Irish Competition Authority Decisions

1. Notification was made by Applied Micro Electronics Ltd (AMEL) 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 share subscription agreement relating to AMEL.

2. The notification concerns a share subscription agreement dated 8 April 1991 between James O'Reilly and Martin O'Malley, as promoters, Catherine O'Reilly, AMEL, AME (Sales) Ltd, AME (Ireland) Ltd, AM Electronics Inc and AME Software Canada Inc and the Industrial Development Authority (IDA) as subscriber in relation to the subscription by the IDA for shares in AMEL.

3.(i) AMEL is an Irish registered company engaged in the manufacture and sale of electronic test equipment for optical discs and drives and rotating storage media. In the year 1993 it had a turnover of £2.55m of which £2.1m was exported, mainly outside Europe. At the date of the agreement AMEL had an issued share capital of £36,500 in £1 B Ordinary shares which were held as follows:-

James O'Reilly 28,338

Catherine O'Reilly 1

Martin O'Malley 8,111

Total 36,500

AMEL's balance sheet at 31 December 1994 shows a called up share capital of £72,580 made up as follows:-

A ordinary shares 10,597*

B ordinary shares 36,500

8% Cum. Red. Pref. 25,483

Total 72,580

* These shares are held by the Minister for Finance as a result of the IDA investment.

(ii) AME (Ireland) Ltd is a wholly owned subsidiary of AMEL engaged in the manufacture and sale of computer products. AME(Sales) Ltd is another wholly owned Irish subsidiary of AMEL which is non-trading. AM Electronics Inc is a wholly owned subsidiary of AMEL which is based in the USA and engaged in the sale of computer products. At the date of the agreement AME Software Canada Inc. had an issued share capital of £2 in 2 £1 ordinary shares of which 1 was held by AMEL and the other held by James O'Reilly. It is no longer shown as a subsidiary of AMEL.

(ii) James O'Reilly and Martin O'Malley were the owners and directors of AMEL.

(iv) The Industrial Development Authority was the State body responsible for industrial promotion and development. Its activities also included the letting of factories and the taking of shareholdings in certain Irish companies. Its shareholding activities have now been taken over by its successor, Forbairt. The Annual Report of Forbairt for 1994 shows that it held shares in around 270 mainly small Irish companies of which 35 shareholdings were ordinary shares only, 64 were a combination of ordinary shares and preference shares and 171 were preference shares only. Approximately 25 of the investee companies are engaged in the manufacture of electronic equipment of wide varieties.

4.(i) The notified agreement was executed on 8 April 1991 to provide for the subscription by the IDA for 22.5% of the issued share capital of AMEL at a substantial premium. Simultaneously with the agreement, IDA was also subscribing for £25,483 in Cumulative Redeemable Preference shares in, and providing a package of grants for, the company. The agreement provides for conditions precedent including the condition that the terms of the promoters employment have been recorded in terms acceptable to the IDA. It also provides for warranties by the promoters and the company, and completion arrangements.

(ii) The agreement contains standard covenants by the company related to the operation of its business in a businesslike manner and the provision of information on its progress to the IDA. Restricted transactions, which are largely related to the prevention of a dilution of share values or assets and which require the consent of IDA, are listed. The promoters may not sell their shares without the consent of IDA unless a similar offer for the IDA shares is obtained.

(iii) The following restrictive covenants are contained in clause 5

"1. The Promoters hereby covenant and undertake with the Authority and with the Company and the Associated Companies that for so long as the Authority holds not less than five per cent of the "A" ordinary shares in the capital of the Company or the Associated Companies or any of them they shall not:-

(a) For a period of eighteen months after the date upon which they or either of them shall cease to be a shareholder holding in excess of five per cent of the issued share capital or director in or employed by the Company (or the Associated Companies) (whichever shall be the later) on their own behalf or on behalf of either of them or in conjunction with or on behalf of any other person, firm or company directly or indirectly carry on or be engaged, concerned or interested in carrying on business in competition with any business of the AME Group at the time of such cessation or directly or indirectly assist any such person firm or company with any technical advice.

(b) For the period of eighteen months after the date upon which they or either of them shall cease to be a shareholder holding in excess of five per cent of the issued share capital or director in or employed by the Company (or the Associated Companies) (whichever shall be the later) on their own account or either of them or in conjunction with or on behalf of any other person firm or company directly or indirectly solicit or entice away from the AME Group for the time being thereof any officer manager or servant whether or not such person would commit a breach of his contract of employment by reason of leaving service.

2. The Promoters shall in so far as lies within their power procure that no company owned or controlled by them or either of them shall act in such a way as would be a contravention of the covenants and undertakings contained in the preceding clause hereof.

3. For so long as the Authority is the holder of not less than five per cent of the "A" ordinary shares in the capital of the Company or the Associated Companies or any of them it shall not take any ordinary shareholding in any company which is in competition with the AME Group in the business of test equipment for floppy disc drives and media, optical disc drives and media, magneto optical disc drives and media, tape drives and media and floppy and optical disc duplication equipment."

5. Following an expression of concern by the Authority about the duration of the post-termination non-compete and non-solicit clauses AMEL indicated that they would only seek to enforce these clauses for the period of 18 months after a promoter ceased to be a shareholder or director. AMEL also argued that the restriction relating to cessation as director should not be regarded as a restriction relating merely to employment as the promoters were clearly shareholders and saying that the Authority has consistently permitted a post termination non-compete period of up to 2 years for shareholders. Following the issue of a Statement of Objections by the Authority on 12 May 1997, the beneficiaries of the post-termination non-compete and non-solicit clauses (Applied Microelectronics Ltd., AME (Sales) Ltd., AME (Ireland) Ltd., AM Electronics Inc. and Forbairt) indicated by way of a waiver dated 9th June 1997 that they would enforce the restrictive covenants contained at clauses 5.1 (a) and (b) of the Agreement only for a period of eighteen months from the date on which a Promoter should cease to be a shareholder holding in excess of 5% of the issued share capital of the Company, and not in the event only of a Promoter ceasing to be a director and/or employee of the Company.

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. AMEL and its wholly owned subsidiaries are engaged for gain in the manufacture and/or sale of computer testing equipment and are therefore undertakings. The promoters, James O'Reilly and Martin O'Malley were the owners and directors of AMEL at the date of the agreement and are therefore undertakings. In this instance IDA was, and its successor Forbairt is, engaged in investment for gain and is also an undertaking. The notified agreement is an agreement between undertakings. The agreement has effect within the State.

9. The Subscription and Shareholders Agreement constitutes an agreement whereby a State sponsored company, involved in industrial development and venture capital investment, subscribed for a minority equity stake in AMEL. An agreement involving venture capital type investment 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).

10. Under clause 5.1 of the notified agreement each of the promoters covenanted that for as long as IDA holds not less than 5% of the A ordinary shares in the company, they would not for a period of 18 months after cessation as a shareholder, or as a director in, or employed by, the company, whichever shall be the later

- directly or indirectly carry on or be engaged in any business in competition with the business of AMEL group of companies (clause 5.1(a))

- solicit or entice away from the group any employee (clause 5.1(b))

11. In a large number of previous decisions the Authority has consistently taken the view that insofar as non-compete and non-solicit restrictions of this nature apply for a period after a disposal of shares they do not offend against Section 4(1) 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. Under the notified agreement the non-compete and non-solicit restrictions apply for a period of 18 months after each covenantor ceases to hold more than 5% of the equity. As this is within the period that the Authority generally regards as acceptable this aspect of the restriction does not offend against Section 4(1). As in Decision No. 478 [1], the Authority does not believe a post-shareholding restriction would be justified in this instance if an individual’s shareholding was 5% or less.

12. Under clause 5.1(a) the non-compete restriction also applies for a period of 18 months after the date a covenantor ceases to be an employee or director of the company, if this is later than the date he reduced his shareholding below 5%. The Authority has consistently taken the view [2] that such a provision could have the effect of extending the non-compete clause beyond the period necessary for the transfer of the business and that it therefore offends against Section 4(1). The parties entitled to the benefit of the covenants have now agreed to enforce the non-compete restriction only after a Promoter ceases to be a shareholder holding in excess of 5% of the issued share capital of the Company, and not in the event only of a Promoter ceasing to be a director and/or employee of the Company. In the Authority’s opinion this amended provision does not offend against Section 4(1) of the Competition Act.

13. Under clause 5.1(b) the non-solicit of employees restriction also applies for a period of 18 months after the date a covenantor ceases to be an employee or director of the company, if this is later than the date he reduced his shareholding to below 5%. In its decision on Eureko/Celtic International [3] the Authority accepted that some restriction on the soliciting of employees might be necessary to protect the legitimate interest of the company but that the restriction should only apply for one year after the date of termination. In this instance the restriction applies for a period of 18 months after cessation as director or employee, whichever is the later and no justification has been provided for a period of this duration. This clause therefore offends against Section 4(1). The parties entitled to the benefit of the covenants have now agreed to enforce the non-solicit restriction only after a Promoter ceases to be a shareholder holding in excess of 5% of the issued share capital of the Company, and not in the event only of a Promoter ceasing to be a director and/or employee of the Company. In the Authority’s opinion this amended provision does not offend against Section 4(1) of the Competition Act.

14. AMEL had submitted that a distinction should be made between cessation as an employee and cessation as a director stating that the promoters in this instance are also shareholders. The Authority did not accept this distinction. A shareholding had not been shown as a necessary qualification for the position of director and the agreement provides for the appointment by IDA of their nominee director who would not be a shareholder. A covenantor could continue, or be re-appointed by the then shareholders, as a director after he disposed of his shares or reduced his holding to nominal levels. If his directorship existed only as long as his shareholding remained at over 5%, the company and other shareholders would benefit from the restriction for 18 months after a disposal of shares. The provision, before its amendment by the waiver, offended against Section 4(1) because if he continued as a director beyond the date of disposal of shares it could have the effect of extending the non-competition period beyond the 18 months from the date of that disposal.

15. Under clause 5.3 IDA covenants that as long as it is the holder of not less than 5% of A ordinary shares in the company it will not take an ordinary shareholding in any other company "which is in competition with the AME Group in the business of test equipment for floppy disc drives and media, optical disc drives and media, magneto optical disc drives and media, tape drives and media and floppy and optical disc duplication equipment." Under the subscription agreement, as long as IDA has this shareholding, they remain a substantial part of the business i.e. they may appoint a director and their prior consent is required for a wide list of restricted transactions by the company. In its decision on Cambridge - ACT/Imari [4] 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). Since this provision only applies for as long as IDA holds over 5% of the A ordinary shares in the company it does not offend against Section 4(1).

16. In the Authority's opinion the subscription agreement between James O'Reilly and Martin O'Malley, Catherine O'Reilly, Applied Micro Electronics Ltd, AME (Sales) Ltd, AME (Ireland) Ltd, AM Electronics Inc, AME Software Canada Inc and the Industrial Development Authority notified on 30 September 1992 (notification no. CA/299/92E) constitutes an agreement between undertakings. In the opinion of the Authority the notified agreement, as amended by way of the waiver dated 9th June 1997, 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 8 April 1991 between James O'Reilly and Martin O'Malley, as promoters, Catherine O'Reilly, AMEL, AME (Sales) Ltd, AME (Ireland) Ltd, AM Electronics Inc and AME Software Canada Inc and the Industrial Development Authority (IDA) as subscriber in relation to the subscription by the IDA for shares in AMEL, as amended by the waiver dated 9th June 1997, does not offend against Section 4(1) of the Competition Act, 1991.

For the Competition Authority,

Isolde Goggin

Member

8 July 1997.

[1] Development Capital Corporation/Capco Holdings ltd. (Decision No. 478, 11 March 1997).

[2] For example, in Cambridge - ACT/Imari (Decision No. 24, 21 June 1993)

[3]Eureko Holdings Ltd/Celtic International Insurance Co. Ltd, Decision No. 409, 23 June 1995

[ ]⁴See note 2, above .