COMPETITION AUTHORITY

Competition Authority Decision of 23 October 1992 relating to a proceeding under Section 4 of the Competition Act, 1991.

Notification Nos. CA/51/92 and CA/52/92 ‑ GI Corporation/General Semiconductor Industries Inc.

Decision No. 10

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Competition Authority Decision of 23 October 1992 relating to a proceeding under Section 4 of the Competition Act, 1991.

Notification Nos. CA/51/92 and CA/52/92 ‑ GI Corporation/ General Semiconductor Industries Inc.

Decision No.10

Introduction

1.	Arrangements for the acquisition of General Semiconductor Ireland, a Cork based manufacturer of electrical devices, and certain assets of its parent company, General Semiconductor Industries Inc., by G.I. Corporation, a multinational company based in the U.S., were notified to the Competition Authority on 18 June, 1992.  The arrangements were notified for the purposes of obtaining a certificate under Section 4(4) of the Competition Act, 1991 or, in the event of a refusal by the Authority to issue a certificate, a licence under Section 4(2) of the Act.  The acquisition and restrictive clauses included in the arrangements were notified separately.  The Authority is considering these notifications together for the purposes of this decision.

2.	Notice of the intention of the Authority to take a favourable decision in relation to the arrangements was published in the Irish Times on 14 August, 1992.  No observations were received from third parties.

The Facts

(a)	The subject of the decision

3.	This decision concerns the acquisition of General Semiconductor Ireland by GI Corporation.  Restrictive clauses are included in the arrangements for the acquisition.

(b)	The parties concerned

4.	The parties to the agreement are GI Corporation, General Semiconductor Industries Inc. and Square D Company.   G.I. Corporation is the principal operating subsidiary of General Instrument Corporation (GI) of Chicago, Illinois.  GI is a publicly held company.  It is a holding company with no assets or operations other than through GI Corporation.

5.	The gross value of the assets of GI Corporation, as it appears from its latest audited consolidated accounts to 31 December 1991, is US$1,783m.  The turnover of GI Corporation, excluding payments in respect of value added tax on sales, for the 10 month period ended 31 December 1991, is US$785m.

6.	General Semiconductor Ireland was incorporated in Ireland on 10 December, 1981 under the name General Semiconductor Ireland Limited and was subsequently re‑registered as an unlimited liability company on 5 December, 1988 under the name of General Semiconductor Ireland.  It is a wholly owned subsidiary of General Semiconductor Industries Inc.  General Semiconductor Industries Inc is in turn a wholly owned subsidiary of Square D Investment Company which is in turn a wholly owned subsidiary of Square D Company.  The ultimate parent is Schneider SA public company with its shares quoted on the Paris Stock Exchange.

7.	General Semiconductor Ireland has an authorised share capital of IR10,000,000 divided into 10,000,000 ordinary shares of IR1 each of which 1,895,000 ordinary shares of IR1 each have been issued and allotted.  General Semiconductor Industries Inc is the beneficial owner of all of the issued share capital of General Semiconductor Ireland.  Square D Company is a nominee on behalf of General Semiconductor Industries Inc in respect of one share in General Semiconductor Ireland.

(c)	The products and the market

8.	General Semiconductor Ireland is a manufacturer of avalanche transient voltage suppressors for the home and export markets.  These products protect sensitive electronic systems from voltage and current surges induced by such phenomena as lightning, load switching, electrostatic discharges, etc.  They operate by clamping the transient voltage and redirecting the energy away from sensitive components.  Such protection devices exist in all electrical systems and therefore the market for these devices covers all electronic end use sectors including the automotive, computer, consumer, industrial and telecommunications industries.  The parties have claimed that similar protection devices are inductors, capacitors, carbon blocks, Metal Oxide Varistors, zener diodes and thyristors.  The market can be described as the market for protection devices for electronic circuitry.

9.	The value of sales of protection devices for electronic circuitry in Ireland is estimated by the parties to be IR4m annually.  They estimate that General Semiconductor Ireland and G.I. Corporation each has less than 5% of the Irish market.  Other major suppliers are Motorola, Thomson, Toshiba and Microsemi.  Entry costs are low and therefore a large number of smaller suppliers operate in the market.  According to the parties Motorola and Thomson each have over 30% of the market.

