May, 1997

[ ]   ¹Decision No. 24, 21 June 1993