Competition Authority Decision no. 406 of 22 June 1995, relating to a proceeding under Section 4 of the Competition Act, 1991.

Notification No. CA/14/95 - RNH Wood Products Limited/Isotherm Company/AG (Ireland) Limited

Decision No. 406

Introduction

1.	Arrangements for the acquisition of the entire issued share capital of RNH Wood Products Limited (RNH) by AG (Ireland) Limited were notified to the Authority on 27 April 1995.  The notification requested a certificate or, in the event of a refusal by the Authority to issue a certificate, a licence.

The Facts

(a)  The subject of the notification

2.	The notification concerns a share purchase agreement dated 21 April 1995 between AG (Ireland) Limited, (the purchaser) AG Holdings plc (AG Holdings), and John Neill and Alice Neill (the vendors) for the purchase by AG Ireland of the entire issued share capital of RNH which was owned by the vendors.  The arrangements included a number of non-compete provisions.

(b)  The Parties

3.	AG Ireland is a wholly-owned subsidiary of AG Holding, a company incorporated in England and Wales with its registered office at High Street, Askern, Doncaster, South Yorkshire.  AG Holdings has four other wholly-owned subsidiaries and one which is 50% owned.  Subsidiaries include Askern Sawmills Limited, Askern Steel Reels Limited, Askern Packaging Limited, Arthur Stanton & Co. Limited, Russian Timber Limited (50% owned) and Smith & Cooke Limited.  In addition AG Holdings holds 87% of the issued share capital of Adome SA (a non trading French company), which in turn owns Emballages Manutention Stockage SA (a French company which supplies wooden plywood and plastic  reels).  The main activities of the AG Group are the manufacture and supply of shipping and despatch reels used largely for energy and communication cables, wire and wire rope.  Peripheral activities include reel repair, packing case manufacture and timber retailing and merchanting.  The turnover of AG Holdings for 1994 was £17.9m.

4.	RNH was established in 1976 by three individuals, including one of the present vendors, John Neill who has since bought out the other two shareholders.  RNH is engaged in the business of manufacturing shipping and despatch wooden and cardboard cable drums and reels primarily for sale in the Irish market.  The turnover of the company in 1994 was £1.3m.

5. John Neill and Alice Neill between them directly owned 50% of the entire share capital of RNH and 100% of the share capital of Isotherm Company (Isotherm). Isotherm is an unlimited company whose only function is to hold shares in RNH. Isotherm owns the other 50% of the shares in RNH. Pursuant to the share purchase agreement, the Neills sold the 50% of the issued shares which they held in RNH. Under a separate option agreement their shares in Isotherm are subject to a put and call option which provides that the purchaser has the option to purchase, or may be required by the vendors to purchase, the shares during the period from 1 May 1996 to 7 May 1996. 

(c)  The product and the market

6.	The products concerned in this notification are despatch (or shipping) cable drums and reels.  There are three principal products involved namely;
	
	Wooden cable drums -  These are used for the carrying of telecommunications and 
power cable, wire rope and plastic or aluminium tubing or other windable products.  They can 
carry from [   ]cwt. 1 to [   ]tons of cable and range in price from IR£[   ] to IR£[   ].  
According to the parties, approximately 13,000 such drums were manufactured by RNH in 
1994.

 	Plywood Reels -  These are used for the carrying of 	household electrical/telephone cable. They range in 	price from IR£[   ] to IR£[   ].  Approximately 40,000 	reels were manufactured by RNH in 1994.

	Cardboard Reels -  These are used for the carrying of lightweight household cable or 
retail packaging. They range in price from [  ] to [  ].  Approximately 350,000 were 
manufactured by RNH in 1994.

7.	RNH manufactures products primarily for sale in the Irish market.  The customers of RNH are mainly manufacturers of electrical cable, telecommunication cable and wire rope.  The market in Ireland is small and the parties estimated that total sales amount to IR£[   ] per year.  

8.	The principal competitor of RNH in the past in the Irish wooden cable drum market has been Murray Telecommunications who have supplied products imported from North America to Wessel Group. In 1994 Murrays (which are connected to Murray Communications) established a business manufacturing wooden cable drums, in Gorey, Co. Wexford.  No statistics are available as to Murrays' market share in Ireland but it is believed to be the only significant Irish based manufacturer of wooden cable drums other than RNH.  RNH's principal competitors in the Irish plywood and cardboard market are mainly UK based companies including AG Holdings, Pentre Reels, WTR, and Cable Reels. 

