Dairygold/Muileann Ui Luasa Teo [1993] IECA 22 (11th June, 1993)

BAILII is celebrating 24 years of free online access to the law! Would you consider making a contribution?
No donation is too small. If every visitor before 31 December gives just £1, it will have a significant impact on BAILII's ability to continue providing free access to the law.
Thank you very much for your support!

1. Arrangements for the acquisition of the assets and property, including the goodwill of an animal feed business by Dairygold Cooperative Society Ltd., (Dairygold) from Muileann Ui Luasa Teo., (MUL), were notified to the Competition Authority on 9 November, 1992. MUL is beneficially owned by the IAWS Group plc. (IAWS) The notification requested a certificate, or in the event of a refusal by the Authority to grant a certificate, a licence.

3. The notification relates to an agreement, dated 21 September 1992, between Dairygold Finance Limited, MUL and IAWS for the sale by MUL of the assets and property, including goodwill, of MUL's grain milling and animal feed business located at Ballymakeera Co. Cork to Dairygold Finance Limited. Dairygold Finance Ltd. is a wholly owned subsidiary of Dairygold and the arrangements effectively involve the acquisition by Dairygold of MUL's grain milling and animal feed business. MUL is beneficially owned by IAWS. MUL's entire business consisted of the operation of the grain milling and animal feed business which is the subject of the agreement. The arrangements were notified to the Minister for Industry and Commerce under the Mergers Act on 15 May 1992 and were approved by him on 31 July 1992. The arrangements include certain non-compete provisions. The parties indicated in a letter dated 15 April 1993 their intention to amend the non-compete provisions.

4. Dairygold Finance is a subsidiary of Dairygold. Dairygold is a cooperative society engaged in a wide range of activities including dairy and meat processing, sale of dairy and meat products on domestic and export markets, processing and sale of liquid milk and fresh dairy products including cream and potted products, manufacture and sale of animal feed, grain trading, shop retailing, supply of farm inputs and farm requisites. Dairygold's annual report for the year ended 31 December 1991 values its gross assets at £224.6m with a turnover of £408.3m. MUL is a private limited company which carried on a milling and animal feeds business at Ballymakeera Co. Cork. The last full year for which accounts are available is the year to December 1990 and these show MUL's gross assets as £3.7m with a turnover of £12.4m.

5. IAWS is a public limited company quoted on the Irish Stock Exchange. It has, through its subsidiaries, been a major supplier of materials and services to the Irish agricultural and food industries for over 90 years. The group's principal operating businesses consist of fish processing, fertiliser, animal feed, energy products and food. Its accounts for the year ended 31 July 1991 value IAWS gross assets at £143m with a turnover of £380m. IAWS is engaged inter alia in the import and trading of grains and other products used in the production of animal feed. It also has an investment in a company in Northern Ireland engaged in animal feed production.

6. MUL was engaged in the business of milling and the production of animal feedstuffs. These are known as compound feeds and are given to pigs, poultry and cattle. Such compound feedstuffs are manufactured from grain and other cereal crops. They constitute the main feed used by farmers for pigs and poultry and are used as a supplementary feed for cattle.

7. The bulk of MUL's sales (72%) was attributable to poultry feeds with a further 25% due to pig feed. Cattle feed accounted for a relatively small amount of MUL sales of animal feed. Dairygold is also engaged inter alia in animal feed production although such activities accounted for less than 10% of its total turnover. The bulk of Dairygold's sales of animal feed (82%) was attributable to cattle feed. Pig feed accounted for 17% of animal feed sales with poultry feed accounting for less than 2%. Thus the market involved is that for animal feed, in particular pig and poultry feed which accounted for the bulk of MUL's sales of animal feed.

8. There are a number of firms based in Ireland engaged in the production of animal feeds. The most recent Census of Industrial Production (CIP) for 1989 indicates that there were 94 establishments engaged in the production of animal feed within the State and a further 30 engaged in grain milling. An establishment is effectively equivalent to an individual factory or plant. This category in the CIP also includes establishments engaged in the production of pet foods and other animal food products. 75% of the sales of establishments included in the animal feed category was composed of poultry, pig and bovine feed. It would appear, therefore, that the majority of establishments included in this CIP category are engaged in the production of pig, poultry and bovine feedstuffs.

9. The CIP also provides data on the number of enterprises (or firms) in each industrial sector. The 1989 CIP results indicate that there were 33 enterprises in the combined grain milling and animal feed sectors. This compares with a total of 47 enterprises in 1981. The CIP indicates that total turnover of enterprises in the grain and animal feed sector in 1989 was £423.6m (ex VAT) of which less than 7 percent was attributable to exports. The data also indicates that one third of all establishments in the sector export products with the bulk of those exports (89%) going to the UK. In spite of some differences in methodology between the CIP series on establishments and enterprises, it would appear from the relative figures on the numbers of establishments and

10. The CIP also provides details on the location of establishments, in particular, it provides information on the number of establishments in each industrial sector by County and planning region. Details of the number of grain milling and animal feed establishments by planning region are given in Table 1.

