COMPETITION AUTHORITY

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

Notification No. CA/10/92 ‑ Woodchester Bank Ltd./UDT Bank Ltd.

Decision No. 6

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Competition Authority Decision of 4 August 1992 relating to a proceeding under Section 4 of the Competition Act.

Decision No. 6

Notification No. CA/10/92 ‑ Woodchester Bank Ltd./UDT Bank Ltd.

Introduction

1.	An agreement between Hill Samuel & Co. B.V. and Woodchester Bank Limited for the sale of UDT Bank Limited was notified to the Competition Authority on 20 March, 1992.  While the notified agreement is between Hill Samuel & Co. BV and Woodchester Bank Limited, the notification includes Hill Samuel Bank Limited and Woodchester Investments plc, which are the parents of the main parties.  The notification was in respect of a certificate, or in the event of refusal by the Authority to issue a certificate, a licence.

2.	Notice of intention to take a favourable decision was published in 'The Irish Times' on 3 July 1992.  No submissions were received from interested parties.

The Facts

The Parties

3.	The Woodchester Group was founded in 1977.  It initially concentrated on the business of leasing office equipment.  The Company's development was seen to be limited by capital constraints and so a decision was taken to float Woodchester on the Unlisted Securities Market (USM) in 1982 to raise additional capital.  Woodchester raised further capital when it was floated on the USM in London in 1983.  Woodchester took over 2 Cork based motor finance companies in 1984.  In 1986, it acquired Hamilton Leasing Ireland which was the biggest non‑bank leasing company in Ireland.

4.	In 1987 Woodchester expanded into the banking sector with the acquisition of Bowmaker Bank.  It has continued its policy of expansion into the banking sector with the acquisition of Trinity Bank in 1988 and Mercantile Credit in 1991.  The company has also expanded into the UK market by purchasing a licensed bank and a leasing company.

5.	Woodchester Investments plc (Woodchester) is a public limited company incorporated in Ireland.  It is a holding and investment company with a number of subsidiaries and associated companies operating in Ireland, Woodchester Bank Limited, and the UK.  Its shares are listed on the Dublin and London Stock Exchange.  45% of its issued share capital is owned by Campagnie Rhodanienne de Gestion, a subsidiary of the French bank, Credit Lyonnais.  The other major shareholders are Irish Life Assurance plc., AIB Investment Managers Limited and the Standard Life Assurance Company.  Pre‑tax profits in 1991 were £39.6m, an increase of 34% over the previous year's figure.
6.	Woodchester Bank Limited (Woodchester Bank) is a wholly owned subsidiary of Woodchester of which it is the principal subsidiary operating in Ireland.  It is a licensed bank under the Central Bank Acts 1942‑84.  It was acquired by Woodchester in 1987 when it traded as Bowmaker Bank Limited.

7.	UDT Bank Limited (UDT) was founded in 1937 and is a licensed bank under the Central Bank Acts.  In 1989 UDT acquired from the Bank of Nova Scotia the entire issued share capital of First Southern Bank Limited.  The business of First Southern was similar to UDT except that it focused on small to medium sized companies.  Its business had arisen in large part from personal contacts.

8.	UDT Bank Limited is a wholly owned subsidiary of Hill Samuel & Co. B.V. which is in turn a subsidiary of Hill Samuel Bank Limited, and ultimately of the UK TSB Group plc.  UDT's principal subsidiaries in Ireland are UDT Leaseline Limited which provides lease finance and United Dominions Trust (Ireland) Limited which provides residential mortgages.

9.	Hill Samuel & Co. B.V. is a company incorporated in Holland which is the immediate parent of UDT.  It exists solely as a holding company.  Its ultimate holding company is TSB Group plc., a public limited company incorporated in the UK, whose shares are listed on the London and Dublin Stock Exchange.

10.	Hill Samuel Bank Limited is a limited company incorporated in the UK.  It trades in the UK as a licensed bank.  Its ultimate holding company is TSB Group plc.  Hill Samuel Bank (Ireland) Limited is a licensed bank under the Central Bank Acts engaged in banking business in Ireland.

The Products

11.	The activities of Woodchester Bank are general banking activities including deposits, secured and unsecured lending, foreign exchange transaction, commercial paper, personal loans, sales aid finance, leasing of office equipment and vehicles, instalment credit and farm finance.
12.	The services offered by UDT include the acceptance of deposits, instalment credit to business and to the public, leasing, hire purchase and bank loans.

The Market

13.	Banks may be regarded as multi‑product firms, which accept deposits and make loans.  Admittedly this is something of a simplification as both of these activities may be broken down into a number of distinct markets.  It nevertheless represents a useful starting point for considering the relevant market.  Banks also provide a third type of product namely cash transmission services which are considered later.

14.	Traditionally the Irish financial system was composed of a variety of different types of institution each confined primarily by regulation to a particular range of activities. The main financial groupings comprised the associated and non‑ associated banks, the building societies, the Trustee Savings Banks and other State owned institutions.  The latter group included the Post Office Savings Banks, the ACC and the ICC.  In addition, the life assurance companies operated in some areas of the financial services market.

15.	The associated banks are essentially clearing banks which provide a broad range of retail and wholesale banking services and were traditionally responsible for the money transmission system.  The name derives from a provision of the 1942 Central Bank Act and is a carry over from the banks' status as shareholders in the Currency Commission, the forerunner of the Central Bank.  A series of mergers during the 1960s reduced the number of associated banks from eight to four.  Two of these are Irish owned institutions while the other two, which are much smaller in terms of size, are subsidiaries of overseas banking groups.  Entry to retail banking was effectively inhibited other than by means of a takeover.

16.	In the 1960s there were virtually no controls on the establishment of branches or subsidiaries by foreign banks who wished to concentrate on wholesale banking.  In the decade up to 1975 a number of major European and North American banks opened branches in Ireland.  The success of such institutions in capturing business from the associated banks, caused the latter to establish non‑associated bank subsidiaries of their own.  The initial development of the non‑associated banks was prompted by the failure of the associated banks to respond adequately to the growing demand for new types of product.  The non‑associated banks entered the market to provide the specialised lending and deposit services which the associated banks had failed to supply.