9.	The parties submitted that the market is competitive because there is no significant expertise or skill needed in the manufacture of despatch reels.  There are no barriers to entry into the despatch and shipping reel manufacturing market.  Production technology is straightforward.  The principal outlay for a wooden reel manufacturing operation is the production equipment consisting of a combination of general purpose sawing and cutting machinery and special purpose nailing and multi drilling machines.  Machines can be relatively easily designed and manufactured in-house for specific requirements.  Complete production lines are available from specialist manufacturers.  Soft wood timber which is the main raw material is easy to source at competitive rates.  Other raw materials are available from a range of suppliers.  According to the parties it is easy therefore for new suppliers to enter the market or for customers to manufacture their own reels.  Given the relatively small size of the Irish market and the significant size of most customers, entry to obtain a small market share would be uneconomic.  Transport costs (which may be 10 to 15% of export cost) would be a consideration for any potential competitor wishing to enter the Irish market.

10.	A major contributory factor to success in the Irish market is the ability to meet individual customer requirements at short notice. Customers are almost all large multi-national cable manufacturers with strong bargaining power vis-a-vis the supplier. Customers will change suppliers in order to obtain the best price and terms or even establish in-house manufacturing units themselves if they are unable to source from outside on satisfactory terms.  Hence the power of the purchaser to raise prices following the merger is believed to be very limited, according to the parties.

11.	The parties submitted that there is, in general, a degree of product substitution, in particular between larger wooden and smaller steel reels, between larger plywood/hardboard and smaller wooden reels and between plywood/hardboard and cardboard reels.  For particularly heavy duty application there will, in some cases, be no substitutes for steel reels and similarly at the extreme lightweight end of the market there may be no cost-effective alternative to cardboard reels.

(d)  The Arrangements

12.	The arrangements relate to the sale by the vendors of the entire share capital of RNH to AG Ireland.  Pursuant to a share purchase agreement dated 21 April 1995, AG Ireland acquired 50% of the shares of RNH which were held by the vendors.  An Option Agreement of the same date provided that the purchaser has the right and in certain circumstances the obligation, to acquire all of the issued share capital of Isotherm Company (which owns the remaining 50% of the share in RNH), from the vendors.  The option can only be exercised in the period 1 May 1996 to 7 May 1996.  Clause 2 of the share purchase agreement provided that completion of the acquisition is conditional on a number of terms including receipt by the purchaser of a certificate from the Competition Authority.

13.	Clause 8 of the share purchase agreement contains a number of restrictive clauses as follows:-

'8.	Protection of Goodwill

8.1	Non-Competition:  For the purpose of assuring to the Purchaser the full benefit of RNH and in further consideration of the transaction agreed hereby, each of the Vendors jointly and severally covenants and undertakes with the Purchaser that it will not without the prior written consent of the Purchaser, whether directly or indirectly and whether alone or in conjunction with or on behalf of any other person and whether as principal or shareholder, corporate director, agent, consultant or otherwise:

	(a)	for a period of two years immediately following the Completion Date:
		(i)		be engaged, concerned or (save as the holder of shares or other securities listed in any company which are quoted, listed or otherwise dealt with on a recognised Stock Exchange or other securities market and which confer not more than 3% of the votes which could be carried at a general meeting of the company) interested in any Competing Enterprise:

		(ii)		through any Competing Enterprise, transact business with any person who was a customer of RNH on or about the date of this Agreement (namely the period of three months preceding the date of this Agreement) and has not ceased to be a customer at the Completion Date (otherwise than due to breach of this Clause by the Vendors);

		(iii)		canvass or solicit orders for Competing Enterprises from any person who was a customer of RNH at any time on or about the date of this Agreement (namely the period of three months preceding the date of this Agreement) and has not ceased to be a customer at the Completion Date (otherwise than due to breach of this Clause by the Vendors);

	(b)	that none of the Vendors shall at any time after Completion use the words "RNH or Wood Products" or any similar words in any trade or business or in the name of any company, corporation or partnership in which they have any direct or indirect interest or permit or allow the words "RNH or Wood Products" to be used by others in connection with any trade or business.

8.2	Suppliers:  For the purpose of assuring to the Purchaser the full benefit of RNH and in further consideration of the transaction agreed each of the Vendors jointly and severally covenants and undertakes with the Purchaser that it will not without the prior written consent of the Purchaser for a period of three years immediately following the date of Completion, knowingly solicit or entice away from RNH any supplier to RNH who had supplied goods and/or services to RNH at any time during the 12 months immediately preceding the date of Completion where such solicitation or enticement materially reduces that supplier's supply of those goods and/or services to RNH or knowingly to procure any other person to do so.