10.	General Semiconductor Ireland sells to a broad range of industrial sectors in Ireland.  GI Corporation has no manufacturing facility in Europe, it sells its products through various agents.

11.	The parties estimate that total worldwide sales of protection devices in 1990 was US$570m approx.  GI Corporation supplies protection devices to the automotive, computer, consumer, industrial and telecommunications sectors and in particular to the cable and satellite television industry.

The arrangements

12.	Two agreements known as the 'Main Acquisition Agreement' and the 'Irish Agreement' give effect to the arrangements.  Under the agreements, General Semiconductor Industries Inc and its nominee, who own all of the issued and outstanding shares of par value IR1 per share in General Semiconductor Ireland, agree to sell the shares and the assets specified in the Main Acquisition Agreement to GI Corporation.  The Irish agreement deals only with the acquisition of the shares.
13.	Section 1.01(ii) of the 'Main Acquisition Agreement' sets out the assets being purchased by GI Corporation.  These assets include:
"....(b)  all technical, manufacturing or marketing information, new development, inventions or ideas, know‑how and trade secrets used or held for use in connection with the Products or the Business and all documentation thereof, including related papers, parts drawings, blueprints and specification sheets, tool drawings, chemical compositions, formulae, diaries, notebooks, specifications, methods of manufacture, data processing cards, discs and tapes and all data contained therein or thereon and all rights thereto;

(c)	all customer files, customer lists, collection and credit records, purchasing records, supplier lists, parts lists, bills of material, catalogs, advertising literature, vendor lists, and all rights or claims in or under customers' and suppliers' contracts used or held for use in connection with the Products or the Business;

(d)	all patents, copyrights, and applications and registrations therefor used or held for use in connection with the Products or the Business, including, without limitation, those listed in Schedule 1.01(d);

(e)	the trademarks and service marks and registrations therefor used or held for use in connection with the Products or the Business, including, without limitation, those listed in Schedule 1.01(e);

(f)	all patent, trade secrets, technology licenses or other licence agreements, software designs, machine readable data, drawings, unpatented designs or processes, formulae, know‑how, technical assistance or other proprietary rights of Seller used or held for use in connection with the Products or the Business, including, without limitation, those listed in Schedule 1.01(f);

(g)	the name "General Semiconductor Industries, Inc.", "GSI" or any similar name and any trade names, trademarks, service names, service marks or corporate symbols or logos utilizing such name or any similar name;...."

14.	The provisions of the 'Main Acquisition Agreement' were incorporated into the 'Irish Agreement' by reference.  The relevant provision in the 'Irish Agreement' is as follows:
"3.	The Seller has agreed to sell and the Purchaser has agreed to purchase certain assets described in the Main Agreement and to purchase the Shares free from all Encumbrances, for the consideration stated in the Main Agreement.  The purpose of this Agreement is to evidence the Agreement to sell the Shares and the consideration relating thereto shall be paid on Closing and the allocation of the consideration to such Shares shall be determined by the Purchaser in accordance with the Main Agreement."

15.	The 'Main Acquisition Agreement' also contained a number of restrictive covenants accepted by the vendors:
"8.10	Noncompetition by Seller and Parent
(a)	Seller and Parent hereby agree that, subject to the consummation of the transactions herein provided for, neither they nor any Square D Affiliate will, prior to the fifth anniversary of the Closing Date, directly or indirectly, and whether as principal or agent or otherwise, alone or in association with any Person, engage, anywhere in North America or the European Economic Community, in the business carried on by GSI Ireland or the Business (or any business which is substantially similar therewith) at any time during the three years preceding the Closing Date (the "Restricted Period"); provided, however, that Parent may itself manufacture or subcontract the manufacture of the following products (the "Excluded Products") solely for the purpose of including the same as components in Parent's products: (i) trilliant surge arrestors, (ii) SP 1175, (iii) SP 3650 and (iv) any other similar surge arrestors; provided, further, however, that Parent may not manufacture any component used in such Excluded Products if such component was manufactured by Seller or GSI Ireland during the Restricted Period (but may subcontract or license the manufacture or otherwise have made any such component solely for use in the Excluded Products; provided that such subcontracting, licensing, manufacturing or having made such components will not violate or infringe upon any Intellectual Property which is a Purchased Asset).  Notwithstanding the foregoing, the restrictions contained in this Section 8.10(a) shall not be applicable to the purchase by a Square D Affiliate, solely for the purposes of investment, of up to 10% of the outstanding equity securities of a corporation, some or all of the operations of which would otherwise violate the foregoing prohibitions.

(b)	If any court of competent jurisdiction determines that Section 8.10(a), or any clause therein, is unenforceable because of the duration or geographic scope of Section 8.10(a), such court shall have the power to reduce the duration or scope of such clause, as the case may be, and, in its reduced form, such clause shall then be enforceable.  Each of Seller and Parent acknowledges that Purchaser may have no adequate remedy at law if Seller, Parent or any Seller Affiliate violates any of the terms contained in Section 8.10(a).  In such event, Purchaser shall have the right, in addition to any other rights it may have, to obtain in any court of competent jurisdiction injunctive relief to restrain any breach or threatened breach hereof or otherwise to specifically enforce any of the provisions in Section 8.10(a).

8.11	No‑Shop.  Between the date of this Agreement and the Closing, none of Seller, Parent or any of their respective representatives shall, directly or indirectly, solicit or engage in discussions or negotiations with or provide any information to, or otherwise cooperate with any Person which seeks to acquire, or expresses an interest in acquiring, all or any part of the Business or the Purchased Assets, or for the purpose of otherwise effecting a transaction inconsistent with the transactions contemplated by this Agreement.  It is understood that this Section 8.11 does not restrict the activities of Seller or Parent with respect to the sale of assets other than the Purchased Assets or GSI Ireland or businesses other than the Business.

8.12	No Raiding.  For a period of one year from and after the Closing, neither Seller nor any Seller Affiliate will solicit to employ or hire any Person listed on Schedule 6.19 or any employee of GSI Ireland retained by GSI Ireland after the Closing Date, except for employees (i) whose employment has been terminated by Purchaser or GSI Ireland, as the case may be, or (ii) who respond to general, non‑directed, employment solicitations through an independent employment agency or advertisement."

Submission of the parties

16.	The notifying parties have argued that the acquisition is not reviewable under the Competition Act, 1991, because it is notifiable under the Mergers Act.  In addition, they have submitted that:
"....whilst the Competition Act amended certain aspects of the Mergers Act, it was not the intention of the legislature that transactions notified under the Mergers Act might also be reviewed under the Competition Act."

17.	The notifying parties also argued that "if transactions notified under the Mergers Act could also be reviewed under the Competition Act, this would introduce a serious degree of uncertainty into commercial transactions....".  It was acknowledged by the notifying parties at a subsequent meeting with the Authority that lesser significance might be applied to this particular argument that mergers cannot be reviewed under Section 4 of the Competition Act than to the argument referred to in Para. 18.

18.	The parties also argued that:
"Where the acquisition is that of a 100% interest in another company and this results in a concentration, then subject to EC Council Regulation 4069/89, the acquisition is only reviewable under Article 86 of the Treaty.  By analogy, an acquisition of a 100% interest in another company which results in a concentration may only be reviewed under the Competition Act (if at all) under Section 5 of the Act....

....the parties submit that the acquisition by GI Corporation of the entire issued share capital of General Semiconductor Ireland and certain assets of General Semiconductor Industries Inc constitutes a concentration and, therefore, may only be reviewed under the Competition Act (if at all) under Section 5 of the Act.  On this basis, the parties submit that the acquisition is not subject to review by the Competition Authority under the Competition Act.  In particular, on notifications under the Competition Act, the Competition Authority reviews agreements in the context of Section 4 of the Competition Act and not Section 5...."

19.	The notifying parties have submitted the following arguments in support of the inclusion of the restrictive covenants at 8.10, 8.11 and 8.12 of the 'Main Acquisition Agreement':
"It is submitted that, by analogy with the criteria adopted in the Reuter/BASF Decision, the Remia judgement and the Decision of the Authority in Nallen/O'Toole, the restrictions in Clauses 8.10, 8.11 and 8.12 of the Main Agreement should not be held to infringe Section 4(1) of the Act.  The periods during which the restrictions are to apply are related to the time during which a potential competitor would be able to build up a market position equivalent to the lifespan of the goodwill and know‑how of General Semiconductors Ireland protected by Clauses 8.10, 8.11 and 8.12 of the Main Agreement.