17.	The Spring 1992 Central Bank Bulletin lists 23 non‑ associated banks among its list of reporting institutions in the merchant and commercial banks category with a further 8 in the industrial banks category.  Some banking groups have both industrial and merchant and commercial banking subsidiaries.  Woodchester Investment Bank is included in the latter category while Woodchester Bank and UDT are listed as industrial banks.

18.	Building societies traditionally specialised in the business of raising funds from members and depositors for lending to members largely for house purchase by way of a mortgage.  The societies have been very successful in attracting deposits at the expense of the banks.  The assets of the largest society are believed to exceed the assets within the State of the two smaller associated banks.  Until relatively recently societies were not permitted to engage in unsecured lending and were thus not regarded as competing with banks in the lending market.  There are 8 societies included in the Central Bank's list of reporting institutions.

19.	State owned financial institutions may be divided into three groupings, the Trustee Savings Banks (TSBs), the Post Office Savings Bank and the ACC and ICC.  The latter two institutions were originally established to provide credit in order to encourage the development of particular sectors, namely agriculture and small business.  The Post Office Savings Bank traditionally confined itself to attracting deposits from small savers and lent virtually all of its resources to the Exchequer.
Since the 1960s the TSBs have gradually expanded their branch network.  Over the same period their number has declined as a result of a series of amalgamations.  Recently the two remaining TSB groups combined to form a single entity.  Traditionally TSBs were legally obliged to lend most of their resources to the Exchequer.

20.	Some idea of the relative size of the different types of institutions can be gauged from their respective shares of total assets which is given in Table 1.

	Table 1: Assets of Credit Institutions vis‑a‑vis residents

									   %
	Associated Banks    						40.2
	Non‑Associated Banks					36.5
	Building Societies  						15.9
	Others    						 	  7.4

	The data is for 31 December 1991.  Others in this case includes the ACC, ICC and the TSB.
	Source: Central Bank bulletin, Spring 1992.

21.	The associated banks account for over 40% of the assets of credit institutions with the non‑associated banks having almost 37% and building societies 16%.  The combined assets of Woodchester Bank and UDT represent 2.7% of the total assets of credit institutions.  The Business and Finance listing of the top 1000 Irish companies for 1991 ranked Woodchester Investments as the ninth largest financial institution in terms of assets.  UDT was ranked 36.
22.	The life assurance companies also compete in the market for savings.  Although their products are not close substitutes for deposits with banks or building societies, fiscal incentives have in the past favoured savings with life assurance companies.

23.	Hire purchase companies also compete in the lending market.  Such companies may generally be regarded as engaging in personal lending and in small scale commercial lending.  There are 33 companies listed as hire purchase companies in the Central Bank's list of reporting institutions.

24.	During the past decade many of the distinctions between the different types of institution have begun to break down.  Building societies are now permitted to engage in unsecured lending up to certain limits while the obligation on the TSB to lend the bulk of its resources to the Exchequer has been relaxed, allowing it to compete in the market for personal and corporate loans.  The ACC and ICC have shifted toward providing a broader range of banking services to a greater number of customers.  The associated banks have become far more active in the home mortgage market.

25.	The development of Woodchester and UDT is described in paras 3‑8 above.  The parties have indicated that the market in which Woodchester Bank and UDT compete is the market for banking services within the State.  The principal services provided by them include deposits, personal and commercial loans, lease and hire purchase finance.

26.	As already pointed out banks may generally be described as being in the business of accepting deposits and making loans.  In reality the market is somewhat more differentiated than this, although as para 24 above indicated, these distinctions are becoming less important over time.

27.	Woodchester Bank has a network of ten branches throughout the country, while UDT has a small branch network located principally in the Munster region.  Thus on the deposit side both institutions effectively operate in the market for wholesale rather than retail deposits.  Wholesale deposits include commercial and personal deposits which must generally exceed a certain amount and be placed on deposit for a specified period of time.  Retail deposits in contrast involve no minimum amount and may be withdrawn virtually on demand.  Both associated and non‑associated banks have traditionally competed in the wholesale deposit market.  More recently state institutions such as the ACC and ICC have entered this market along with the building societies.  Societies offer higher interest rates for deposits above a certain size in an attempt to attract funds of this type and have begun to pay higher rates on funds deposited for fixed periods.

28.	Both Woodchester Bank and UDT offer a range of lending products including personal and commercial loans, lease and hire purchase finance, personal and commercial mortgages, and term loans.  All licensed banks compete in the market for commercial loans.  The easing of restrictions on building societies' permitted activities has allowed them to enter this market also.  In addition larger companies have always had the option of borrowing overseas.  There has also been a growing tendency for large companies to lend directly to other large companies so that in the market for large commercial loans Irish based banks face competition from non‑banks and foreign based institutions.

29.	The personal lending market was traditionally distorted by quantitative credit guidelines and other controls.  These led both to credit rationing and disintermediation.  The latter term
describes the process by which regulations divert business from regulated institutions to less regulated or unregulated competitors.  Credit guidelines have not been applied since the mid 1980s.  Together with the removal of restrictions on unsecured lending by the building societies and the easing of the obligation on the TSBs to lend most of their resources to the Exchequer, this has increased competition in the personal lending market.

30.	Data on total lending and deposits of credit institutions is included in the Central Bank's quarterly bulletins.  The distribution of non government deposits and lending by the different types of institution is given in Table 2.