8.3	Employees:  For the purpose of assuring to the Purchaser the full benefit of RNH and in further consideration of the transaction agreed hereby each of the Vendors jointly and severally covenants and undertakes with the Purchaser that it will not without the prior written consent of the Purchaser for a period two years immediately following the Completion Date, solicit or entice away from RNH, any person employed at the date of this Agreement by RNH or knowingly to procure any other person to do so.

8.4	Confidential Information:  For the purpose of assuring to the Purchaser the full benefit of RNH and in further consideration of the transaction agreed each of the Vendors jointly and severally covenants and undertakes with the Purchaser that it will not without the prior written consent of the Purchaser use or reveal to any person any of the trade secrets, secret or confidential operations, processes or dealings or any other confidential information concerning RNH or any customer of RNH which for the purposes of this sub clause means customer lists and names, sales statistics, reports on pricing, information relating to sales by RNH until such time as the same fall into the public domain (otherwise by reason of a breach of the covenant and undertaking) or knowingly to procure any other person to do so.  The foregoing provisions of this sub clause shall not apply to the extent that the Vendors are required by law to reveal the same.'

(e)  Submissions of the parties

14.	The parties argued that the acquisition itself (as distinct from the ancillary clauses) was outside the scope of Section 4(1).  However notwithstanding this, they submitted various arguments as to why the acquisition did not offend against Section 4(1) of the Competition Act. 

15.	They referred to the decision of the Authority in the Woodchester Decision (decision No 6), in which the Authority stated that before a merger could be held to offend against Section 4(1) it must be shown that it would, or would be likely to, result in an actual diminution of competition in the market concerned.  They also referred to  GI Corporation/General Semiconductor Industries Inc (decision no. 10), and B & D Firestone/Grenfell Ltd and Thoroughbred Promotion and Development Ltd. (decision no 11), in which the Authority considered the fact that strong competition existed in the relevant market, there were a large number of small suppliers, and the ease of entry to the market by new competitors, were relevant factors to its findings that the acquisition did not offend Section 4(1).

16.	The parties went on to refer to the Authority's decision in Scully Tyrrell and Company and Edberg Limited (decision no. 12), which stated the view that a merger per se would not offend against Section 4(1) unless the market is, or will as a result of the merger become highly concentrated.  The Authority went on to explain that were the market highly concentrated following the merger it would be unlikely to prevent, restrict or distort competition where, there were no significant barriers preventing new competitors from entering the market, and/or there was effective competition from overseas suppliers.

17.	In Spring Grove Ireland Limited/P.O Services Group/Initial Services (International) Limited/BCT plc, (decision no 148), the parties noted the Authority's recognition of the importance of the ability of customers to provide services in house in considering the impact of an acquisition on competition. Due to the fact that customers of RNH in Ireland and AG Holdings in the UK  are large      multi-national companies, they exercise major influence and any attempt by a supplier to raise prices would result in a customer either establishing an in-house assembly operation or changing to a foreign supplier.

18.	The parties referred to the Authority's decision in Irish Distillers Group plc/Cooley Distillery plc, (decision no.  285), and David Allen Holdings Limited/Adsites Limited, (decision no. 381).  They argued that unlike the situation which existed in those cases, the present acquisition would not restrict competition, as due to the nature of the product concerned, ease of entry to the market (and low start up costs), and the emergence of new entrants, the market is competitive and will remain so after the acquisition.

19.	Regarding the restrictive provisions in clause 8 of the share purchase agreement, the parties referred to the decision of the European Commission in Reuter and BASF AG, in support of their claim that the restrictions were legitimate and necessary for the transfer of the goodwill, including relations with customers, to the purchaser.  In addition they referred to Nallen/O'Toole (Belmullet), (decision no. 1),  which concerned a non-compete clause for a period of three years.  They submitted that by analogy with the criteria adopted in these and numerous other decisions, the restrictions in Clause 8 of the share purchase agreement did not infringe Section 4(1).

20.    The parties also made a number of submissions in support of a request for a licence. As these are not relevant in this case they are not considered here.

Assessment

(a)  Section 4(1)

21.	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 and the agreement

22.	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 to this agreement are AG Holdings, AG Ireland and John Neill and Alice Neill. AG Holdings and its subsidiary AG Ireland are engaged for gain in the design, manufacture and distribution of despatch and shipping reels.  At the time of the agreement the vendors, both directly and indirectly, owned the entire issued share capital of RNH which was engaged for gain in the manufacture of cable reels and drums. In line with previous Authority decisions they are therefore regarded as undertakings.

