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You are here: BAILII >> Databases >> Irish Competition Authority Decisions >> Irish Competition Authority Decisions (Notice Division) >> Notice in respect of Agreements involving a Merger and/or a Sale of Business [2002] IECA 1 (Notice) (1 July 2002) URL: http://www.bailii.org/ie/cases/IECA/Notice/2002/1.html Cite as: [2002] IECA 1 (Notice) |
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COMPETITION AUTHORITY
NOTICE IN RESPECT OF AGREEMENTS INVOLVING A
MERGER AND/OR SALE OF BUSINESS
Decision No. N/02/001
Date: 1 July 2002
Page 1
Notice in respect of Agreements involving a Merger and/or a Sale of
Business
Section 1: Introduction
1. The Competition Act 2002 (“the Act”) was signed into law on 10 April 2002. The
Competition Act 2002 (Commencement) Order of 13 May 2002 appointed two dates for
the coming into force of the Act. Part 2 of the Act, which establishes the rules of
competition and makes provision for their enforcement, Part 4 which sets out the
functions of the Competition Authority and Parts 1 and 5 containing ancillary matters all
come into effect on 1 July 2002. Part 3, which makes provision for the control of
mergers and acquisitions, together with four related sections, comes into effect on 1
January 2003.
2. Section 4(1) of the Act provides that:
‘…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 are prohibited and void.’
3. Section 30(1) of the Act provides that:
‘the Authority shall have …the following functions:
(d) to publish notices containing practical guidance as to how the provisions of
this Act may be complied with;’
4. Section 48(d) of the Act revokes the Competition Act 1991 (as amended) (“the 1991
Act”), which provided for the issuing of category certificates. In accordance with
Paragraph 3(1) of Schedule 2 of the Act, every certificate issued under the 1991 Act
stands revoked upon the coming into operation of the Act.
5. On 2 December 1997, the Authority issued a Category Certificate in respect of
Agreements involving a merger and/or Sale of Business (Decision No. 489) An
amended version was issued on 21 January 1998. As this Category Certificate now
stands revoked, and as the provisions of the Act regarding mergers do not come into
effect until 1 January 2003, the Authority considers it appropriate to publish a Notice
setting out its view on the application of the Act to mergers, covering the period
between the revocation of the Category Certificate on 1 July 2002 and the coming into
force of the merger provisions of the Act on 1 January 2003. The Authority does so in
order to give practical guidelines to businesses as to how the provisions of Section 4(1)
may be complied with in the case of a merger or sale of a business.
6. In the view of the Authority, an agreement between undertakings for the sale of a
business is not automatically outside the scope of Section 4(1) of the Act. The Authority
considers that this applies equally to agreements which constitute a merger or takeover
as defined by the provisions of the Mergers and Takeovers (Control) Acts, 1978 to 1996.
The Authority is of the opinion, however, that in many cases a merger will not have any
adverse effect on competition and so will not contravene the prohibition on anticompetitive
agreements contained in Section 4(1) of the Act. The Authority is able to
Page 2
define circumstances in which an agreement for a merger or sale of business will not
prevent, restrict or distort competition.
Section 2: The Subject of the Notice
(a) Merger - Sale of Business
7. A merger for the purposes of this Notice takes place when two or more undertakings
at least one of which carries on business in the State, come under common control.
Undertakings shall be deemed to be under common control if the decisions as to how
or by whom each shall be managed can be made either by the same person, or by the
same group of persons acting in concert.
8. Without prejudice to the above, where one undertaking obtains the right in relation to
another undertaking, which is a body corporate, to:
(a) appoint or remove a majority of its board or committee of management;
(b) shares in it which carry 25% or more of the voting rights
the two undertakings shall be deemed to have come under common control.
9. For the avoidance of doubt, common control exists in any circumstances where one
undertaking controls the commercial conduct of the other. This may for example be
the case where the conditions of a loan or other contract between the undertakings
give a contractual right to veto all or some specified commercial decisions of the
other.
10. A sale of business takes place when all, or a substantial part, of the assets, including
goodwill, of an undertaking are acquired by another undertaking.