In particular, as the transfer of the business involves the transfer of goodwill and know‑how a period of five years as under clause 8.10 is reasonable in the circumstances and does not have as its object or effect the prevention, restriction or distortion of competition in trade in any goods or services in the State or any part of the State.  The know‑how which is being transferred with the business involves formulae and technology required to manufacture the products.  The provisions in clauses 8.11 and 8.12 are less restrictive and operate for shorter periods of time than those in clause 8.10.  These provisions should also be considered as reasonable and necessary to protect the value of the know‑how being transferred in particular the knowledge of employees of General Semiconductor Ireland in relation to the products manufactured at the Macroom plant."

Assessment

(a)	Section 4(1)

20.	Section 4(1) of the Competition Act states 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'.

(b)	The Undertakings

21.	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.'  The parties involved in the present notification, GI Corporation and General Semiconductor Industries Inc., are both corporate bodies engaged for gain in the electronic industry and are therefore undertakings within the meaning of the Act.

(c)	The Agreements

22.	Under the agreements GI Corporation has acquired certain assets of General Semiconductor Industries Inc., as provided for in the 'Main Acquisition Agreement' and the entire issued share capital of General Semiconductor Ireland, as provided for in the 'Irish Agreement'.
The agreements include a number of restrictive covenants.  They constitute agreements between undertakings which have effects within the State.

(d)	The Acquisition

23.	The parties have argued that the arrangements constitute a `merger or takeover' within the meaning of Section 5 of the Mergers, Takeovers and Monopolies (Control) Act, 1978 (the Mergers Act) as amended by the Competition Act.  They have indicated that the acquisition has been notified and approved under the Mergers Act and therefore they claimed that it should not be reviewable under the Competition Act.  The arguments advanced by the notifying parties in support of their position are similar to those set out in the Woodchester/UDT decision.  Briefly these arguments are as follows:

  ‑	it was not the intention of the legislature that transactions notified under the Mergers Act might also be reviewed under the Competition Act;

  ‑	if transactions notified under the Mergers Act were reviewable under the Competition Act, a serious degree of uncertainty would be introduced into commercial transactions;

  ‑	it would be inconsistent to have an acquisition approved by the Minister for Industry and Commerce under the Mergers Act subject to review under the Competition Act.

  ‑	on the basis of EC precedents, the acquisition of a 100% interest in a company can only be reviewed under Section 5 of the Competition Act, if at all.

24.	The Authority concluded in its Woodchester/UDT decision that the arrangements notified for the acquisition of UDT did not enjoy any automatic exemption from the provisions of Section 4(1) of the Competition Act.  In arriving at this conclusion the Authority noted that Section 4(1) specifically referred to 'all agreements' without exception.  In addition, the Authority stated that ancillary clauses, forming part of merger agreements and containing restrictions on competition, could escape scrutiny under Section 4(1) if merger agreements were not reviewable under the Competition Act.  The Authority added that it would be inconsistent for the Competition Act not to apply to agreements notified under the Mergers Act when it could apply to mergers that were below the thresholds set for notifications under that Act.  The Authority rejected the argument put forward by the notifying parties that Section 4 of the Competition Act could not be applied where the acquisition of a 100% interest in a company was involved in its decision in respect of Woodchester/UDT.

25.	The present agreements are between General Semiconductor Industries Inc., its parent Square D Company and GI Corporation.
The result of the agreements is that General Semiconductor Ireland will now be owned by GI Corporation and that one competitor will be eliminated from the Irish market.  The Authority indicated in its decision on Woodchester/UDT that it did not consider that a reduction in the number of competitors,  of itself, constituted a restriction of competition.  The question is whether such an arrangement may be viewed as preventing, restricting or distorting competition in the market.  Accordingly, the impact of the acquisition on the market for protection devices for electronic circuitry in Ireland must be considered.

26.	The principal activity of General Semiconductor Ireland is the manufacture of avalanche transient voltage suppressors for the electronics industry.  The vast majority of the company's sales are achieved on worldwide markets with 2% of sales generated in Ireland.  GI Corporation is a major supplier of systems and equipment (including electronic protection devices) to the cable and satellite television market.  Its sales of protection devices for electronic circuitry in Ireland represent a negligible percentage of its overall sales.  According to the parties' estimates General Semiconductor Ireland and GI Corporation each held less than 5% of the Irish market which is estimated to be worth $4m.

27.	The products supplied as protection devices are numerous ‑ inductors, capacitors, carbon blocks, zjener diodes, etc.  The Authority has accepted the parties' claim that these products are substitutes for the voltage suppressors supplied by General Semiconductor Ireland as they carry out the same function and can be used in electronic devices found in a broad range of industries.  Accordingly, the provision of voltage suppressors should not be regarded as a separate market.

28.	While the acquisition of General Semiconductor Ireland will increase GI Corporation's share of the Irish market for protection devices for electronic circuitry, the Authority does not believe that the increase in market share of itself could be regarded as preventing, restricting or distorting competition, as it will amount to less than 10%.  There are a considerable number of strong competitors such as Motorola and Thomson supplying the market to ensure against such a possibility.  The cumulative share of the market held by these two companies is claimed to be about 60% which implies that a high degree of concentration exists in this market.  The cost of becoming involved in this business is relatively small and this accounts for the large number of small suppliers who are involved in it.  In addition, there is considerable competition from imports in this market.  In these circumstances, the Authority does not believe that the acquisition of General Semiconductor Ireland by GI Corporation offends against Section 4(1) of the Act.

(e)	Restraints on competition

29.	Clauses 8.10, 8.11 and 8.12 of the 'Main Acquisition Agreement' contain restrictions on the activities of the vendors.

30.	Under Clause 8.10, the vendors undertake not to engage in the business carried on by General Semiconductors Ireland for a period of 5 years.

31.	The Authority has set out its views on clauses similar to 8.10 in a series of previous decisions.  In these decisions the Authority indicated that in the case of the sale of a business some restriction on the seller may be necessary in order to ensure the complete transfer of the goodwill of the business.  It stated that, provided the restriction was limited in terms of its duration, geographical coverage and subject matter to that which was necessary for the complete transfer of the goodwill, then the restriction was not in breach of Section 4(1) of the Act.  The Authority's decisions are in line with those of the European Commission in a number of cases under Article 85 of the Treaty of Rome on which Section 4 of the Competition Act is based.  The Authority has stated that it generally regards a restriction of two years as sufficient to ensure the complete transfer of the goodwill of a business.  Having now considered several such agreements the Authority can see no reason for altering this view, and, where only the transfer of goodwill is involved, it will generally not accept a restriction on competition of more than two years.

32.	In its decision in ACT/Kindle, the Authority indicated that it believed a longer restriction on a seller of a business competing with a purchaser was justified where the sale included the transfer of technical know‑how as well as goodwill.  The Authority stated that "It appears unreasonable to afford the purchaser unlimited protection against the use of technical know‑how by the seller.  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.  As pointed out the European Commission has indicated that 'where the transfer of a business also involves the transfer of goodwill and know‑how, a period of approximately five years will normally be acceptable'.  The Authority could find no good reason to depart from EC guidelines on this first occasion on which it considered a non‑competition clause relating to technical 'know‑how'."  The know‑how transferred in this case meets the know‑how requirements specified in ACT/Kindle and detailed in the EC Regulation on know‑how licensing.  The Authority concludes that the five year non‑competition clause is justified.

33.	The effect of clause 8.10 is confined to North America and the EEC.  General Semiconductor Ireland operates on a worldwide basis therefore the geographical restraint of the clause does not, in the opinion of the Authority, exceed what is necessary to secure the complete transfer of the goodwill and know‑how.  The restraints relate to protection devices for use in electronic circuits.  As this is the market in which General Semiconductor Ireland operates, the subject matter of the restraint does not, in the opinion of the Authority, exceed what is necessary to secure the complete transfer of the goodwill and know‑how.  Accordingly, the Authority is satisfied that clause 8.10 does not offend against Section 4(1) of the Act.

34.	Clause 8.11 provides that, having agreed to sell the business of General Semiconductor Ireland, the vendor cannot, before completion, enter into negotiations with or attempt to sell it to another party.  The vendor is also prevented from entering into arrangements which would in any way alter the nature of the business being sold.  The purpose of these provisions was to ensure that completion of the agreement would not be frustrated by specific actions of the vendors.  The provisions were in existence for only a brief period of time and they are no longer in effect, since the contract for sale has been completed.  In the Authority's view such provisions do not prevent, restrict or distort competition, and do not offend against Section 4(1).

35.	Clause 8.12 prevents the vendors from soliciting the employment of former employees for a period of 1 year.  This restriction does not apply where the employees respond to advertisements or to general employment solicitations by independent employment agencies.

The Authority has considered similar clauses in its decision in Woodchester/UDT and Phil Fortune/Budget Travel.  In Woodchester/UDT, the vendors, UDT, were prevented from enticing their former executives away from Woodchester for three years.  The restriction had no effect where the executives approached UDT with a view to employment or if they responded to a public advertisement from their former employers.  The Authority concluded that no breach of Section 4(1) had arisen because "expertise is an integral part of the goodwill of the company being sold and the restriction.... does not have the effect of tying UDT executives to Woodchester Bank".

In Phil Fortune/Budget Travel, the vendors, Budget Travel were prevented from soliciting into employment employees of Budget Travel Schools Abroad Ltd. (BTSA ‑ the sale of which was the subject of the agreement) for a period of four years.  The Authority found that this clause had gone beyond what was necessary to secure the transfer of the goodwill of BTSA because of its duration.  Phil Fortune agreed to accept a lesser period of three years and the Authority concluded that this was acceptable "....given that Ms. Fortune, despite her background in the business, will need some time to establish a reputation for the newly managed entity....".

36.	The notifying parties have submitted that this clause is "necessary to protect the value of the know‑how being transferred in particular the knowledge of employees of General Semiconductor Ireland in relation to the products manufactured at the Macroom plant."  The Authority accepts that this clause is necessary to ensure the complete transfer of the goodwill and know‑how of General Semiconductor Ireland.  It applies for a period of 1 year which is not considered to be excessive.  In addition, the employees affected by the clause may respond to advertisements and to independent employment agencies during this time.  In the circumstances, the Authority considers that clause 8.12 does not offend against Section 4(1) of the Act.

The Decision

37.	GI Corporation, General Semiconductor Industries Inc., Square D Company and General Semiconductor Ireland are undertakings within the meaning of Section 3 of the Competition Act and the arrangements in question give effect to agreements which apply within the State.

38.	The Authority believes that the agreements for the purchase and sale of assets of General Semiconductor Industries Inc and the issued share capital of General Semiconductor Ireland do not offend against Section 4(1) of the Competition Act, 1991.

39.	In the case of a sale of business, some restriction on the seller is essential in order to ensure the complete transfer of the goodwill for which the purchaser has paid.  If these restrictions are limited to that which is necessary to ensure the complete transfer of the goodwill of the business, then, in the Authority's opinion, they do not prevent, restrict or distort competition.  For the same reasons the Authority believes that a restriction on competition may be necessary to ensure the complete transfer of all technical know‑how.  Again such a restriction may not exceed the period necessary to achieve that end.   The Authority believes that the restrictive covenants in this agreement satisfy these requirements and that they do not offend against Section 4(1) of the Competition Act, 1991.

The Certificate

The Competition Authority has issued the following certificate:

The Competition Authority certifies that, in its opinion, on the basis of the facts in its possession, the agreements  between General Semiconductor Industries Inc., Square D Company and GI Corporation (CA/51/92 and CA/52/92), for the purchase and sale of assets of General Semiconductor Industries Inc and the issued share capital of General Semiconductor Ireland, including clauses which restrict the vendors from competing with the purchaser, notified on 18 June 1992 under Section 7, do not offend against Section 4(1) of the Competition Act, 1991.

For the Competition Authority

Patrick Massey
Member
23 October 1992