11. The figures show that establishments were located fairly widely throughout the State. As pointed out, however, many establishments are owned by the same firm so that the figures on establishments cannot be taken to indicate that there are competing entities operating in each planning region. Nevertheless, taken together with the number of firms in this sector, this suggests that most areas of the State are likely to be served by more than one firm. The South West region which comprises Counties Cork and Kerry had 30 establishments in the grain milling and animal feed sector of which 26 were located in County Cork.

12. The main customers for animal feed are pig, poultry and cattle producers. These would include both livestock farmers as well as manufacturing type plants engaged in pig and poultry production. MUL customers include a number of major poultry producers. The 1991 Census of Agriculture indicates that there were 17,298 farms in County Cork [1]. According to the Census only 6.7% of total agricultural land in Munster is used for crop production so that the bulk of these farms would be engaged in livestock production. The Census indicates that there were over 1 million cattle on farms in County Cork, of which 31% were dairy cattle. In addition there were 208,000 pigs and 837,000 poultry on farms in the County according to the Census.

13. CSO data for agricultural output puts the total value of purchases of feedingstuffs by farmers in the State in 1991 at £524.4m. [2] While recognising that all statistics involve some margin of error, this would appear to give a good approximate indication of the size of the market. The value of animal feed purchases by farmers in 1991 was 10.5% higher than in 1987. The CSO estimate that the volume of feedingstuffs used by farmers increased by 11.3% implying that in nominal terms prices have fallen slightly which in turn implies a significant price fall in real terms.

15. Effectively Dairygold was not engaged in the poultry feed market except on a very small scale while MUL was not engaged in the bovine feed market. Both firms had relatively small shares of the pig feed market. IAWS is involved as an importer and supplier of grains and other ingredients used in the production of animal feeds through its subsidiary R & H Hall. The business of R & H Hall was acquired by IAWS during 1990/91 and combined with the Group's existing feed and grain companies under the R & H Hall name [3]. IAWS also has an investment in a company based in Northern Ireland engaged in the production of animal feed. Although it sells its products within the State, such sales are confined largely to the border Counties and it is not a competitor in the South West region.

16. The agreement relates to the sale by IAWS of the business of MUL to Dairygold. The business is that of milling and trading animal feedstuffs located at Ballymakeera Co. Cork. Under the terms of the sale Dairygold purchased the property, business assets and goodwill of the business together with the benefit of certain supplier contracts. The business assets essentially consist of the plant and equipment of the business and these are specified in part one of the schedule to the agreement.

17. Clause 8.4 of the agreement provides that, in the light of the Competition Authority's decision on Woodchester [4], the parties undertake to notify this agreement to the Authority within thirty days of it being signed. Clause 8.5 provides that should the Authority either refuse to issue a certificate or should it grant a licence, on terms which are unacceptable to one or both parties, then the agreement shall stand rescinded as at the fourteenth day following the decision of the Authority. It then makes provision for the repayment of monies to the purchaser in that event.

(c) at any time after the Completion Date use the name "Lucey Millers" or "Sullane Mills" (whether in the Irish or English language) or any name substantially similar to or likely to cause confusion with such name whether by using such name as part of a corporate name, business name, brand name, trade mark or service mark or otherwise;

Clause 13.2 then provides that MUL will not directly or indirectly at any time during the period of [three] years after the Completion Date canvass or solicit or accept orders for the supply of the Products to any person who is or was a customer of the Business during the twelve months preceding the Completion Date, or induce any such person to cease being a Customer of the Business. 13.3 provides that nothing in 13.1 shall prevent the continued operation of the present activities and business of any company, other than the Vendor, which is a Vendor Group Company at the Completion Date.

19. The parties have claimed that the markets in question particularly those for pig and poultry feed are highly competitive. They also state that it is easy for new suppliers to enter the market. They have indicated that there are a large number of other producers of such products, including most of the other big agricultural co-ops and a number of specialist animal feed producers. They have also indicated that there are a large number of alternative producers located in Cork and neighbouring counties. It is claimed that there are no substitute products.