(c)	Applicability of Section 4(1)

The Acquisition

23.	The Authority has stated its views on mergers in a number of previous decisions many of which have already been referred to by the parties in support of their arguments for a 
certificate.  It does not consider that it is necessary to restate these views at any length in this instance.  It has indicated that a sale of business per se  does not offend against Section 4(1).

24.	The Authority considers that the relevant market in this instance is highly concentrated.  Apart from RNH there is only one other significant Irish producer of wooden cable drums.  Prior to the acquisition AG Ireland was not involved in the Irish market. However it is relevant that AG Holdings in the UK is a potential competitor of RNH and according to the parties it has supplied goods to the value of £[   ] to the Irish market in the past 15 months.

25.	In Barlo/Kingspan, 2 the Authority concluded that although the combined market share of Barlo and Veha exceeded 70%, the acquisition did not have the effect of preventing, restricting or distorting competition within the State.  In particular, the Authority noted that there were no significant barriers to entry, transport costs would not create a significant barrier to entry for imported products and the presence of other producers within Ireland and in other EU countries would be sufficient to maintain competition. There are no significant barriers to entry into the despatch and shipping reel manufacture.  Manufactured products can be easily obtained from other producers in the EU.  In addition the Authority accepts the parties' claim that customers (the majority of which are large multi-national companies) would be in a position to establish in-house manufacturing units themselves if there was any attempt by suppliers to raise prices or if they were not getting satisfactory terms outside. Consequently in the Authority's opinion, the sale of the business of RNH does not offend against Section 4(1).

The Non-compete Provisions

26.	Clause 8.1(a) of the agreement contained a number of non-compete provisions.  The vendors agreed that they would not, for a period of two years from the date of the agreement, without the prior written consent of the purchaser, become engaged in a competing business (other than as a shareholder or holder of other securities of a public company which confers not more than 3% of the votes which could be carried at a general meeting of the company).  Similarly, the vendors agreed not to solicit or transact business with any person who was a customer of RNH around the time of the agreement. In clause 8.3 the vendors undertook, that for a period of two years from completion, they would not solicit or entice away from RNH, any person who was an employee of the company at the time of the agreement.   The Authority has considered similar restrictions in sale of business agreements in a number of previous decisions.  It has indicated that provided such restrictions are limited in terms of duration, subject matter and geographical scope to secure the transfer of goodwill of the business being sold, it does not regard them as offending against Section 4(1).  It has stated that it would normally consider a period of two years as adequate for such a purpose.  Therefore, the Authority considers that the restrictions in Clause 8.1(a) and 8.3 are no more than is necessary to secure the transfer of the goodwill of RNH and do not offend against Section 4(1).

27.	Clause 8.1(b) prevented the vendors from using the word 'RNH' or 'Wood Products' or any similar words in any business which they or others may be involved in.  In the Authority's opinion such a provision does not involve any restriction on competition and does not offend against Section 4(1).

28.	Clause 8.2 prevented the vendors, on their own behalf or through another person, for three years from the date of completion of the agreement, from soliciting any supplier of RNH, where such solicitation would materially reduce the supply of goods and/or services to RNH.  The Authority does not consider that this clause would have any impact on competition.  It considers that it is merely a safeguard to protect the legitimate commercial interests of RNH.  The vendors are not actually prevented from obtaining supplies from the same sources as RNH, provided this does not interfere with supplies to the company.  Consequently clause 8.2 does not prevent, restrict or distort competition.

29.	Clause 8.4 provided that the vendors could not, at any time after completion, disclose any confidential information concerning the business of RNH or its customers other than that which had lawfully come into the public domain.  The Authority has previously stated that such a restriction is acceptable provided it is not used to prevent the vendor re-entering the market concerned once a legitimate non-compete clause has expired.

The Decision

30.	In the Authority's opinion AG Holdings, AG Ireland and John Neill and Alice Neill are undertakings within the meaning of Section 3(1) of the Competition Act and the notified arrangements for the acquisition by AG Ireland of the business of RNH constitutes an agreement between undertakings.  In the Authority's opinion, the agreement does not have, as its object or effect, the prevention, restriction or distortion of competition and does not offend against Section 4(1) of the Competition Act, 1991.

The Certificate

31.	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 of  21 April 1995 between AG (Ireland) Limited, AG Holdings plc and John Neill and Alice Neill for the acquisition by AG (Ireland) Limited of the business of RNH Wood Products Limited, (notification no. CA/14/95), notified on 27 April 1995 under Section 7, does not offend against Section 4(1) of the Competition Act, 1991.

For the Competition Authority

Patrick Massey
Member
22 June 1995.

Notes: