COMPETITION AUTHORITY

Competition Authority Decision of 6 May, 1997 relating to a proceeding under Section 4 of the Competition Act, 1991.

Notification No CA/855/92E - Kleerex Licensing Ltd/ICC Bank plc/Subscription and Shareholders Agreement.

Decision No. 483

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Competition Authority Decision No. 483 of 6 May, 1997  relating to a proceeding under Section 4 of the Competition Act, 1991.

Notification No. CA/855/92E ‑ Kleerex Licensing Ltd/ICC Bank plc/Subscription and Shareholders Agreement.

Decision No. 483

Introduction

1.   Notification was made by ICC Bank plc (ICC) 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 Licensing Ltd (Kleerex L). Following the issue of a Statement of Objections on 2 November 1995 certain waivers were executed by ICC. 

The Facts

(a)  Subject of the Notification

2.   The notification concerns the agreement dated 15 February 1991 between Frank Carroll, Gerard Higgins, Aidan Mc Morrow (shareholders and warrantors) and Kieran Comerford (shareholder), ICC Bank plc (ICC) and Kleerex L in relation to the subscription by ICC for new shares in Kleerex L. 

(b)   The Parties Involved

3.(i)   Kleerex L was incorporated within the State in June 1987.  According to its abridged financial statements filed with the Company's Registration Office the company is connected to Carroll Products and Designs Ltd and to the Kleerex International Ltd group of companies. Kleerex L is engaged in the licensing on a world wide basis of patents developed by Carroll Products and Designs Ltd.

The holders of ordinary shares of 1p each before and after the ICC subscription was as follows:‑

                    before agreement    after ICC subscription
                    
Frank Carroll 		 5,700		 5,700 
Gerard Higgins 	 1,900		 1,900 
Aidan Mc Morrow	 1,900		 1,900 
Kieran Comerford 	    500 		    500 
ICC			   -----   	 6,500 
Total			10,000		16,500
Total issued capital	   £100 	   £165
(ii)  Messrs Carroll, Higgins, McMorrow and Comerford were the owners of Kleerex L at the date of the agreement. Kieran  Comerford subsequently disposed of his 500 shares on 27 May 1994. Messrs, Carroll, Higgins and Mc Morrow were also directors of Kleerex L.

(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 International 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. 

(c)   The Product and the Market

4.     The Kleerex group of companies 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. With 90% of its output exported, the Kleerex group of companies has only a small share of the Irish market for these products. Kleerex L is engaged in the issue of licences and franchises abroad in respect of the Kleerex merchandising products. Kleerex L does not operate within the State or the UK.

(d)  The Notified arrangements

     Subscription and shareholders agreement  

5. (i)  The notified agreement was made on 15 February 1991 to provide for the subscription by ICC for 6,500 new 1p ordinary shares in Kleerex L 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 a Mr. 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 position of ICC.  

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

" Each of the Warrantors hereby undertakes and covenants with 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 its 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 (furnishing licences and franchises in respect of the manufacturing, marketing and selling of 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.”

Contracts of Employment

7.  Under clause 2.1(a) of the subscription and shareholders agreement, Messrs. Carroll, Higgins, McMorrow and a Mr. O'Donoghue were required to enter into service agreements with the group 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 L, Kleerex International Ltd and Carroll Products and Designs Ltd referred to in the agreement as "the Group". The agreements provide for the terms and conditions of each persons’ 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."

(e)  Subsequent Developments

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 Kleerex L, similar waivers from that company were necessary to meet the Authority's concerns. No evidence that such waivers have been executed has been furnished.

Assessment

(a)  Section 4(1)

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.

(b)   The Undertakings

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 L is engaged for gain in the licensing of patents and inventions and is therefore an undertaking.  Frank Carroll, Gerard Higgins, Aidan Mc Morrow and Kieran Comerford were the owners and directors of Kleerex L and are also undertakings. ICC is engaged in the provision of banking services and in investment for gain and is also an undertaking. The notified agreement is an agreement between undertakings. The agreement has effect within the State.

(c)   Applicability of Section 4(1)

11.    The subscription and shareholders agreement constitutes an agreement whereby a State bank involved in the investment of venture capital has made a venture capital type investment by way of subscription for a minority shareholding in Kleerex L. 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 licensing or franchising 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 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 satisfies this requirement. 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 L.  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 18 months 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 therefore, the interests of the new investor, 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 Kleerex L and continues in force insofar as that company is concerned. The clauses therefore continue to offend against Section 4(1).  

Contract of employment
	
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 L and continues in force as far as the company is concerned. The clause therefore continues to offend against Section 4(1).

 Applicability of Section 4(2)

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 however considers that the non-solicit restrictions under clauses 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 they enure to the benefit of Kleerex L cannot be regarded as indispensable to the attainment of the objectives of the agreement and so do not satisfy the requirements for a licence.

The Decision

18.    In the Authority's opinion the subscription and shareholders agreement dated 15 February 1991 between Frank Carroll, Gerard Higgins, Aidan Mc Morrow and Kieran Comerford, Kleerex Licensing Ltd and Industrial Credit Corporation plc in relation to the subscription for shares in Kleerex Licensing Ltd notified on 30 September 1992 (notification no. CA/855/92E) constitutes an agreement between undertakings. The Authority considers that clauses 6.1(iv) and 6.1(v) of the notified agreement and clause 14 of the related employment agreements insofar as the benefits of their restrictions enure to Kleerex Licensing 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.