Table 2: Private Sector Loans and Deposits by Credit Institution
	
				  %
							    	Deposits     Loans
	Associated Banks					   43.2           35.5
	Non‑Associated Banks			 	   22.1           32.2
	Building Societies					   25.9           20.7
	Hire Purchase Companies			                 ‑                3.6
	Other						                 8.8            8.0
	Total						             100.0        100.0

	Woodchester						     2.0            2.2
	UDT							     1.8            1.1
	Woodchester & UDT				                 3.8            3.3

	Data relate to 31.12.1991
	Others include the TSB, ACC and ICC.
	Woodchester's share of the deposit market is based on the figure for deposits in the consolidated balance sheet of Woodchester Investments plc.

	Source: Central Bank bulletin Spring 1992 and Woodchester Investments Annual Report, 1991.

31.	The four associated banks accounted for 43% of non Government deposits and 36% of non Government lending in 1991.  The non‑associated banks accounted for 22% of deposits but their share of lending was almost as large as that of the associated banks at 32%.  Building societies accounted for 26% of deposits and 21% of lending.  Woodchester accounted for 2.0% of non‑Government deposits with credit institutions in 1991 while UDT accounted for a further 1.8%.  On this basis the enlarged Woodchester Group would have 3.8% of the total non‑Government deposit market.  In para. 27 it was indicated that Woodchester and UDT operated largely in the market for wholesale deposits although UDT does have a branch network in the Munster region which may be regarded as operating to some extent in the retail deposit market.  It is not possible to obtain separate information on the value of wholesale deposits.  Nevertheless it would appear that its share of the market is relatively small.

32.	The table does not include deposits with the Post Office Savings Bank.  Clearly the POSB is in competition with other financial institutions in seeking to attract deposits.  At the same time some POSB savings schemes involve placing funds on deposit for a lengthy period of time and they cannot, therefore, be regarded as close substitutes for deposits with a bank or a building society.  If deposits with the POSB were included then Woodchester's share of the deposit market would be reduced.

33.	Woodchester Bank accounted for 2.2% of total loans and advances in 1991 while UDT had a market share of just over 1%.  This would give the enlarged group a market share of just over 3.3%.  The lending market is somewhat more fragmented than the deposit market, however, with some institutions specialising mainly in particular areas of business.

34.	Woodchester Investments plc originally developed as a leasing company.  Essentially under a leasing arrangement the finance company rents the asset in question to the lessee while retaining ownership of that asset.  Leasing is frequently regarded as an alternative to instalment credit or hire purchase although it differs from such finance in a number of respects.  Traditionally the bulk of the leasing business of Woodchester Investments plc involved office equipment and motor vehicles with most of the customers being commercial organisations.  In recent years there has been a growing trend toward motor vehicle leasing by private individuals and it has come to be regarded as an alternative means of `buying' a car.

35.	Historically the leasing company, as the owner, could avail of capital allowances on the asset, thereby reducing its tax liabilities.  Leasing arrangements can appear attractive.  They may appear lower than repayments on a conventional loan but it has to be kept in mind that they are in effect only rental payments so that it is difficult to make comparisons between the two.  The cost may also be lower than loan repayments because, as the leasing company retains ownership of the asset, the risk of default is considerably reduced.

36.	There appear to be some links between leasing companies and motor car dealers.  In some instances for example, leasing companies may finance dealers' stocks.  Such arrangements are not a part of the present notified agreement.   The Authority regards any such arrangements which may exist as constituting entirely separate agreements which have not been notified.  The present assessment, therefore, offers no view as to whether or not such arrangements offend against Section 4(1) of the Competition Act.

37.	In sum, banks operate in the markets for deposits and lending.  Both these markets may be further broken down into different segments.  On the deposits side both Woodchester and UDT concentrated on the wholesale deposit market although UDT was also active in the retail deposit market.  On the lending side both institutions offered a wide range of personal and commercial lending services.  Both operated in the leasing business while UDT was also engaged in the residential mortgage market.

The Agreement

38.	The agreement for the sale and purchase of UDT was made on 10 March, 1992.  Clause 3 of the agreement provides that:
	'Subject to the terms and conditions hereof and for the consideration hereinafter appearing the Vendor as beneficial owner hereby agrees to sell or procure the sale and the Purchaser hereby agrees to purchase all the Shares with effect on and from the Completion Date free from all options, charges, liens or encumbrances and with all rights now or hereinafter attaching thereto including rights to all dividends and distributions declared, made or paid on the Shares or applicable to or deriving from such rights thereafter.'

39.	The agreement also includes several non‑competition provisions.  Clause 9.01 states that:
	'The Vendor hereby undertakes and covenants to the Purchaser:

9.01.1	that it will not and will procure that all the Related Companies will not within the Republic of Ireland during the period of one year after Completion carry on or be involved directly or indirectly or be engaged involved or interested whether as principal, shareholder (including as a shareholder in a company which is itself a shareholder in a company engaged, involved or interested in the undermentioned businesses), partner, employee, agent, or otherwise in the business of Instalment Credit or Motor Vehicle Leasing except (i) as a shareholder in a public company whose shares are quoted or dealt in any recognised Stock Exchange and holding not more than 5% of the share capital of such public company or (ii) in respect of shareholdings held by the Related Companies which shareholdings are not beneficially owned by or held in trust for any of the Related Companies;

9.01.2	that it will not and will procure that all the Related Companies will not within the Republic of Ireland during the period of three years after Completion either on their own account or on behalf of any other person firm or company knowingly solicit orders in connection with Instalment Credit or Motor Vehicle Leasing from any person firm or company who has been a customer of the Company during the three years immediately prior to Completion;

9.01.3	that it will not and will procure that all the Related Companies will not within the period of three years after Completion solicit, endeavour to entice away, employ,offer to employ or engage any executive or employee other than clerical or secretarial employees of the Company at the date hereof provided that this Clause 9.01.3 shall not be construed so as to prevent or restrict the Related Companies from employing any such person who approaches it or initiates a request to it for employment without direct solicitation on its part or so as to prevent or restrict it from soliciting or initiating an offer of employment to any such person whose employment with the Company has been terminated or whose employment will terminate on the expiration of any notice period in relation to which notice of termination had been served at such time or from employing any person who applies to a Related Company for employment in response to a public advertisement offering employment within such Related Company;

9.01.4	that it will not and will procure that all Related Companies will not within the period of three years after Completion carry on or be concerned engaged or interested as aforesaid in any business in the Republic of Ireland under the name or style of "UDT", "United Dominions Trust", "First Southern Bank" or "Endeavour Securities" or any variation, derivative or abbreviation thereof or any misleadingly similar name in any corporate name, sign, logo, emblem, letterhead, advertisement or promotional material.'

