Independent Radio Sales/Shareholders Agreement [2001] IECA 591 (28 June 2001)

COMPETITION AUTHORITY

Competition Authority Decision of 28 June 2001 relating to a proceeding under Section 4 of the

Competition Act, 1991.

Notification No. CA/1/01 - Independent Radio Sales/Shareholders Agreement

Decision No: 591

Price £1.10, ( €1.39 )

£1.60, ( €2.03 ) including postage

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Competition Authority Decision of 28 June 2001 relating to a proceeding under Section 4 of

the Competition Act, 1991.

Notification No. CA/1/01 - Independent Radio Sales/Shareholders Agreement

Decision No: 591

Introduction

1. Notification was made on 22 January 2001 of a draft shareholders’ agreement between

Independent Radio Sales Limited (“IRS”) and each of its Shareholders, with a request for

a certificate or, in the event of refusal by the Authority to issue a certificate, a licence.

Seventeen shares have been allotted but one is held by IRS because a previous Shareholder

wished to exit from IRS and sold its share to the other Shareholders. The remaining shares

are held by sixteen independent local radio stations, licensed by the Independent Radio

and Television Commission (“IRTC”). There are only fifteen Shareholders, however, as

Midland Radio Group Limited holds two radio licences and thus two shares - for

Shannonside Radio and Northern Sound FM.

The Facts

(a) The Subject of the Notification

2. The notification concerns a draft shareholders’ agreement (“the agreement”) between

Independent Radio Sales Limited and each of its Shareholders. The Shareholders are

independent local radio stations, who propose to engage in the joint sale and marketing of

radio advertising slots on their stations (“the arrangements”), through the establishment of

the company. The agreement sets out the terms and conditions for membership of IRS.

(b) The Parties

3. The parties to the arrangements are IRS and the following radio Shareholders:

i. Carlow/Kildare Radio Limited - trading as CKR

ii. Kalacastle Limited - trading as LMFM

iii. Kilkenny Community Communications Co-operative Society Limited - trading

as Radio Kilkenny

iv. Midland Community Radio Services Limited - trading as Midland Radio 3

v. Cormuda Limited - trading as South East Radio

vi. East Coast Radio Limited - trading as East Coast Radio

vii. County Tipperary Radio Limited - trading as Tipp FM

viii. Tipperary Mid West Radio Co-operative Society Limited - trading as Tipp Mid

West

ix. South East Broadcasting Company Limited - trading as WLR FM

x. Clare Community Radio Holdings plc - trading as Clare FM

xi. Radio Ciarrai Teoranta - trading as Radio Kerry

xii. County Mayo Radio Limited - trading as Mid West Radio

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xiii. North West Radio Limited - trading as NWR FM

xiv. Midland Radio Group Limited - trading as Shannonside Radio and Northern

Sound FM

xv. Donegal Highland Radio Limited - trading as Highland Radio

4. IRS was established in 1998 to provide a common marketing and sales organisation in

Dublin for member independent radio stations throughout the country. The Board is made

up of representatives of cluster groups of radio stations. The cluster groups will consist of

three shareholders and be loosely linked to geographical areas. The parties stated that the

shareholders would probably be grouped in threes as per the list above, beginning with

Carlow/Kildare Radio Limited, Kalacastle Limited and Kilkenny Community

Communications Co-operative Society Limited. Membership of the Board will rotate each

year among the members of the cluster group. The registered office of IRS is 62 Lower

Mount Street, Dublin 2.

5. The Shareholders all operate independent local commercial radio stations, licensed by the

IRTC and operating within the State.

(c) The Product and the Market

6. The product is radio advertising slots and the relevant market is that for the sale and

marketing of those slots in the State. Each of the Shareholders of IRS operates at a local

level, i.e. the transmission range of their radio signal covers only a limited area within

Ireland. Independent local radio licences are awarded by the IRTC for a “franchise area”

roughly equivalent to a county in the State. There is currently only one licence for each of

the franchise areas of the IRS stations. None of the IRS stations are based in Dublin,

Cork, Galway or Limerick. In order to ensure high quality and complete coverage of the

franchise area, the transmissions tend to spill over into adjacent franchise areas to a certain

extent.

