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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.

 

Page 13

 

 

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.

 

Page 14

 

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.

 

Page 15

 

(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

 


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