Views of the Parties

40.	The notifying parties have stated that the acquisition is not reviewable under the Competition Act, 1991, because it has already been notified and approved under the Mergers Act.  They argue that an acquisition reviewable under the latter Act is not reviewable under the Competition Act.  They also state that if such transactions were reviewable under the Competition Act this would introduce serious uncertainty into commercial transactions.  The acquisition has been notified to and approved by the Minister for Industry and Commerce and the Central Bank under the Mergers and Central Bank Acts respectively.

41.	They also state that "where the acquisition is of a one hundred percent interest in another company and this results in a concentration, then, subject to EC Council Regulation 4069/89, the acquisition may only be reviewed under Article 86 of the Treaty....  By analogy, as Sections 4 and 5 of the Competition Act are essentially identical to Articles 85 and 86 of the Treaty, an acquisition of a one hundred percent 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 Woodchester of the entire issued share capital of UDT 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."

42.	The notifying parties have stated that "The restrictions in Section 9 of the agreement are fair and reasonable, and do not have either as their object or effect the prevention, restriction or distortion of competition in the markets to which they relate, so that the restrictions do not infringe Section 4(1) of the Competition Act, 1991."  They referred to EC case law in support of their arguments.

Assessment

(a)	Section 4(1)

43.	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

44.	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.'  Woodchester Bank is a body corporate engaged for gain in the provision of banking services and is therefore an undertaking within the meaning of the Act.  Hill Samuel & Co. BV is a holding company.  It is a body corporate which is a subsidiary of Hill Samuel Bank.  The Authority decided in AGF/Irish Life Holdings that a holding company was an undertaking within the meaning of Section 3(1) of the Act, as it was engaged for gain in the provision of services through its subsidiaries.  Hill Samuel & Co. BV is an undertaking.

(c)	The Agreement

45.	The notified arrangements concern an agreement whereby Woodchester Bank has acquired from Hill Samuel the shares of UDT Bank Ltd.  The agreement also includes a number of `non‑ competition' provisions.  The arrangements constitute an agreement between undertakings within the State.

(d)	Applicability of Section 4(1) to an Acquisition
Interpretation of the Act

46.	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 for reasons already given in paras 40‑41.

47.	The present notification raises some complex questions regarding the treatment of mergers under the Competition Act and the relationship between that Act and the Mergers Act on which the Authority is required to give its views.

48.	The FTC report on Competition Law specifically addressed the mergers issue in recommending a law based on Articles 85 and 86 of the Treaty of Rome and stated that:
	`In addition a merger or a takeover is often an agreement which may have the effect of restricting or distorting competition.  Such mergers would be prohibited under the provisions of Article 85.  Other mergers might be prohibited under Article 86.  If separate merger and take‑over provisions are to continue, there must be a specific exclusion for mergers and take‑overs which would otherwise be caught by Articles 85 or 86.'

49.	It is clear to the Authority that a merger or takeover may, on occasion, prevent, restrict or distort competition.  Indeed this is one of the reasons why there are legislative controls in relation to mergers.  The parties have argued for a number of reasons that it cannot have been the legislature's intention that mergers, which had been notified to, and approved by, the Minister, would be reviewable under the rules of competition as set out in the Competition Act.  The Authority considers that there is some merit to this argument.  The important point, however, is that Section 4(1) specifically refers to `all agreements'.  There are no exceptions provided for in the Section.  In arguing that mergers are not reviewable under Section 4 of the Competition Act the parties are implying that the Section be read as 'all agreements except mergers subject to review under the Mergers Acts'.  In the Authority's opinion the legislature's intention is clear from the form of words chosen.  Having specified `all agreements', it seems reasonable to conclude that the legislature would have specified exceptions if that had been its intention.  It is relevant in this context that in a recent Supreme Court decision which ruled that the VHI was an undertaking within the meaning of Section 3(1) of the Competition Act, Finlay CJ stated that: 'If the legislature had intended that any undertaking which, though engaged in the supply of goods or services, was not so engaged with a view to making profits, it seems to me that it would unambiguously have said so, and the word we would see would be "profit" instead of "gain".' It is relevant in this regard that the Competition Act is a significant new departure in Irish law which was designed to introduce a blanket prohibition on all anti‑competitive agreements.

50.	Mergers frequently include a number of ancillary clauses which may themselves involve some restriction on competition.  If notifiable mergers are not reviewable under the Competition Act, then a number of practices which would be prohibited in other circumstances under Section 4(1) would escape that prohibition if they were part of a merger agreement.  The Authority does not believe that this was the legislature's intention.

51.	A further complication arises by virtue of the fact that mergers involving firms below a certain size are not subject to review under the Mergers Act.  If the parties argument were accepted it could mean that mergers above the thresholds set in the Mergers Act were outside the Competition Act while those below the threshold were subject to it.  This in turn could mean that, where a merger below the threshold prevented, restricted or distorted competition, aggrieved parties would have a right of relief under Section 6 of the Competition Act but no such relief would exist in the case of a merger which had been notified to, and approved by, the Minister.  This would appear highly inconsistent as the latter case would appear likely to give rise to more serious restrictions of competition than the former.
52.	The Minister must take account of the effects on competition of any notified merger before approving it.  While this is so, the Minister might approve a merger which had adverse effects on competition because he believed that it was in the common good.  While Section 4(2) of the Competition Act allows the Authority to grant a licence to an anti‑competitive agreement exempting it from the prohibition contained in Section 4(1), strict criteria must be satisfied before such a licence can be granted.  Section 4(2) does not allow a licence to be granted to an agreement on the grounds that it is in the interests of the common good.  Thus, if the parties' argument was accepted, and Section 4 was not to apply in the case of mergers notifiable under the Mergers Act, this would create a further inconsistency in the treatment of large and small mergers.  The Authority believes that such an inconsistency was not intended.