11. The acquisition of some or all of the assets of an undertaking by a receiver, liquidator
or examiner does not constitute a merger or sale of business. However, although it is
not the subject matter of this Notice the Authority draws attention to the fact that an
agreement between undertakings by which one makes a loan to the other with the
result that it may obtain the right to appoint a receiver over the assets of that other on
default is capable of being an agreement of the kind defined in Section 4 of the Act.
12. This Notice is relevant to all mergers and sales of business without limitation as to
the size or turnover of the undertakings involved.
(b) Agreement Between Undertakiings
13. Section 3(1) of the 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.' The Supreme Court has
ruled that the phrase ‘for gain’ is to be interpreted as ‘for a charge or payment.’ Thus
the definition of undertaking is quite wide-ranging and it is clear that firms generally
come within this definition. The Authority has indicated in a number of decisions
involving agreements for the sale of a business that, in its view, individuals who are
parties to such an agreement also generally come within the definition of an undertaking.
Page 3
In Nallen/O’Toole1 the Authority decided that partners in a business were each
undertakings. In Budget Travel2 it decided that, where an employee purchased the
business of her employer, she was an undertaking. In ACT/Kindle3 the Authority took
the view that, where a number of individuals collectively held a majority share holding
in a business, they would be regarded as undertakings. In Scully/Tyrrell4 it took the view
that a group of individuals could be regarded as undertakings, even though they did not
hold a majority of the shares in a business, but nevertheless were able to exercise a
significant degree of control, by virtue of the contractual arrangements involved and
because their interests differed from those of the company in which they held those
shares.5
Section 3: Applicability of Section 4(1)
14. The Authority believes that a merger may, on occasion, have the object and/or effect of
preventing restricting or distorting competition. The primary objective of a merger may
in fact be the elimination of a competitor and a lessening of competition. Equally the
Authority recognises that many mergers take place for entirely legitimate business
reasons and have no anti-competitive object or effect. The present Notice is designed to
identify those agreements for mergers and sales of business which, in the Authority’s
opinion, are unlikely to contravene Section 4(1). As a general rule the Authority
considers that before a merger or sale of business agreement can be found to offend
against Section 4(1)) of the Act, it must be shown that it would, or would be likely to,
result in an actual diminution of competition in the market concerned.
Section 4: Horizontal Mergers
(i) Market Concentration Thresholds
15. A horizontal merger involves two or more undertakings which are competitors in one or
more markets. By definition such a merger reduces the number of competitors in the
market, at least in the short-term. A reduction in the number of competitors or the fact
that a merger will result in the merged entity having a larger share of the market than
that previously held by either of the merged undertakings individually, is not, of itself,
sufficient to establish that the merger would result in a diminution of competition. A
merger would, in the Authority's opinion, contravene Section 4(1) where it resulted in,
or would be likely to result in, a lessening of competition in the relevant market such as
would allow, for example, the merged undertaking or all of the remaining firms in the
market to raise their prices, as the effect of the arrangement would be to restrict or
distort competition. Other factors, such as the ease with which new competitors could
enter the market, are also relevant in assessing a merger in the Authority's view. Among
the factors which the Authority believes need to be considered in order to decide
1 Competition Authority decision no. 1, 2 April 1992.
2 Competition Authority decision no. 9, 14 September 1992.
3 Competition Authority decision no. 8, 4 September 1992.
4 Competition Authority decision no. 12, 29 January 1993.
5 For the avoidance of doubt all references to mergers hereafter refer only to mergers which are the result
of an agreement between undertakings, a decision of an association of undertakings or a concerted practice.
Page 4
whether a merger would have the effect of preventing, restricting or distorting
competition is the actual level of competition in that market, the degree of market
concentration and how it is affected by the merger, the ease with which new competitors
may enter the market and the extent to which imports may provide competition to
domestic suppliers.
16. The Authority believes that where post-merger market concentration levels are
relatively low, a merger or sale of business would not have any adverse effect on
competition in a market. There are two relevant measures of market concentration
which can be used in this context. These are the four firm concentration ratio and the
Herfindahl-Hirschman Index (HHI).