7. IRS offers various packages to advertisers whereby they can book simultaneous

advertising slots on all 16 IRS member stations and thus advertise on an almost nationwide

basis. The pricing of slots on all 16 stations is decided by IRS. It is also possible to book

slots on a single station and to book slots on any number of IRS stations, and thus

advertise on a local or regional basis. Customers rarely approach IRS for advertising slots

on one station only. The pricing of slots on a single station, on its own or as one of a

number of stations (but not all stations), is decided independently by each station

concerned, and these types of product account for 35-40% of total IRS sales.

8. There are a further six independent local radio stations (licensed by the IRTC) in the

market who are not Shareholders of IRS. They are all located in the main urban centres -

Dublin, Cork, Limerick and Galway - and sell their own airtime exclusively. IRS offers a

product called “Bulls Eye” which runs in particular news bulletins (INN News) across all

22 independent local radio stations except for the newest Dublin station, Lite FM. This

product accounts for 15-20% of IRS annual gross sales.

9. IRS has a 15% market share in terms of sales of advertising slots. The other six

independent local radio stations collectively account for 30% of the market. RTE’s three

radio stations Radio 1, 2FM and Lyric - have 45% of the market and Today FM has a

10% market share - these stations broadcast nationwide.

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10. The number of potential entrants to the market is finite, in that there is only a limited

amount of radio spectrum available for radio licences. The parties stated that it does not,

however, appear to be a scarce resource currently. Thus there is the possibility of new

entry to the market. The IRTC is currently assessing the amount of radio spectrum it has

with a view to reviewing the ownership and control of radio licences. The IRTC does not

plan to award any new radio licences in the franchise areas of the IRS stations, at least

until the current licences expire, and so entry is severely limited in the short term. All

local independent radio licences are for 10 years and will be readvertised in 2002/3, by

which time the IRTC may have been allocated more radio spectrum from the Office of the

Director of Telecommunications Regulation, and may be advertising licences which cover

larger franchise areas in Ireland.

11. There is currently another organisation providing advertising sales and marketing services

for independent radio stations in the State. Broadcasting Media Sales is a sales agent

based in Dublin, providing national advertising and promotion sales for Galway Bay FM,

Cork 96FM and Limericks Live at 95FM. The agent is owned by Cork 96FM and the

other two stations pay a commission to the firm and also have their own in-house sales

staff. Broadcasting Media Sales’ rate cards offer a variety of packages for each station but

do not include any combined packages covering all three stations.

(d) The Notified Arrangements

12. The arrangements take the form of a draft shareholders’ agreement of IRS. The members

of IRS established the company to promote the individual sales of the members of the

company and to market and promote a combined “rate card”1 offering an almost

nationwide service. The agreement sets out the terms and conditions for membership of

IRS.

13. The Rate Cards give details, including the price, of various packages of radio advertising

slots and promotions which cover all sixteen member stations.2 For example, one package

offers a fixed price for a number of advertising slots, across all the stations, before lunch,

Monday to Friday (titled the “Housewife Package”).

14. Clause 2.1 states that “The primary object of the Company is to carry on the business of

radio and general advertising media sales and marketing contractors for independent

radio stations licensed by the IRTC.” It is thus a condition of membership that

Shareholders hold a licence from the IRTC.

15. Clause 9.1 contains non-compete restrictions. The Shareholders are not permitted to join

or be associated with other companies or persons which compete with the Business of IRS,

as defined in Clause 1.1, without the prior written consent of the other Shareholders. This

restriction does not apply to Shareholders after they have exited the agreement. A

Shareholder may still market and sell its own advertising. Clause 1.1 defined “Business”

as: “the business of the company as described in Clause 2.1 and such other business as the

parties agree in writing should be carried on by the Company and its subsidiaries.”

16. Clause 14 provides for the exit of a shareholder from the arrangements. A shareholder

wishing to exit the shareholders’ agreement is obliged to have been a shareholder for three

1 Although the Rate Card does not itself form a specific component of the Shareholders’ Agreement.

2 The Bulls Eye Rate Card covers 21 independent local radio stations, the names of which are listed on the back of

the card.

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years - beginning on the date of the execution of the agreement or, in the case of new

shareholders, the date of signing a Deed of Adherence.3 The shareholder must also give

notice of one year to each of the other shareholders of its intention to exit from the

agreement and has to “seek and obtain the permission of the Board” to exit. The

permission of the Board may be given by a majority of its members and “such permission

shall not be unreasonably withheld.” The clause also provides that the shareholder who

wishes to exit must do so in accordance with Clause 5 of the agreement. Under the terms

of this clause, the shareholder must obtain the prior written consent of the other

shareholders before transferring any of the shares held by it.

(e) Arguments in Support of Request for the Issue of a Certificate

17. The notifying parties stated that IRS was effectively a cooperative of independent radio

stations which had come together to offer to advertising agencies, in one package, a

national service and to strengthen the shareholders’ collective ability to compete against

national broadcasters, whether state-owned or otherwise. They argued that, if the

members of IRS did not organise themselves thus, they would not be able to compete

effectively against nationwide stations, as purchasers of advertising space rarely, if ever,

wished to buy the advertising slots of one radio station only.

18. The agreement provides that the shareholders are not permitted to join or be associated

with other companies which compete with IRS. The agreement also provides for

minimum periods during which shareholders cannot assign or transfer their individual

shareholdings and minimum periods of notice of intention to assign/transfer shareholdings.

The parties claimed that these provisions were necessary to ensure that IRS functioned

properly, to ensure that it had a sufficiently wide commercial base and a certain stability to

its membership, in order to maintain a product which was attractive to advertisers. They

argued that it was necessary for the advertising agencies that there be some stability as to

the membership of IRS and, therefore, the IRS rate card. Finally on this point, they stated

that “Agencies (the ultimate consumers of the IRS product) should be given some proper

degree of notice so that they can make alternative arrangements with any member which

intends assigning/transferring its shareholding.”

19. The parties stated that there were a number of organisations which offered competing

products in the market, i.e. radio stations offering advertising slots on radio stations.

These organisations were necessarily limited, as the number of radio licences was limited.

The notifying parties believed that each of the individual IRS radio stations could not, on

their own, provide effective competition to the nationwide radio stations. Grouped

together, however, they could provide products in competition with the nationwide radio

stations and this, the parties argued, encouraged efficiency and competitiveness in the

market.

20. In summary, it was claimed that the object and effect of the agreement was to form an

effective competitor to the nationwide radio stations for radio advertising slots in the State.

(f) Arguments in Support of Granting of a Licence

21. The parties submitted arguments in support of the granting of a licence which, in the

opinion of the Authority, are not relevant to this decision.

3 A Deed of Adherence to the terms and conditions of the agreement.

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(g) EU Law

EU Guidelines

22. The EU Guidelines4 on the applicability of Article 81 of the EC Treaty to horizontal

cooperation agreements cover, inter alia, commercialisation agreements i.e. cooperation

between competitors in the selling, distribution or promotion of their products.

23. The Guidelines state that commercialisation agreements only fall under the competition

rules if the parties to the agreement are competitors.5 In this context, they state at

paragraph 143 –

“This also applies if a cooperation in commercialisation is objectively necessary to allow one party to enter a

market it could not have entered individually, for example because of the costs involved. A specific

application of this principle would be consortia arrangements which allow the companies involved to mount

a credible tender for projects they would not have been able to fulfil, or would not have bid for, individually.

As they are therefore not potential competitors for the tender, there is no restriction of competition.”