53.	The parties have argued that, if mergers are reviewable under Sections 4 and 5 of the Competition Act, this would create considerable uncertainty for business.  The Authority accepts that this may be the case.  It is frequently the case that the enactment of new legislation results in uncertainty for business.  Such uncertainty tends only to be eliminated over time as a result of court decisions which clarify the meaning of legislation.  It has been claimed in some quarters that the entire Competition Act has created considerable uncertainty for business as people do not know exactly what sort of activities are prohibited by the legislation.  The Authority cannot accept the view that it was not the legislature's intention that mergers would be subject to the Rules of Competition simply because this would create uncertainty.

54.	It is relevant to the present case that the notified arrangements involve a merger between two licensed banks.  Section 1(3)(a) of the Mergers Act states that:
	'For the purposes of this Act, but subject to Section 3, a merger or take‑over shall be taken to exist when two or more enterprises, at least one of which carries on business in the State, come under common control.'

55.	Section 1(1) defines an enterprise as 'a person or partnership engaged for profit in the supply or distribution of goods or the provision of services'.  A service is deemed not to include 'any service provided by the holder of a licence under Section 9 of the Central Bank Act 1971'.

56.	Thus a merger between two licensed banks, not being a merger between enterprises, appears not to be notifiable under the Mergers Act.  To the extent, however, that the merger is between holding companies which are the parents of licensed banks it would appear, to come within the scope of the Mergers Act.  If the parties arguments are accepted, however, a merger involving two licensed banks would presumably come within the scope of the Competition Act by virtue of the fact that it is not an agreement to which the Mergers Act applies.  This would appear to create a further anomaly which the Authority does not believe was the legislature's intention.

EC Precedents

57.	The parties have further argued that, by analogy with EC law, the acquisition does not come within the scope of Section 4(1).  In this they have sought to rely on the decision of the European Court of Justice in the Philip Morris case.  The parties have claimed that the Court's decision in this case implies that where an undertaking acquires 100% of the shares in another undertaking, Article 85 of the Treaty of Rome and hence Section 4(1) of the Competition Act do not apply.

58.	Prior to the Philip Morris case it was believed that Article 85 did not apply to mergers.  In the Philip Morris case, the Court decided that the acquisition by one company of an equity interest in a competitor might fall within Article 85(1) where the acquirer obtained legal or de facto control of the commercial conduct of the other company.  It is argued by the parties, however, that this only applies to an acquisition of less than 100% of the share capital in the company.

59.	In its decision the Court stated that: 'The main issue in these cases is whether and in what circumstances the acquisition of a minority shareholding in a competing company may constitute an infringement of Articles 85 and 86 of the Treaty.'  In other words the Court specifically stated that it was only considering the issue of the acquisition of a minority shareholding.  It is difficult to see therefore how the Court's decision can be interpreted as implying that a 100% acquisition is not caught by Article 85(1) since the Court did not address this issue.  The Court went on to state that:
	'Since the acquisition of shares in Rothmans International was the subject of agreements by companies which have remained independent after the entry into force of the agreements, the issue must be examined first of all from the point of view of Article 85.'  (Point 31)

60.	It is argued by the parties that the key issue is whether the parties to the agreement can be said to have remained independent after it has come into force and that in the case of an acquisition of 100% of the shares there are no longer two independent undertakings.  In the case of the present agreement both Hill Samuel & Co. B.V. and Woodchester Bank remain as independent undertakings.

61.	The Court then went on to assess whether or not an acquisition of shares infringed Article 85(1).
	'Although the acquisition by one company of an equity interest in a competitor does not in itself constitute conduct restricting competition, such an acquisition may nevertheless serve as an instrument for influencing the commercial conduct of the companies in question so as to restrict or distort competition on the market on which they carry on business.'  (Point 37)

62.	The judgment (points 38 and 39) implies that where the acquisition gave the purchaser legal or de facto control, or indeed where it created the possibility of it doing so at a later stage, the agreement would be in breach of 85(1).  This view is supported by the fact that the Court stated that in the market circumstances which prevailed in this instance:
	'any attempted take‑over and any agreement likely to promote commercial cooperation between two or more of those dominant companies is liable to result in a restriction of competition.'  (Point 44)

63.	It appears that an agreement to acquire shares in a competitor which would give the purchaser legal or de facto control would be in breach of Article 85(1).  The Authority does not believe that the decision can be construed in such a way as to imply that the acquisition of a shareholding in a competitor which gave the purchaser legal or de facto control could only be in breach of Article 85(1) if the acquisition involved less than 100% of the shares.

64.	Commenting on the decision the EC Commission stated that:
	'As the share purchase had been the subject of agreements between undertakings which remained independent after the agreement had taken effect, the Court looked at the question primarily from the angle of Article 85.... Not only the immediate consequences, but also the potential effects of the agreement had to be considered, including the possibility that the agreement was part of a long‑term plan.'

65.	Significantly the EC Commission went on to state that:
	'The judgment has far‑reaching implications.  It underlines the need for an economic approach in interpreting and applying Articles 85 and 86.  Conduct cannot cease to be anti‑competitive merely by reference to the legal form in which it is presented.  Even purchases of blocks of shares in a company may in particular circumstances infringe the competition rules.

	The judgment also makes important statements about the scope of Articles 85 and 86.  Agreements on the acquisition of shareholdings in competitors fall within Article 85 where they influence the market behaviour of the firms concerned so that competition between them is restricted or distorted.  For this to occur it is not necessary for the agreement specifically to provide for or to facilitate commercial cooperation between the competitors.  It is sufficient if the result of the acquisition of the shareholding is to give one company legal or de facto control over the commercial policy of the other company.  It does not matter whether the holding necessary for control is acquired in one go or successively in a series of operations.  These rulings by the Court mean that contrary to the hitherto accepted view, certain transactions involving the acquisition by an undertaking of shares in a competitor may be caught by Article 85.'

66.	Subsequent to the Philip Morris decision the EC Commission in Carnaud/Sofreb examined the acquisition of a 66.6% shareholding in a company under Article 85 following a complaint by a minority shareholder.  Carnaud then offered to buy the remaining shares and the complaint was withdrawn.  The Commission saw no objection to a full takeover of Sofreb as the acquisition only marginally increased Carnaud's share of the relevant market.  In this case, Article 85 was applied to the acquisition of a majority shareholding and there is no reference to Article 85 ceasing to apply in the event of a 100% acquisition.

67.	In the case of a subsequent notification the EC Commission issued a comfort letter in respect of agreements notified by the Compagnie Internationale des Wagons Lits et du Tourisme and Volkswagen AG concerning the merger of their respective car rental subsidiaries, Europcar and InterRent, and providing for the organisation of a joint network of affiliated companies.  The Commission stated that the agreements did not infringe Article 85(1).  Since the two undertakings were not competitors the arrangement did not restrict competition.  Two clauses had been regarded as unacceptable but these had been removed.  This decision again indicates that the EC Commission does not regard mergers as automatically outside the scope of Article 85 as the parties have sought to argue.

68.	If the notifying parties' arguments were correct, then undertakings could, by exchanging ownership of subsidiary companies, engage in practices which would otherwise be prohibited under Section 4(1).  The Authority does not consider that such an interpretation is correct.  It agrees with the EC Commission view that it is the economic effect rather than the legal form of agreement which must be considered in deciding whether or not arrangements offend against Section 4(1).

69.	Further clarification is given by the European Commission's decision in PPG/Mecaniver.  In this case the EC Commission was concerned with an agreement between Mecaniver, a Belgian holding company, which was 78% owned by BSN‑Gervais Danone and PPG Industries Inc.  The latter firm was the largest glass producer in the US.  The decision involved a share purchase agreement whereby Mecaniver sold 67% of the shares in a wholly owned subsidiary to PPG.  The agreement also provided for PPG to subscribe to an increase in the share capital of the company in question thereby increasing its shareholding to 81%.  The agreement also gave PPG an option of purchasing Mecaniver's remaining 19% holding in the company during the period from two to four and a half years after the closing date and, if PPG did not exercise the option, it gave Mecaniver the option in the six months following the expiry of PPG's option of obliging PPG to purchase its remaining shareholding.

70.	The Commission made the following decision in respect of the share purchase agreements:
	'The share purchase agreement and the ancillary agreements of 17 December 1981 between the companies of the BSN‑Mecaniver group and PPG are agreements between undertakings.'

71.	It went on to state that, in the absence of a risk of co‑ordination of competitive behaviour:
	`The sale constituting the mere transfer of a business [did] not in itself and in the absence of any indications to the contrary give rise to any restriction of competition and as such did not fall within the scope of Article 85(1).'

72.	The clear implication is that the sale of a business which gave rise to any restriction of competition would come within the scope of 85(1).  By analogy, therefore, such an agreement would offend against Section 4(1) of the Competition Act which is based on Article 85 of the Treaty of Rome.  The Commission cleared the transaction in that particular case since it also could not be said to have strengthened a dominant position such that it could be regarded as an abuse under 86.

73.	The parties have argued that EC Regulation 4064/89 (the "Merger" regulation) implies that an acquisition of a one hundred percent interest in another company results in a concentration which may only be reviewed under Article 86.  By analogy therefore it is only subject to review under Section 5 of the Competition Act.  Article 3 of the EC Merger Regulation states that a concentration shall be deemed to arise where:
'(a)	two or more previously independent undertakings merge, or
 (b)	one or more persons already controlling at least one undertaking or,
	one or more undertakings
	acquire, whether by purchase of securities or assets, by contract or by any other means direct or indirect control of the whole or parts of one or more other undertakings.'
The regulation does not require that an undertaking acquire a one hundred percent shareholding in another undertaking for it to constitute a concentration.  It is relevant also that the EC Commission has explicitly stated that it does not intend to apply Articles 85 and 86 of the Treaty to mergers covered by the merger control regulation other than by means of this regulation.  The Commission has also stated that it does not intend to take action in respect of mergers below certain limits which are below the thresholds in the merger regulation, on the grounds that below such levels a merger would not normally significantly affect trade between Member States.  Third parties are not, however, thereby precluded from taking a private action against a merger under Articles 85 or 86 in the national courts.

The View of the Authority

74.	The Authority recognises that, if mergers are subject to Section 4 of the Competition Act, this will create considerable uncertainty for business.  It also recognises that the prospect of having to notify a merger to two separate bodies, the Authority and the Minister, can impose a significant burden on the parties to a proposed merger.  The Authority, however, has to operate on the basis of its interpretation of the Act.  Even if the Authority considered that mergers are not subject to the Act, this would not prevent a challenge by a third party in the High Court in respect of Section 4 or Section 5.  In this instance the parties have notified an acquisition to the Authority and requested a certificate for it.  In the Authority's view such arrangements do not enjoy any automatic exemption from the provisions of Section 4(1).

75.	The present agreement is between Woodchester Bank and Hill Samuel & Co. B.V., both of which will continue as independent undertakings.  There is, therefore and by analogy with PPG/Mecaniver, an agreement between undertakings.  The result of the agreement is that two previously competing financial institutions, Woodchester Bank and UDT Bank, have become a single entity.  The question is whether such an arrangement may be viewed as preventing, restricting or distorting competition in the market.  The Authority has indicated in previous decisions that the prohibition in Section 4(1) is not to be interpreted literally.  In its decision on Nallen/O'Toole it stated that:
	`If Section 4(1) were to be interpreted literally then virtually every form of business agreement could be argued to prevent, restrict or distort competition because any agreement effectively prohibits others from concluding the very same contract with the original parties.'

76.	As pointed out earlier a merger may, on occasion, prevent, restrict or distort competition.  The primary objective of a merger may in fact be the elimination of a competitor and a lessening of competition.  Having concluded that a merger may come within the scope of Section 4 of the Competition Act, the Authority believes that it is desirable that it should set out its views on when a merger might be found to offend against Section 4(1) of the Act or not.

77.	A merger will frequently result in a reduction in the number of competitors in a market.  The Authority does not believe that this necessarily restricts competition.  If Section 4(1) were in fact to be interpreted in this way, it would amount to a per se prohibition of mergers.  The Authority does not believe that this was the legislature's intention.  It has already indicated in Nallen/O'Toole that an agreement which excluded an undertaking from a particular market for a period of time would not necessarily amount to a restriction of competition.  That decision indicated that the economic circumstances prevailing in the market in question had to be taken into account before deciding whether or not the agreement was anti‑competitive.

78.	The Authority believes, therefore, that, before a merger can be found to offend against Section 4(1) of the Competition Act, it must be shown that it would, or would be likely to, result in an actual diminution of competition in the market concerned.  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 are not, of themselves, sufficient to establish that such a diminution of competition has occurred or would be likely to occur.  A merger would, in the Authority's opinion, offend against 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.  Other factors, such as the ease with which new competitors could enter the market, would also be relevant in assessing the merger in the Authority's view.

Woodchester Bank and UDT

79.	Woodchester Bank and UDT both competed in the overall market for banking services within the State whilst specialising in particular segments of the market.  The impact of the acquisition on a number of separate markets must, therefore, be taken into account in order to establish whether it offends against Section 4(1) of the Competition Act.

80.	Data on total lending and deposits of credit institutions were given in Table 2.  This showed that the combined share of Woodchester Bank and UDT Bank in both markets was relatively small.  The Authority believes that there is considerable competition from a large number of other financial institutions in the wholesale deposit market which has been the main area of the deposit market in which Woodchester Bank has tended to operate.  It has also been indicated to the Authority that, having acquired UDT's retail branch network, Woodchester Bank intends to expand its activities in this area.  The entry of a stronger group into the retail banking market would actually increase competition in that sector so that the agreement is in some respects pro‑competitive.

81.	The lending market is somewhat more fragmented than the deposit market, however, with some institutions specialising mainly in particular areas of business.  Nevertheless while these may all represent separate markets to some extent, it seems that in areas such as commercial lending there is a large number of competitors in the market and that the acquisition by Woodchester Bank of UDT will not therefore prevent, restrict or distort competition.

82.	UDT is involved in the residential mortgage business to some degree.  Here again there are a large number of competitors in the market.  In recent years the associated banks have captured a significant share of the market from the building societies which had dominated the market.  The growing diversity in the range of mortgage products now available to consumers is further evidence of the extent to which there is competition in this market.  Here again the Authority does not believe that this acquisition will reduce competition in the relevant market.  This view is reinforced by the fact that the vendor may, under the terms of the agreement, continue to operate in the market for all banking services other than motor vehicle leasing and instalment credit.

83.	Following the acquisition Woodchester's share of the deposit and lending markets is quite small.  While it has increased its market share as a result of such acquisitions, the Authority does not believe that the increase in market share could be regarded as preventing, restricting or distorting competition.  There are still a large number of competing institutions active in all areas of the lending and deposit markets.  The Authority does not believe that the acquisition has resulted, or would be likely to result, in a diminution of competition for various types of financial services.  It is also relevant that, while regulations restricted the entry of new institutions in many areas of financial services in the past, the advent of the single market at the end of 1992 will allow institutions from other EC Member States to provide financial services in Ireland thereby opening up the market to a large number of new entrants.

84.	As pointed out, some banks also operate in the market for money transmission services.  Traditionally this market has been confined to the big four associated banks because this business required a large retail branch network.  It was also regarded as a loss making activity which the associated banks cross‑ subsidised from profits on their other activities.  For this reason it was not an attractive proposition for other financial institutions.  In recent years technological developments have changed this picture.  The introduction of Automated Teller Machines (ATM's) and other developments has made it possible to provide a wide range of money transmission services without the need for an extensive branch network.  As a result, building societies, for example, now provide certain money transmission services.  Neither Woodchester Bank nor UDT were really active in this market so the arrangements do not have any adverse implications for competition in this area.  Indeed to the extent that the enlarged group might enter into retail banking this would make it a potential competitor in this sector so that the effect on competition might be positive.

85.	The one segment of the market where the Authority had some concerns was in respect of motor vehicle leasing.  This was due to the fact that Woodchester was reported to have held a significant share of this market and the acquisition of UDT was claimed to have increased this significantly.  In particular a report in Business and Finance claimed that the acquisition would increase Woodchester's share of the Irish car leasing market to over 40%.  An acquisition which increased market share to this level might prevent, restrict or distort competition.

86.	The total of outstanding leasing finance from credit institutions and hire purchase companies as at 31 December 1991 amounted to £912m.  Of this total £519m or 57% was accounted for by hire purchase companies.  Central Bank figures show a rapid increase in leasing by hire purchase companies from a total of £194m in December 1989.  Over the same period there has been some decline in leasing by other credit institutions.  A further £310m was outstanding in instalment credit and hire purchase finance, of which hire purchase companies accounted for £135m or 43%.  As pointed out leasing is frequently regarded as an alternative to the latter type of finance.  These figures indicate that there are a large number of firms competing in the overall leasing market.