17. The four firm concentration ratio measures the combined market share of the four
largest firms in the relevant market. The HHI is the sum of the squares of the shares of
all firms in a market. It is in many respects a better measure of market concentration
than the four firm concentration ratio since it takes into account the relative size of all of
the firms in the relevant market. The fact that information on market shares of all the
firms in a market is required to calculate the HHI means that it may be difficult to
estimate on occasion. It is true that an accurate approximation of the HHI can be arrived
at provided one has information on the market shares of the largest firms in a market,
while the extent of the change in the HHI arising as a result of the merger can be
calculated on the basis of the market shares of the two firms involved. As the HHI
provides more accurate information on market structure and concentration, the Authority
believes that it should be used wherever possible. Where there is inadequate information
on market shares to estimate the HHI to a reasonably high degree of accuracy the
Authority will use the four firm concentration ratio.
18. The HHI is used by the US Department of Justice to evaluate mergers; and its
guidelines classify markets into three categories. Where the post-merger HHI is below
1000 the market is regarded as unconcentrated and mergers in such markets are
considered unlikely to have adverse effects on competition. Where the post merger HHI
lies between 1000 and 1800 the market is regarded as moderately concentrated. Mergers
which increase the HHI by more than 100 points in such markets are considered to
potentially raise significant competitive concerns depending on other factors. When the
HHI exceeds 1800 the market is regarded as highly concentrated, although even in this
case, a merger raising the HHI by less than 50 points, is considered unlikely to have
adverse competitive consequences. The Authority recognises that in a small economy
such as Ireland market concentration ratios in many sectors may be high relative to those
which exist in much larger economies. The Authority also recognises that where market
concentration following a merger is found to be relatively high, the merger need not
necessarily restrict competition. While recognising that the thresholds applied in this
instance were developed for larger economies it nevertheless considers that they provide
a useful guide. In the Authority’s opinion a merger is unlikely to have any adverse effect
on competition where:
(i) The HHI post-merger is below 1000; or
(ii) The HHI post-merger is between 1000 and 1800 but has increased by less than 100
points as a result of the merger; or
(iii) The HHI post-merger is above 1800 but has increased by less than 50 points as a
result of the merger.
Page 5
Where a merger satisfies the above criteria, it does not, in the Authority’s opinion,
contravene Section 4(1).
19. Where the four firm concentration ratio rather than the HHI is used to calculate market
concentration levels, the Authority considers that if the post-merger four firm
concentration ratio is 40% or less, a merger would be unlikely to have any adverse effect
on competition. Thus in the Authority’s opinion a merger or sale of business does not
contravene Section 4(1) of the Act if the four firm concentration ratio in the relevant
market following the merger is below 40%.
20. In the Authority’s opinion any merger which could potentially create or strengthen a
dominant position in a relevant market would require a careful analysis. For this reason
the Authority believes that a horizontal merger between two firms where either firm has
a market share of 35% or more should be subjected to individual scrutiny. Consequently
such a merger is excluded from the coverage of this Notice
21. Where post-merger concentration levels exceed the thresholds set out in paras. 16 and
17, the Authority believes that other factors must also be taken into account. The
Authority considers, for example, that, even in relatively highly concentrated markets, a
merger will not have an adverse effect on competition in the absence of any barriers to
entry or where there is a significant level of competition from imports.
(ii) Barriers to Entry
22. Economic analysis indicates that firms in a market can only earn above normal profits
in the long run if, for some reason, it is difficult for new firms to enter. In the absence
of entry barriers the entry of new firms, or even the threat of entry, would be sufficient
to force prices and margins down to competitive levels. There is some disagreement
among economists regarding the importance of entry barriers. Some would argue that
only legal barriers to entry should be regarded as an entry barrier. Others would define
an entry barrier as a cost which must be borne by a new entrant but which an
incumbent firm does not or has not had to bear. There are numerous examples in
economics literature of ways in which incumbent firms will seek to deter entry. In
some instances such behaviour will involve strategic moves designed to put barriers in
the way of new entrants. In the Authority’s opinion if new entrants are attracted to a
market by high profits but cannot successfully enter it, this is an indication of the
possible existence of entry barriers in the market in question. In the absence of any
evidence of barriers to entry in the relevant market, in the Authority’s opinion, a
merger or sale of business involving competing undertakings, does not contravene
Section 4(1), irrespective of the level of market concentration post-merger.
(iii) Potential Competition
23. The Authority also considers that a horizontal merger will not have any adverse effect
on competition where there is a significant degree of competition from imports.
Obviously if products are currently imported prior to the merger, then such imports
will be reflected in market share statistics already. Nevertheless, where it can be
Page 6
shown that, although the merger may result in levels of market concentration above
those specified in paras. 16 and 17, there is a strong likelihood that any increase in
price would be unsustainable because it would lead to an increase in imports from
existing suppliers, or of imports from suppliers previously not engaged in the market,
in the Authority’s opinion, the merger or sale of business would not contravene
Section 4(1).
24. At the same time, however, the Authority considers that where market concentration
exceeds the thresholds set out in paras. 16 and 17 above, a merger or sale of business
between firms who are potential competitors could have an adverse effect on
competition. A potential competitor can exercise a significant restraining influence on
the behaviour of firms in a market. In particular it can act as a significant check on the
market power of existing firms who are unlikely to increase their prices if they believe
it will lead to the entry of firms currently located outside the market. Consequently the
Authority considers that there is a risk that a merger or sale of business, which results
in the removal of a potential competitor from the market, would have an adverse
effect on competition, where market concentration levels were already relatively
high6. A merger involving potential competitors would not, in the Authority’s opinion
contravene Section 4(1) where:
(i) The HHI was below 1800; or
(ii) The four firm concentration ratio was 40% or less.
Where concentration levels exceeded these thresholds, the Authority considers that a
merger or sale of business would not contravene Section 4(1) in the absence of any
barriers to entry or where there is a realistic prospect of competition from imports.
25. Where the relevant market was relatively highly concentrated and a particular potential
competitor had a comparable advantage in entering the market, then the Authority
considers that such a merger could well have an adverse effect on competition. Where it
could be shown that a number of other potential competitors enjoyed a similar
comparable advantage, the Authority considers that a merger between potential
competitors would not contravene Section 4(1). Where the advantage was unique to the
potential entrant or where there were less than two other potential competitors with
similar advantages then the Authority believes that further examination would be
required. This Notice would not apply to a merger in such circumstances.
(iv) Actual Level of Competition in the Relevant Market
26. Where there is already evidence of inadequate competition in a market, a merger
between actual or potential competitors poses a high risk that competition will be
further diminished. This point is recognised, for example, in the US Department of
Justice Merger Guidelines which state that:
6 By definition a merger involving potential competitors will have no impact on market concentration,
since the potential competitor will have a zero market share.
Page 7
‘When the market in which the proposed merger would occur is
currently performing non-competitively, the Department is more likely to
challenge the merger. Non-competitive performance suggests that the firms in
the market already have succeeded in overcoming, to some extent, the
obstacles to effective collusion. Increased concentration of such a market
through merger could further facilitate the collusion that already exists. When
the market in which the proposed merger would occur is currently performing
competitively, however, the Department will apply its ordinary standards of
review. The fact that the market is currently competitive casts little light on the
likely effect of the merger.
In evaluating the performance of a market, the Department will
consider any relevant evidence, but will give particular weight to the following
evidence of possible non-competitive performance when the factors are found
in conjunction:
(a) Stable relative market shares of the leading firms in recent years;
(b) Declining combined market share of the leading firms in recent years; and
(c) Profitability of the leading firms over substantial periods of time that
significantly exceeds that of firms in industries comparable in capital intensity
and risk.’7
Where there is evidence that competition in the relevant market is relatively weak, the
Authority believes that a more detailed analysis of any proposed merger would be
required in order to establish whether or not it might have an adverse effect on
competition. Consequently this Notice would not apply to a merger in such
circumstances.
Section 5: Vertical Mergers
27. Mergers between firms which operate at different stages in the production or
distribution process, i.e. between a firm and its suppliers or a firm and its distributors or
retailers, generally pose fewer risks to competition than mergers between actual or
potential competitors. In certain circumstances, however, vertical integration resulting
from vertical mergers could have anti-competitive effects. Such a merger could, for
example, be designed to block access either to sources of raw materials or to distribution
outlets. Nevertheless the Authority believes that in general such mergers would not
contravene Section 4(1). A vertical merger would be regarded as anti-competitive where
it was considered likely to result in market foreclosure. Any merger between firms
which had the effect of foreclosing entry to one or more markets would, in the
Authority’s opinion contravene Section 4(1) and would therefore not be covered by this
Notice The Authority repeats the view it articulated in Xtravision/Blockbuster that
analysis of vertical mergers should focus on an analysis of the share of the market
foreclosed to competitors, entry barriers and any elimination of potential competition.
Section 6: Ancillary Restrictions on Competition
7 US Department of Justice Merger Guidelines, 1984, para 3.45.
Page 8
28. Mergers and sale of business agreements commonly include provisions which restrict
the seller in various ways from competing in the relevant market for a period of time
following completion of the transaction. Such provisions may consist of restrictions on
the seller competing with the business, soliciting customers or staff, using or disclosing
technical know-how or other confidential information. As a general rule an agreement
which imposes restrictions on an undertaking competing is anti-competitive and
contravenes Section 4(1). In the Authority’s opinion, an exception to this general rule
has to be made in respect of provisions in a sale of business agreement which restrict the
vendor from competing with the business being sold, provided they are subject to certain
limitations.
29. It is widely recognised in competition law in other countries and in the common law
that some restraint on a party disposing of all or part of his interest in a business is
essential for the proper transfer of the goodwill of the business to take place, and that
without the transfer of such goodwill, the transfer of ownership would be incomplete.
The Authority agrees with this view. The restraint must, however, be limited in terms
of its duration, geographical coverage and subject matter, to what is necessary to
secure the adequate transfer of the goodwill. Provided this is the case, then clearly the
intention of such a restraint is not to restrict competition in the market in question.
30. It is clear that the length of time necessary for the full transfer of the goodwill of a
business will vary from industry to industry and thus the non-competition obligations
imposed on sellers of businesses will depend on the particular circumstances of each
individual case and no universal rule can therefore be established as to the permissible
duration of such clauses. Thus what may be regarded as a reasonable length of time
for a non-competition clause in one case may be regarded as excessive in another. In
its first decision, the Authority referred to the guidelines set out by the EU
Commission in the Nutricia8 case where it indicated that among the factors to be
taken into account in evaluating the duration of such clauses were:
(i) how frequently consumers in the relevant market change brands and
type (in relation to the degree of brand loyalty shown by them),
(ii) for how long, after the sale of the business, the seller, without a
restrictive clause, would be able to make a successful comeback to the
market and regain his old customers.
31. In a large number of decisions, however, the Authority has taken the view that, as a
general guide, a period of approximately two years will normally suffice if the sale
involves only the transfer of good-will. The Authority remains of the view that a
period of two years would be adequate to secure the transfer of goodwill in the vast
majority of cases and that a longer period would, therefore, in the majority of cases
restrict competition. A longer period of restraint may be justified in particular
circumstances but such cases must be considered on their individual merits. The
Authority considers that in the case of a sale of business which involves a transfer of
goodwill but does not involve any transfer of technical know-how, a restriction on the
8 Nutricia/de Rooij OJ [1983] L376
Page 9
vendor competing with the business for no more than two years does not contravene
Section 4(1).
32. The geographical scope of a non-competition clause also has to be limited to the
extent which is objectively necessary to achieve the aforementioned goal. As a rule, it
should therefore only cover the markets where the products concerned were
manufactured, purchased or sold by the vendor at the time of the agreement. A
restriction on the vendor competing within such a defined area does not, in the
Authority’s opinion contravene Section 4(1).
33. The restraint must also be limited in terms of subject matter. Specifically the restraint
must apply only to the lines of business in which the vendor was previously engaged.
Provided it is so limited such a restraint does not contravene Section 4(1).
34. In the Authority’s opinion restrictions on dealing with, or soliciting customers,
employing or soliciting employees normally have the object and/or the effect of
restricting a party from competing and hence they also constitute a restriction on
competition contrary to Section 4(1). In the context of a sale of business agreement
such restraints if they are limited, are not anti-competitive, but are merely ancillary to
the main purpose of the agreement, which is to secure the transfer of the goodwill of
the business. Thus such restraints do not, in the Authority’s opinion, contravene
Section 4(1) provided that they are for a maximum period of two years, apply only to
parties which have been customers of the firm at the time of the agreement or in the
previous two years and apply only in respect of the business previously carried on by
the vendor.
35. In general the Authority considers that restrictions on the use or disclosure of
confidential information regarding the business are not anti-competitive and are
merely designed to prevent the vendor using commercial information which is the
property of the business being sold. A restriction on the use or disclosure of such
information for an unlimited period of time would not normally contravene Section
4(1). The exception would be where it could be shown that such a restraint would
have the effect of preventing the vendor re-entering the market once a legitimate noncompete
provision, as defined in para. 29 above, had expired.
36. An unlimited restriction on the vendor using or disclosing confidential information is
not acceptable, in the Authority’s opinion, where the information concerned consists
of technical know-how. Where a degree of technical know-how is involved, it is clear
that the vendor would be at a disadvantage in re-entering the market if he could not
make use of such know-how and that an unlimited restriction on the use or disclosure
of such know-how would be tantamount to an unlimited restriction on competing in
the relevant market.
37. The Authority also gave its views on restrictions on use or disclosure of technical
know-how in ACT/Kindle9. In particular it noted the views expressed by the EC
Commission in Reuter/BASF that:
9 Competition Authority decision no. 8, 4 September 1992.
Page 10
‘In no circumstances may an obligation to keep know-how secret from
third parties, imposed on the transfer of an undertaking, be used to prevent the
transferor, after the expiry of the reasonable term of a non-competition clause,
from competing with the transferee by means of new and further developments of
such know-how.'
The Authority then went on to state that:
‘To afford the purchaser unlimited protection against the use of
technical know-how by the seller would, in the Authority's view, restrict
competition since such an unlimited restriction would go beyond what is necessary
to secure the complete transfer of the business to the purchaser. As in the
Reuter/BASF case it appears reasonable to limit such protection to the time
required to allow the purchaser to obtain full control of the undertaking. Once
such a reasonable time has elapsed, however, the purchaser is no longer entitled to
be protected against competition by the seller.'
38. The Authority also noted that the Commission stated in Reuter/BASF that:
‘It is further recognised that it may be necessary in certain
cases to provide additional safeguards to ensure the effective performance of an
agreement where technical knowledge, constituting an important part of the value
of a transferred undertaking, is placed at the disposal of the transferee. As in the
case of goodwill, it must be possible to prevent the transferor for a certain time
from using such knowledge in a manner which would prevent the transferee from
acquiring the undertaking with its market position undiminished.
Here too, the protection afforded to the transferee should be
limited in time, since the transfer of legally unprotected know-how confers no
exclusive rights on the purchaser. Contrary to the contention of BASF, the transfer
of technical know-how in connection with the sale of an undertaking does not
automatically preclude any further activity on the part of the seller based on such
know-how. The opportunity of using know-how which is unknown to competitors
is, like goodwill, a competitive advantage. This advantage can be diminished by
the development by third party competitors of their own know-how. Unlike third
parties the transferor of an undertaking remains aware of the contents of any
transferred know-how, since he cannot divest himself of his own knowledge. For
this reason it appears legitimate to protect the transferee in order for a certain
time to enable him to acquire the undertaking with its competitive position
undiminished. This need to protect the competitive position of the undertaking
provides the justification for and prescribes the time limits to any non-competition
clause involved.
In determining the duration of the non-competition clause, the
factors particularly to be taken into account are the nature of the transferred
know-how, the opportunities for its use and the knowledge possessed by the
purchaser. It is also reasonable to assume that the transferee will actively exploit
the assets transferred. A distinction must be made between know-how existing at
the date of transfer and new or further developments by the transferor based on or
Page 11
in connection with the transferred know-how. A non-competition clause extending
to new or further developments can be of shorter duration.'
39. The Commission clearly indicated that the transfer of technical know-how in
connection with the sale of an undertaking does not automatically preclude any further
activity on the part of the seller based on such know-how. In drawing a distinction
between the know-how existing at the time of the sale and new or further
developments of the know-how, it indicated that a longer non-compete clause could
apply in respect of the existing know-how.
40. The Authority believes that a time limit of 5 years from completion of the sale of
business is acceptable where technical know-how is involved. In the Authority’s
opinion, technical know-how means a body of technical information that is secret,
substantial and identified in an appropriate form. Know-how is only protected as long
as it is secret. Thus there can be no justification for restricting a party using or
disclosing know-how which is in the public domain. The Authority considers that the
know-how must be substantial, as a lengthy period of protection following a sale of
business is not justified for worthless and trivial know-how. The know-how must be
‘described or recorded’ in such a manner as to make it possible to verify that the first
two conditions are fulfilled. For the avoidance of doubt the Authority does not
consider that knowledge concerning a particular line of business can be regarded as
constituting technical know-how. The Authority considers that in the context of a sale
of business agreement, restrictions on the vendor competing with the business,
soliciting customers or employees for up to five years do not contravene Section 4(1)
where the sale of the business involves a transfer of technical know-how, i.e. a body
of technical information that is secret, substantial and identified in an appropriate
form.
41. It is common in some sale of business agreements for the vendor to remain engaged
in the business as a shareholder, director or employee. In the Authority’s opinion,
provided that such an arrangement is not an artificial construction designed to obtain a
longer restraint on competition, a restriction on the vendor of the business competing
with the business or soliciting customers of the business for the period during which
he continues to be a shareholder, director and/or employee of the business does not
contravene Section 4(1). Where the vendor remains only as a shareholder this would
not apply if the share holding were a passive one, or where it was held for purely
investment purposes. In particular the Authority does not believe that a restriction on
competing with the business would be justified where the vendor retained less than
10% of the shares in the company and was not otherwise engaged in the firm whether
as a director, employee or in any other capacity. Where the vendor held more than
10% of the shares in the business and subsequently disposes of his shares in the
business the Authority is, of the opinion, that provided that they are for a maximum
period of two years from the date of such sale, apply only to parties which have been
customers of the firm at the time of the agreement or in the previous two years and
apply only in respect of the business previously carried on by the vendor, a restriction
on competing with the business and/or soliciting customers or employees does not
contravene Section 4(1). Where the vendor of a business remains solely as a director
or employee of the business a restriction on competing with the business following
cessation of employment is, in the Authority’s opinion anti-competitive and
Page 12
contravenes Section 4(1). A restriction on soliciting customers of the business for up
to one year after cessation of employment, does not, in the Authority’s opinion,
contravene Section 4(1).
The Decision
42. The Competition Authority has decided to publish a Notice to advise businesses that
in its opinion, on the basis of the facts in its possession, agreements involving a
merger and/or a sale of business which satisfy the requirements of this Notice do not
offend against Section 4 (1) of the Competition Act 2002. However, this in no way
affects the requirement to notify mergers pursuant to the Mergers and Takeovers
(Control) Acts, 1978 to 1996.
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Competition Authority Notice relating to Merger and/or Sale of Business Agreements
Article 1
(a) The Competition Authority publishes this Notice pursuant to Section 30(1)(d) of
the Competition Act, 2002.
(b) A sale of business for the purposes of this Notice takes place when all, or a
substantial part, of the assets, including goodwill, of an undertaking are acquired
by another undertaking.
(c) A merger for the purposes of this Notice takes place when two or more
undertakings at least one of which carries on business in the State, come under
common control. Undertakings shall be deemed to be under common control if the
decisions as to how or by whom each shall be managed can be made either by the
same person, or by the same group of persons acting in concert.
(d) Without prejudice to (c) above, where one undertaking obtains the right in relation
to another undertaking, which is a body corporate, to:
(i) appoint or remove a majority of its board or committee of management;
(ii) shares in it which carry 25% or more of the voting rights
the two undertakings shall be deemed to have come under common control.
For the avoidance of doubt, common control exists in any circumstances where
one undertaking controls the commercial conduct of the other. This may for
example be the case where the conditions of a loan or other contract between the
undertakings give a contractual right to veto all or some specified commercial
decisions of the other.
(e) This Notice does not apply to the acquisition of some or all of the assets of an
undertaking by a receiver, liquidator or examiner nor does it apply to an agreement
between undertakings by which one makes a loan to the other with the result that it
may obtain the right to appoint a receiver over the assets of that other on default.
(f) This Notice is relevant to all mergers and sales of business without limitation as to
the size or turnover of the undertakings involved.
Article 2
(a) Where a merger or sale of business involves two or more undertakings which are
competitors in one or more markets then, in the Authority’s opinion, such an agreement
does not contravene Section 4(1) of the Competition Act 2002, where, following the
merger, the level of market concentration as measured by the Herfindahl Hirschman
Index (HHI) is:
below 1000; or
between 1000 and 1800 but has increased by less than 100 points as a result of
the merger; or
above 1800 but has increased by less than 50 points as a result of the merger.
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The Herfindahl Hirschman Index is defined as the sum of the squares of the market
shares of all firms in the relevant market.
(b) Alternatively where a merger or sale of business involves two or more undertakings
which are competitors in one or more markets then, in the Authority’s opinion, such an
agreement does not contravene Section 4(1) of the Competition Act 2002, where
following the merger, the combined market share of the four largest firms in terms of
market share does not exceed 40% of the total relevant market.
(c) Where a merger or sale of business involves two or more undertakings which are
competitors in one or more markets then, irrespective of the level of market
concentration following the merger, in the Authority’s opinion, such an agreement
could contravene Section 4(1) of the Competition Act 2002 if it led to the creation or
strengthening of a dominant position in a relevant market. For this reason where any
one of the parties already has a market share of 35% or more this Notice does not apply.
(d) Where a merger or sale of business involves two or more undertakings which are
competitors in one or more markets then, irrespective of the level of market
concentration following the merger, in the Authority’s opinion, such an agreement does
not contravene Section 4(1) of the Competition Act 2002, unless it can be shown that
there are barriers which would prevent other firms entering the market or that there is
little prospect for purchasers of the products concerned to obtain supplies from outside
of the State.
Article 3
Where a merger or sale of business involves two or more undertakings which operate at
different stages in the production or distribution process in respect of the same product,
i.e. between a firm and its suppliers or a firm and its distributors or retailers, it does not,
in the Authority’s opinion, contravene Section 4(1) unless it can be shown that the
agreement would result in foreclosure of a relevant market by denying other
undertakings access to sources of supply or distribution outlets which are independent of
the undertakings which are parties to the sale of business agreement.
Article 4
(a) This Notice shall not apply to a merger or sale of business agreement which involves
a post-sale restriction on the vendors competing with the purchaser unless the
agreements includes the sale of the goodwill of the business and the restriction on the
vendor competing, soliciting customers, soliciting employees and/or doing any other
things in competition with the purchaser does not:
exceed two years from the date of completion of the sale;
apply to any location outside the territory where the products concerned
were manufactured, purchased or sold by the vendor at the time of the
agreement; and
apply to goods or services other than those manufactured, purchased or sold
by the vendor at the time of the agreement.
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(b) Notwithstanding the provisions contained in (a) above the Notice shall apply to a
merger or sale of business agreement which involves a post-sale restriction on the
vendors competing with the purchaser, soliciting customers or employees for up to a
maximum of five years from the date of completion where the business involves the
use of technical know-how, defined as a body of technical information that is secret,
substantial and identified in an appropriate form. The restriction must cease to apply
once such know-how is in the public domain. For the avoidance of doubt knowledge
concerning a particular line of business does not constitute technical know-how for
the purpose of this provision.
(c) This Notice shall apply to agreements which include restrictions on the vendor using
or disclosing confidential information regarding the business for an unlimited period
of time. This Notice shall not apply where the agreement includes a restriction on the
vendor using or disclosing technical know-how as defined in (b) above for a period
exceeding five years.
Article 5
(a) This Notice shall apply where, following completion, the vendor remains engaged
in the business as a shareholder, director or employee and is prevented from
competing with the business, soliciting customers and/or employees of the
business for so long as s/he remains engaged in the business whether as a
shareholder, director or employee.
(b) This Notice shall also apply where a vendor, who has retained a share holding of
not less than 10% in the business following completion of the sale agreement, is
prevented from competing with the business, soliciting customers and/or
employees of the business for a period of up to two years from the date of any
future sale of such shares.
Article 6
This Notice will apply from 1 July 2002 to 31 December 2002
For the Competition Authority
________________________
Dr John Fingleton
Chairperson
1 July 2002