24. Once the relevant product and geographic market has been defined, and the parties have

been found to be competitors, the agreement almost always falls under Article 81(1) if it

involves price fixing (in joint selling), irrespective of the market power involved.6

25. Agreements falling under Article 81(1) may be exemptible under Article 81(3), and the

Guidelines go on to state –

“Price fixing can generally not be justified, unless it is indispensable for the integration of other marketing

functions, and this integration will generate substantial efficiencies…..…( paragraph 151)

In addition, the claimed efficiencies should not be savings which result from the elimination of costs that

are inherently part of competition, but must result from the integration of economic activities. …(

paragraph 152)

Cost savings through reduced duplication of resources and facilities can also be accepted. (paragraph 153)

A commercialisation agreement cannot be exempted if it imposes restrictions that are not indispensable to

the attainment of these benefits. …..……( paragraph 154)

No exemption will be possible if the parties are afforded the possibility of eliminating competition in

respect of a substantial part of the products in question. …..……( paragraph 155).”

EU Case Law

26. The parties stated that they knew of two European Court judgements relevant to this

notification: Gottrup-Klim v Dansk LandbrugsGrovvareselskab AmbA [1994] ECR 5644

and H.G. Oude Luttikhius and Others v Verenigde Coöperative Melkindustrie Coberco BA

[1995] ECR 4515.

27. In Gottrup-Klim v DLG the Court found that:

“A provision in the statutes of a cooperative purchasing association, forbidding its members to participate

in other forms of organized cooperation which are in direct competition with it, is not caught by the

4 These Guidelines were published in the Official Journal on 6 January 2001, OJ 2001/C 3/02, in conjunction the

adoption of Commission Regulation (EC) No 2658/2000 of 29 November 2000 on the application of Article 81(3)

of the Treaty to categories of specialisation agreements, OJ L 304 , 05/12/2000 p. 0003 – 0006.

5 Agreements between non-competitors may also fall under the competition rules if they contain vertical restraints.

6 Guidelines, paragraph 148.

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prohibition in Article 85(1)7 of the Treaty, so long as the above mentioned provision is restricted to what is

necessary to ensure that the cooperative functions properly and maintains its contractual power in relation

to producers.”8

In arriving at this conclusion, the Court considered “whether the members of the

cooperative are able to withdraw from it at reasonable intervals.” The Court stated that –

“if this were not the case, [the members] would be constrained to remain in the cooperative for very long

periods of time and, throughout their membership, would be unable to approach competing traders or set

up competing organizations. That twofold bond ([the non-compete restriction and] the excessive duration

of ‘loyalty’ to the cooperative throughout it) would have the effect of depriving members of any real

freedom of action, with the knock-on effect of preventing third parties from developing effective

competition against the cooperative. In order to avoid excessive inflexibility of the market, therefore ... the

length of those intervals should decrease commensurately with the lesser intensity of the competitive

relationship between the association in question and third parties.”

The Court decided that the five-year membership period for the cooperative, which

coincided with the maximum period provided for in Commission Regulation No 1984/83

for exclusive-supply contracts, should be regarded as appropriate, “under normal market

conditions.” In addition, the Court stated that –

“for similar reasons, a clause in the statutes which lays down obviously excessive and disproportionate

penalties where a member of a cooperative is expelled for lack of loyalty, must therefore be regarded as

incompatible with Article 85(1).”

28. The Court noted that the position would be different if the co-operative held a dominant

position, in the relevant market or vis-à-vis its own members, within the meaning of

Article 86 of the Treaty.

29. The Oude Luttikhius judgement had nothing further to offer this notification.

(h) Subsequent Developments

30. Following concerns raised by the Authority, the parties agreed to amend Clause 9.1 by

deleting the words “and such other business as the parties agree in writing should be

carried on by the Company and its subsidiaries” and to amend Clause 2.1 by deleting the

words “and general”. The parties also agreed to delete Clause 5 in its entirety and to

delete the reference to the permission of the Board in Clause 149. At the same time, the

parties indicated their proposal to extend the existing notice period to exit the agreement

from twelve to eighteen months. The parties also stated that they proposed to amend

Clause 14 to provide that that clause would not apply in the event that the shareholders

agree to sell the entire issued share capital.

31. The parties also indicated that they wished to amend Clause 10 - providing for the

expulsion of a shareholder from the agreement for committing “a material breach of its

obligations under the agreement” – to provide that the expelled Shareholder be paid a

price per share of €1.28 (the same price proposed to be paid to a shareholder who exits the

agreement of its own volition).

7 Now Article 81(1).

8 Article 85(1) [now 81(1)] prohibits agreements which have as their object or effect the prevention, restriction or

distortion of competition.

9 See paragraph 16 above.

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32. The parties stated that they were considering the inclusion of a provision in the agreement

to deal with the situation where an offer was made for a substantial part of the shares in

IRS. The provision would govern the rights of the majority/minority in such a situation.

The parties indicated that they would provide the proposed text for the Authority to review

upon request.

33. The parties claimed that the notice period of one year in the draft agreement was originally

suggested on the basis that a transfer could not take place without the consent of the

shareholders. In view of the proposed amendment to allow shareholders to transfer their

shares without requiring consent, the parties now considered a period of 18 months to be

more appropriate. The parties claimed that this period was “crucial”, due to the nature of

advertisement scheduling, which was arranged by advertising agencies up to nine months

prior to broadcast.

34. In regard to the proposed amendment not submitted to the Authority, the parties claimed

that it would render the exit provisions less restrictive, as it would constitute an additional

means by which shareholders could exit the company, to which Clause 14 would not

apply.

Assessment

(a) Section 4(1)

35. Section 4(1) of the Competition Act, 1991 prohibits and renders void all agreements

between undertakings 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.

(b) The Undertakings and the Agreement

36. Section 3(1) of the Competition Act, 1991 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.” IRS is a

limited company engaged for gain in the provision of radio advertising. Fourteen of the

shareholders are also limited companies, engaged for gain, in their case, in the provision of

radio broadcasting. The fifteenth shareholder, Radio Kerry, is not a limited company but

is also engaged for gain in the provision of radio broadcasting. Thus all parties to the

arrangements are undertakings within the meaning of the Act.

(c) Applicability of Section 4(1)

37. The relevant market is the sale and marketing of radio advertising slots in the State. The

formation of IRS effectively constitutes a commercialisation arrangement whereby the

shareholders cooperate in the joint selling and promotion of their products, i.e. advertising

slots. The scope of the arrangements is extensive, involving the joint determination of

almost all commercial aspects related to the sale of the product, including price in the case

of packages for advertising on all 16 stations. IRS competes for nationwide radio

advertising campaigns as well as offering advertising slots on individual stations.

38. While the shareholders all compete in this market and are therefore (under this market

definition) “competitors”, each shareholder does not compete with all of the other

Shareholders. For example, Highland Radio, in Co. Donegal, could not be considered a

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direct competitor of Radio Kerry, although both compete with the nationwide stations.

Rather, due to the limited overlapping nature of local radio broadcasting signals (which is

an unintended by-product of ensuring high quality reception in the franchise area), each of

the member radio stations competes for listeners, and by extension advertising, with its

neighbouring local radio stations only. For example: Eastcoast Radio (which broadcasts in

Co. Wicklow) is received in parts of Co. Wexford and thus competes for listeners with

South East Radio (which broadcasts in Co. Wexford but may also be heard in parts of Co.

Wicklow). The quality of reception in the spillover area is, however, likely to be poorer

and advertisers looking to cover a particular county or area in the State are unlikely to

view the stations as substitutes. Thus, in the Authority’ view, the member stations sell

largely complementary products.

39. The arrangements also provide a central focal point through which orders for a number of

geographical areas can be met. This should enhance the efficiency of the market by

bringing down the cost to advertisers of securing local radio advertising in any area. The

joint marketing function is also likely to be more efficient than each local radio station

marketing its own product. The cost savings through reduced duplication of advertising

sales and promotion resources are likely to be substantial.

40. In the Authority’s view, the arrangements greatly strengthen the shareholders’ collective

ability to compete against nationwide radio stations, whether state-owned or otherwise. It

is difficult to see how the independent local radio stations could effectively compete for

nationwide advertising if they did not organise themselves thus; the cost to an advertising

agency of securing nationwide coverage through each individual local radio station is

likely to be unfavourably high in most cases. Therefore the arrangements facilitate greater

competition in the market by providing an effective competitor to RTE and Today FM for

nationwide advertising.

41. IRS provides an additional option for nationwide radio advertisers and also offers

advertising agents and their clients a central point through which they may reach people

who listen to local radio, in the local areas affected by the arrangements.

42. As mentioned previously, (see footnote 1), the Rate Card does not form part of the draft

shareholders’ agreement notified, but it was specified by the parties to be one of the

primary objectives in setting up the company. In the Authority’s view, the existence of

uniform prices for 16 station packages is indispensable in this case for the integration of

the members’ marketing and sales functions, and is restricted to what is necessary to

enable them to compete for advertising against the nationally-broadcast stations. The IRS

could not function at all if prices had to be negotiated for each station and the member

stations do not co-ordinate their prices for sales of individual or groups of stations.

43. Under Clause 9.1 of the agreement, the Shareholders are not permitted to join or be

associated with other companies or persons which compete with the Business of IRS, as

defined in Clause 1.1. The definition of “Business” therefore also defines the scope of the

non-compete restriction. As in the Gottrup-Klim v DLG judgement, such a provision does

not have as its object or effect the prevention, restriction or distortion of competition, so

long as it is restricted to what is necessary to ensure that IRS functions properly and

maintains contractual power in relation to its customers. The efficiencies resulting from

the formation of IRS are likely to be undermined if members simultaneously participate in

organisations which directly compete with IRS. The scope of the non-compete provision

was initially defined far beyond radio advertising sales and marketing, resulting in an

extremely broad non-compete provision. The parties have since agreed to amend the

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definition of “Business” in Clause 1.1 to limit the scope of the provision to radio

advertising sales and marketing only.

44. Even this narrower non-compete restriction could still be excessive if the possibility for

members of IRS to withdraw from the arrangement at reasonable intervals is lacking.

Clause 14 of the draft agreement provides for the assignment/transfer of shares. At the

same time, however, Clause 5 provides that shares may only be transferred with the prior

written consent of the other shareholders, i.e. requiring the unanimous approval of the

other members. In view of the indefinite duration of the agreement, this restriction on

each member’s ability to withdraw from the agreement would raise serious competition

concerns. The participants could become locked into the agreement indefinitely and,

throughout their membership, they would be unable to approach or set up competing

organizations. The parties have, however, agreed to delete all provisions in the agreement

whereby shareholders must obtain the permission of any of their fellow shareholders in

order to exit the agreement.

45. Withdrawing from the arrangement is subject to a three-year minimum term of

membership and notice of intention to exit. Initially, the period of notice was to be one

year but this was increased, by the parties, to 18 months when they agreed to amend the

provisions for exiting the agreement. This combination effectively requires a minimum

membership period of four and a half years. Given the relevant market conditions - in

particular, that there exists another organisation providing common marketing and sales

for independent radio stations in the State, and that IRS have limited market power and a

15% market share - this does not seem excessive. The eighteen month interval thereafter

is certainly reasonable.

46. Any Shareholder who is expelled from the agreement for breaching the non-compete

provisions of the agreement is paid the same price per share (of €1.28) as it would be paid

if it exited the agreement of its own volition.

47. In the opinion of the Authority, therefore, the non-compete restriction provided for in the

agreement, as amended, is restricted to what is necessary to ensure the proper functioning

of IRS and therefore does not contravene Section 4(1) of the Act.

48. The possible inclusion of a provision in the agreement to deal with the situation where an

offer was made for a substantial part of the shares in IRS, is considered by the Authority as

unlikely to raise competition concerns.

The Decision

49. In the opinion of the Competition Authority, Independent Radio Sales Limited (IRS) and

each of its Shareholders, listed in paragraph 3 above, are undertakings, within the meaning

of Section 3(1) of the Competition Act, 1991 and the notified arrangements constitute an

agreement between undertakings. The Authority considers that the notified arrangements

do not contravene 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 arrangements between Independent Radio Sales Limited (IRS) and its Shareholders listed

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below, relating to the shareholders agreement of IRS (notification no. CA/1/01), notified on 22

January 2001 under Section 7, does not contravene Section 4(1) of the Competition Act, 1991.