87.	Turning to the specific area of motor vehicle leasing the essential issue in this regard is whether or not this can be regarded as a distinct market.  Certainly leasing differs from other forms of finance for car purchase.  Indeed, as pointed out, leasing essentially amounts to renting a car although it appears that consumers may not always appreciate this.  The issue is whether there are other products which may be regarded as sufficiently close substitutes for leasing as a form of car purchase finance.  Banks, hire purchase companies and other leasing companies all provide alternative means of financing the purchase of a new car.  The number of institutions which provide credit for motor vehicle purchase has increased significantly with the entry of the building societies to this market.

88.	New cars leased by Woodchester and UDT as a proportion of new private car registrations increased up to 1989 although they account for a relatively small proportion of the total.  Since then their share has levelled off.  Indeed focusing on new private car registrations may, if anything, overstate the market share held by Woodchester and UDT as some of their leased vehicles may in fact be registered as commercial vehicles.  The relatively low proportion of new car registrations accounted for by Woodchester and UDT combined tends to support the view that there are a wide number of alternatives means of financing the purchase of a new car available to consumers and that these are substitutes for leasing.

89.	It may be argued that certain classes of consumer may not be able to avail of other forms of finance and may have little option other than leasing if they wish to obtain a new car.  There are a number of firms other than Woodchester in the leasing business.  In addition such consumers may be more likely to purchase a second‑hand as opposed to a new car.  The Authority believes that the option of buying a second hand car represents a substitute to leasing for individuals who might have difficulty obtaining the necessary credit to buy a new car.
90.	The Authority believes therefore that there are a number of substitutes to leasing available and that motor vehicle leasing should not be regarded as a separate market.  In sum the Authority does not believe that the acquisition by Woodchester Bank of UDT could be regarded as preventing, restricting or distorting competition within the State or in any part of the State and does not therefore offend against section 4(1).

(e)	Restraints on Trade

91.	Section 9 of the agreement sets out a number of restrictions on the conduct by the vendors of their business in Ireland.

92.	Clause 9.01.1 prevents the vendors from engaging in the instalment credit or motor vehicle leasing business in Ireland for a period of one year.  Clause 9.01.2 prevents the vendors soliciting orders from ex‑customers in connection with the instalment credit or motor vehicle leasing business in Ireland for a period of three years.  Clause 9.01.3 prevents the vendors from enticing their former executives away from Woodchester Bank for a period of three years.  This restriction does not apply where the executive approaches the vendors with a view to employment or where the executive applies to the vendors for employment in response to a public advertisement.  Clause 9.01.4 prevents the vendors using trade names, for example "UDT", for a period of three years.

93.	The Authority has set out its views on clauses similar to 9.01 in previous decisions such as Nallen/O'Toole.  In this decision the Authority indicated that, in the case of the sale of a business, some restriction on the seller was generally 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.  In this respect the Authority's decision was in line with that taken by 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.

94.	In these previous decisions, non‑competition clauses of three years were accepted by the Authority.  Clause 9.01.1 involves a restriction for a period of one year.  This restriction is limited to the Irish market and it relates solely to the instalment credit and motor leasing business.  It is evident that this clause is not in breach of Section 4(1) of the Act having regard to the Authority's earlier decisions.

95.	A restriction on the vendors soliciting orders from their ex‑customers in order to ensure the proper transfer of goodwill in the case of a sale of business is acceptable in principle.  Clause 9.01.2 is limited to the instalment credit and motor leasing business in Ireland and its duration is for a period of three years.

96.	The Authority has indicated in its decision on Nallen/O'Toole that it would normally regard a time‑limit of two years as being adequate for the transfer of goodwill.  It went on to state, however, that it would accept a restriction of longer duration, where it could be shown that this was necessary to secure the complete transfer of goodwill.

97.	Clause 9.01.2 involves a restriction for three years.  The market sectors in which the restriction applies are those in which UDT and Woodchester Bank have traditionally competed and in which UDT has built up substantial goodwill.  In addition, the restriction on solicitation reflects the fact that much of the custom of UDT has been acquired by personal contacts.  In these circumstances the period specified in this clause is no more than is required to secure the complete transfer of the goodwill.  In addition, the scope and geographical coverage of this clause are not in breach of Section 4(1) of the Act.

98.	There is little doubt that ex‑UDT executives have become familiar with the various facets of their business over a number of years and will be efficient in dealing with them.  Accordingly, it is the Authority's view that the expertise of the UDT executives represents an important part of the goodwill of the company and that the purchasers are entitled to seek to protect this element of the goodwill.  The restriction in clause 9.01.3 is for a period of three years.  Under the terms of the restriction, ex‑UDT executives may approach their former employers with a view to obtaining employment.  In addition, these executives may respond to public notices from their former employers who advertise positions in their organisations.  The restriction in clause 9.01.3 does not have the effect of tying UDT executives to Woodchester Bank, and the Authority is satisfied that no breach of Section 4(1) of the Act arises.

99.	The restriction in clause 9.01.4 relates to the trade names such as "UDT" used by the vendors prior to the agreement.  It prevents the use of such names in Ireland by the vendors for a period of three years.  It is necessary to prevent the vendors passing themselves off to their customers or suppliers as representing UDT or some other organisations previously owned by the vendors, in the event that they should decide to compete against Woodchester.  This restraint does not involve any restriction on competition within the State or any part of the State and does not offend against Section 4(1).

The Decision

100.	Woodchester Bank and Hill Samuel and Co. B.V., are undertakings within the meaning of Section 3 of the Competition Act and the arrangements in question constitute an agreement which applies in the State.

101.	The Authority believes that the agreement for the purchase and sale of UDT Bank Limited does not offend against Section 4(1) of the Competition Act, 1991.

102.	In the case of a sale of business, some restriction on the seller is generally 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.  The restrictions in clause 9.01 of the notified agreement satisfy these criteria.

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 agreement between Hill Samuel & Co. B.V. and Woodchester Bank Limited, for the purchase and sale of UDT Bank Limited, notified on 20 March, 1992, under Section 7, does not offend against Section 4(1) of the Competition Act, 1991.

For the Competition Authority

Patrick Massey
Member
4 August 1992