Competition Authority decision no. 425 of 22 September 1995 relating to a proceeding under Section 4 of the Competition Act, 1991.   

Notification No. CA/20/93 ‑ Circa Group Europe Ltd/ Subscription and Shareholders Agreement 

Decision No. 425

Introduction

1.   Notification was made by Circa Group Europe Ltd (Circa) on 8 June 1993 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 shares in Circa.
                   
The Facts

(a)  Subject of the Notification

2.   The notification concerns a subscription and shareholders agreement dated 19 May 1993 between Tom Casey, Andy Conway, Tom Higgins, Eamonn Kinsella, Noel Shaw, Brendan Wafer, and trustees for University College Dublin (UCD) as subscribers and Circa relating to the subscription by the subscribers for shares in Circa.

(b)   The Parties Involved

3.(i)   Circa was established in 1991 and is engaged in the provision of consultancy,  training, and research services, principally to public bodies, on the Irish and international markets in relation to science and technology policy formulation and evaluation. At the date of the agreement Circa had an issued share capital of £2.

(ii)  Tom Casey, Andy Conway, Tom Higgins, Eamonn Kinsella, Noel Shaw, Brendan Wafer, are collectively the majority shareholders in Circa and are directors of the company. Each of these persons is also engaged in the provision of consultancy services outside Circa through their own private companies.  These companies participate in projects undertaken by the Circa Group by each contracting the services of its staff, who are the shareholders in Circa, to Circa.

(iii)   University College Dublin is primarily engaged in the provision of third level education, for which they charge student fees, and also in the provision of research services for gain.

(c)    The Market

4.    Circa provides consultancy services on the Irish and international markets in science and technology policy formulation and evaluation. The company's clients are stated to be principally, but not exclusively, public bodies. The Government Estimates for the Public Service for 1995 show a provision of over £13m for expenditure on consultancy services for Government Departments but this would also include services relating to computerisation, legal fees etc. Other public bodies would include State sponsored bodies and the EU Commission. There are a large number of companies and firms engaged in the provision of consultancy services in the Irish market. These include multinational consultancy companies, Irish consultancy companies, accountancy firms, specialist subsidiaries of banks and State funded companies as well as persons operating as sole traders.

(d)     The Notified arrangements

5.(i)   The notified agreement was executed on 19 May 1993 to provide for the subscription by the subscribers for shares in Circa and to regulate the future conduct of the business of the company and the relationships between the shareholders. Upon execution each of the parties was to subscribe for the following £1 shares in the company viz.

			No. of shares		% shareholding
Tom Casey		  1,800				  12%                                  
Andy Conway		  2,100				  14%                            
Tom Higgins		  3,149			 	  21%
Eamonn Kinsella	  1,500			  	  10%
Noel Shaw		  2,399			  	  16%
Brendan Wafer	  1,800			  	  12%
Trustees for UCD	  2,250				  15%
			14,998				100% 

(ii)     The agreement also provides that the business of the company will be carried on to best advantage and will be controlled by the board. Board meetings will be held regularly with each director getting full detailed management reports in good time. A managing director shall be appointed and be responsible inter alia for management of the register of consultants and implement strategy and the business plan adopted from time to time by the board. Clause 4.06 provides for a remuneration and fees committee to determine disputes between the Managing Director and an individual subscriber relating to fees, remuneration or performance of a project.

(iii)  Each of the parties will be furnished with regular financial information on the company with reasonable access to records. Restricted transactions by the company which require approval by 75% of the shareholders include the following i.e., scheme of arrangements with creditors, creation of charges over assets, onerous contracts, substantial disposal of assets or approval of any transfer of shares other than to a party who has agreed in writing to be bound by the agreement. 

(iv)   Clause 3.01 provides for the competition covenants as follows:

"(a)   As a further consideration for the Subscribers (with the exception of University College Dublin) entering into this Agreement each of them hereby covenants with the others that:-
(1)	during the period commencing on the date hereof and terminating one year after he ceases to be a shareholder in or a Consultant to the Company (whichever is the later) he will not either on his own behalf or on behalf of any other person, firm or company become involved or engaged in the Protected Business or in other projects connected with the same which have the effect of early termination of, disruption or diminution in the value of or received from any arrangement connected with the Protected Business to which the Company is a party.

     PROVIDED HOWEVER, that this restriction shall not prevent a Subscriber who has 	ceased to be a shareholder in the Company from seeking or engaging in any other
      	project or assignment with any client of the Company;

(2)	he will not for one year after the date on which he shall cease to be a shareholder in the Company either on his own behalf or on behalf of any other person, firm or company directly or indirectly solicit or endeavour to solicit or obtain the services of any person employed by the Company;

(3)	he will not at any time hereafter make use of or disclose for his own benefit or for the benefit of for or to or on behalf of any person, firm or company any confidential information which he possesses or may possess appertaining to the business or affairs of the Company or of any client of the Company or any person having dealings with the Company save as may be required for the business of the Company and he shall use all reasonable endeavours including obtaining undertakings to ensure that his employees or agents shall not disclose such information;

(4)	any improvement in procedure, methodology or techniques made or discovered by the Subscribers or any of them while engaged in the Protected Business shall forthwith be disclosed to the Company and shall belong to and be the absolute property of the Company PROVIDED ALWAYS that this sub-clause shall not apply to any discovery or invention or secret process or improvement in procedure, methodology or techniques made or discovered by University College Dublin or its nominees save in connection with work first carried out for the purpose of the Protected Business or as a Director of the Company;

(5)	The Subscribers (whether before or after ceasing to be a shareholder in the Company or ceasing to be an employee of the Company) shall at the expense of the Company or its nominee apply or join in applying for letters patent or other similar protection in the Republic of Ireland (or any other part of the World as specified by the Board by resolution) for any such discovery invention process or improvement as referred to in paragraph (a) (4) capable of being so protected and shall execute all instruments and do all things necessary for vesting the said letters patent or other similar protection when obtained and all right and title to and interest in the same in the Company (or its nominee) absolutely and as sole beneficial owner.

(6)	The Subscribers hereby irrevocably appoint the Company to be their attorney and in their names and on their behalf to execute and do any such instruments or things and in relation to Protected Business, to use their names for the purpose of giving to the Company (or its nominees) the full benefit of the provision of this section.

(7)	Subject to the foregoing restrictions the Subscribers and each of them shall be entitled to carry on their individual businesses of providing technical, economic and management consultancy while members of the Company.

(d)    The foregoing covenants shall not take effect or be enforceable until the day after the Competition Authority has issued a certificate confirming their validity or has issued a licence exempting the foregoing covenants from the provisions of the Act." 
	
Submission of the parties

6.  In its submission Circa stated that there were many other consultancy companies in the State and outside the State, who practice in the State, such that the notified agreement will not distort competition. The agreement did not give rise to a large company, compared to the competing companies, and only arises because of the unusual nature of the relationship between the shareholders. Principally the arrangements provided for a company of viable size, which can compete realistically in the market place. 

Circa added that as regards providing a company of viable size, there were projects which require a range of complementary skills and which also require a considerable amount of work. No one of the shareholders could have either the range of skills or the ability to provide the actual amount of time required for such large projects. No one person would have any credibility in tendering for such large projects. Indeed, there were projects for which the Circa Group tenders in association with other companies whose skills are complementary to those of the Circa Group. Such other companies were often much bigger than Circa but still did not have the range of skills required. The Circa Group therefore provided the shareholders with a credible and respected vehicle for winning contracts. Thearrangement greatly improved the competitive marketing position of the participating consultants, particularly in tendering for international contracts. The arrangement also provided for effective market strategies.  

Assessment

(a)  Section 4(1)

7.   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.

(b)   The Undertakings.

8.   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".

9.   The personal subscribers under the notified agreement, i.e., Tom Casey, Andy Conway, Tom Higgins, Eamonn Kinsella, Noel Shaw and Brendan Wafer are each engaged for gain in the provision of consultancy services on a fee basis through companies owned by them both to Circa and to other customers and they are each, therefore, undertakings. Circa is also engaged for gain in the provision of consultancy services and is also an undertaking. University College Dublin is engaged in the provision of third level education and in research for gain and is also an undertaking. The notified agreement is an agreement between undertakings. The agreement has effect within the State.

(d)      Applicability of Section 4(1)

10.   The Subscription and Shareholders Agreement involves effectively an agreement between a number of undertakings, each engaged in the provision of consultancy services on a small scale, to establish a company to market their services jointly so as to obtain major contracts in which the undertakings themselves will share. The operation is not in competition with the individual undertakings because each undertaking alone is too small to contract successfully for business in this sector of the market which is largely catered for by major consultancy practices based in the State and abroad. Neither does the agreement affect competition between the individual undertakings involved since they continue to be free to compete with one another in the smaller project sector of the market. A major factor in the award of consultancy assignments is the scale and capacity of the consultant to undertake the work required and the establishment of Circa was designed to provide the collective scale to enable the undertakings compete in this major project segment of the market. 

11.   The agreement contains a number of standard conditions and restrictions on the internal operations of the company which are designed to regulate the company's operations and protect each shareholders rights. These do not raise any issues under the Competition Act. 

12.    Under clause 3.01(a)(1) each of the subscribers (excepting UCD) covenants not to become involved or engaged in any programme, consulting opportunity or call for tenders which is raised at a meeting of directors and in which the Board of Circa has declared an interest in submitting a proposal. This covenant is to apply for the period from the date of the agreement until 1 year after the subscriber ceases to be a shareholder in, or a consultant to, the company, whichever is the later. In its decision on H&K International the Authority decided that a provision which prevented a shareholder, for as long as he was a shareholder and for two years thereafter, from competing with the company by being engaged in the same type of business as the company did not offend against Section 4(1).  In this instance the restriction is limited only to projects which the company has considered and expressed an interest in tendering for, with each shareholder otherwise free to operate his consultancy practice independently of Circa. The purpose of this restriction is to protect the goodwill and integrity of Circa's business by preventing shareholder's using insider knowledge to compete against Circa. The same considerations apply in regard to the period of one year after the subscriber ceases to act as consultant to the company, if this is later than the date of disposal of shares, because of the inside knowledge of the company's activities which the subscriber gains as consultant to the company. The Authority takes the view that these restrictions are necessary to protect the goodwill of the business and consequently do not offend against Section 4(1).   

13.  Under clause 3.01(a)(2) each of the subscribers, excluding UCD, is prevented for a period of 1 year from cessation as shareholder from soliciting or endeavouring to obtain the services of any employee of Circa. For the reasons given in its decision on H&K International the Authority considers that this provision does not offend against Section 4(1). Clause 3.01(a)(3) prevents the disclosure or making use of confidential information relating to the company. Clauses 3.01(a) to (6) provide that any improvement in procedures, methodology or techniques made or discovered by a Subscriber while engaged in the Protected business shall be the property of the company with procedures for protecting the company's patent or other rights. The Authority considers that such information and discoveries are the property of the company, that it is entitled to protect it and that such provisions do not offend against Section 4(1).

The Decision

14.    In the Authority's opinion Tom Casey, Andy Conway, Tom Higgins, Eamonn Kinsella, Noel Shaw, Brendan Wafer,  University College Dublin and Circa Group Europe Ltd are undertakings within the meaning of Section 3(1) of the Competition Act, 1991 and the notified Subscription and Shareholders agreement is an agreement between undertakings.  In the Authority's opinion the notified agreement does not offend against Section 4(1) of the Competition Act, 1991

The Certificate

13.     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 Subscription and Shareholders Agreement dated 19 May 1993 between Tom Casey, Andy Conway, Tom Higgins, Eamonn Kinsella, Noel Shaw, Brendan Wafer, University College Dublin and Circa Group Europe Ltd notified under Section 7 on 8 June 1993 (notification no. CA/20/93) does not offend against Section 4(1) of the Competition Act, 1991.

For the Competition Authority.

Des Wall
Member
22 September 1995