20. The parties argued in support of their request for a certificate that neither the Agreement nor the provisions of clause 13 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 within the meaning of Section 4(1) of the Competition Act. They also stated that they considered the restrictions in the Agreement reasonable and necessary in the circumstances for the protection of the legitimate interests of the Purchaser in the goodwill and assets of the Business. Although they recognised that the Authority had previously indicated that a non-compete clause designed to secure the transfer of goodwill in a sale of business agreement should generally not exceed two years, they believed a longer restriction was justified in this instance. In support of this they stated that as the bulk of the purchase price in this instance related to the transfer of the goodwill a three year restriction was justified. They justified the restriction on IAWS employing former MUL staff on the grounds that IAWS were not prevented from entering the relevant market, and, if they were not prevented from employing MUL staff, they could effectively set-up a new firm run by the former managers of MUL, and thereby take back all of the goodwill for which Dairygold had paid.

22. 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.'

23. 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 the present agreement are Dairygold, MUL and IAWS. All of the parties are corporate bodies engaged in the provision of goods and services for gain and are therefore undertakings within the meaning of the Act.

24. The present arrangements therefore constitute an agreement between undertakings whereby Dairygold has purchased the business of MUL from MUL and its parent IAWS. The Authority emphasises, however, that the prohibition in Section 4(1) relates only to agreements between undertakings ´which have as their object or effect the prevention, restriction or distortion of competition within the State or any part of the State'.

26. Following the sale of MUL, Dairygold, which previously was actively engaged in the production of bovine and poultry feed will now also be active in the pig feed business, while its share of the poultry feed market will increase to some degree. The Authority notes the claims of the parties that there are a large number of other competitors active in these markets both nationally and in the South West region. This claim appears to be supported by data included in the CIP which indicates that there are a large number of animal feed establishments located in County Cork. The Authority is also satisfied that firms located outside of County Cork could provide effective alternative sources of supply for users in the County. It was not possible in this instance to estimate the degree of market concentration. However, the large number of firms engaged in the markets in question suggests that the agreement is unlikely to lead to an increase in market concentration to an extent that would threaten competition [6]. In such circumstances the Authority believes that the agreement for the sale of the business of MUL to Dairygold does not have the effect of preventing, restricting or distorting competition within the State or any part of the State and thus does not offend against Section 4(1) of the Competition Act.

27. Clause 13 of the agreement as notified contained a number of non-compete provisions some of which may be disposed of briefly. The Authority has been provided with estimates of market share for each firm, which are not included for reasons of confidentiality. Clauses 13(c) and (d) are restrictions on the Vendor using certain trade names previously used by the business which is being sold. The Authority has already indicated in previous decisions that it does not consider that such provisions offend against Section 4(1) [7].

28. Clause 13.1 (b) provides that the Vendor will not for a period of three years from the completion date seek to prevent, impede, hinder or interfere with any supplier to the Business. The Authority does not believe that such a restriction prevents, restricts or distorts competition since it does not prevent the vendor from doing business with any supplier. Consequently, in its opinion, this clause does not offend against Section 4(1).

29. Clause 13.1(a) provided that for a period of three years after the Completion Date neither MUL nor IAWS nor any of its group companies would employ or solicit or entice any Continuing Employee to leave the employment of the Purchaser. In previous decisions the Authority has decided that a restriction on the Vendor soliciting or enticing any employee of the business being sold to leave the purchaser was necessary to protect the goodwill of the business. It indicated that such a restriction would not offend against Section 4(1) provided it was limited in duration to what was necessary to protect the goodwill of the business [8]. In Budget Travel the Authority had considered a restriction on the Vendor soliciting former employees for a period of 4 years to be excessive but issued a certificate after the duration of this clause had been reduced to 3 years. Similarly in Woodchester and ACT/Kindle the restriction on recruiting employees was for 3 years. In GI the restriction was for just one year. In all these cases, however, the restriction only applied to the vendor soliciting or enticing employees of the businesses and did not extend to employing such individuals if they in fact sought employment with the vendor [9]. In both Budget Travel and Woodchester the Authority indicated that the fact that such employees remained free to seek employment with the Vendor themselves was a factor in concluding that the provisions did not offend against Section 4(1).

30. Clause 13.2 provided that MUL would not directly or indirectly at any time during the period of three years after the Completion Date canvass or solicit or accept orders for the supply of certain products to any person who is or was a customer of the business during the twelve months preceding the completion date, or induce any such person to cease being a customer of the business. Thus MUL would be prevented from competing for the business of its former customers for a period of 3 years.

31. The Authority has stated in a number of decisions that a restriction on a Vendor competing with the Purchaser of a business may be necessary to protect the goodwill of the business being sold and, where such a restriction does not exceed what is necessary for the protection of that goodwill in terms of its duration, geographic coverage and subject matter, it does not offend against Section 4(1). Most recently, in General Semiconductor, the Authority indicated that, having had an opportunity to consider a number of such agreements, it would generally consider a non-competition clause exceeding two years in a sale of business agreement to offend against Section 4(1) [10].

32. There is no restriction on IAWS competing in the relevant market. Dairygold have claimed that, were it not prevented from employing the former staff of MUL, IAWS would be able to re-enter the market and by employing such staff could take back the goodwill of the business which has been purchased by Dairygold. Consequently the Authority believes that a restriction on IAWS employing such staff, as distinct from merely soliciting or enticing them to leave the employment of the purchaser, is necessary to secure the transfer of the goodwill of the business, in the absence of any restriction on IAWS or any of its subsidiaries, other than MUL, competing in the market. It does not believe, however, that it is necessary for such a restriction to exceed two years. Consequently in its view, clause 13.1(a) as originally notified offended against section 4(1).

33. Clause 13.2 as originally notified was limited to supplying the products produced by MUL to its former customers. The Authority believes that this restriction is therefore acceptable in terms of subject matter and geographic coverage. The duration of the restriction was three years from the date of completion. In the light of its General Semiconductor decision the Authority believes that a restriction of more than two years would offend against Section 4(1), unless there were compelling reasons to justify a longer restriction. In the Authority's view no such justification existed in this instance.

34. The only argument advanced by Dairygold was that the bulk of the consideration paid to IAWS for the business was in respect of goodwill and that this would justify a longer restriction than in a case where goodwill accounted for a smaller proportion of the consideration. The issue of how much of the consideration is stated to be in respect of goodwill is, in the Authority's opinion, irrelevant. The parties must show that a non-compete clause of more than two years is absolutely necessary to secure the complete transfer of the goodwill in order to justify a restriction for such a period.

35. A comparison with the position in Nallen/O'Toole [11] where the Authority allowed a three year non-compete clause, is relevant. In that instance the Authority indicated that a period of more than two years was justified on the grounds that the business concerned was located in a small town, customers only purchased the products involved infrequently, it involved a fair degree of contact with the customers and the vendor remained active in business in the locality. In this instance customers purchase the products quite frequently, while Dairygold has acquired, as part of the business, contracts to supply MUL customers and MUL has ceased trading. In such circumstances a restriction on the vendors competing for two years would appear sufficient to enable Dairygold to establish a good relationship with the former customers of MUL. Consequently in the Authority's view the restriction in clause 13.2 went beyond what is necessary to secure the transfer of the goodwill of the business and offended against section 4(1).

36. Since clauses 13.1(a) and 13.2, in the Authority's view, exceeded what was necessary to secure the transfer of the goodwill, they could not be regarded as indispensable to the sale of the business and consequently they would have failed to meet the requirements for a licence specified in section 4(2).

38. In the Authority's opinion, Dairygold, IAWS and MUL are undertakings within the meaning of Section 3(1) of the Competition Act, and the notified arrangements for the acquisition by Dairygold of the business of MUL, constitute an agreement between undertakings. The Authority believes that, in the light of the amendments proposed to clause 13.1(a) and 13.2 in the letter of 15 April 1993, the restrictions in the agreement are no more than is necessary to secure the transfer of the goodwill of the business to Dairygold. The agreement of 21 September 1992 for the acquisition of the business of MUL between Dairygold Finance Limited, Muileann Ui Luasa Teo. and IAWS Group plc, as amended by the letter of 15 April 1993, does not, in the Authority's opinion, offend against Section 4(1) of the Competition Act, 1991.

The Competition Authority certifies that, in its opinion, on the basis of the facts in its possession, the agreement of 21 September 1992 for the acquisition of the business of MUL between Dairygold Finance Limited, Muileann Ui Luasa Teo. and IAWS Group plc, (notification no. CA/1129/92), notified on 9 November 1992 under Section 7 and amended by the letter of 15 April 1993, does not offend against Section 4(1) of the Competition Act, 1991.

[ ]⁶See, for example, Competition Authority decision no. 12, Scully/Tyrell, (CA/57/92), 29 January 1993, where the Authority indicated that, in the case of business being acquired by a competitor, it believed that it was unlikely to offend against Section 4 (1) unless the degree of market concentration following the merger exceeded certain thresholds. In that event the Authority indicated it would undertake a more detailed analysis of the effect of the arrangements on competition in the relevant market.

[ ]⁸Competition Authority decision no.6, Woodchester Bank Ltd./UDT Bank Ltd., (CA/10/92), 4 August 1992, no. 9 Phil Fortune/Budget Travel Ltd., (CA/1/92), 14 September 1992, no. 10, GI Corporation/General Semiconductor Industries Inc.,(CA/51/92 and CA/52/92), 23 October 1992 and ACT/Kindle op. cit.

[ ]⁹In some instances it was specifically stated that the vendor could employ such an individual who either applied for employment or responded to an advertisement by the vendor. In others the restriction was simply confined to soliciting or enticing staff to take up employment with the vendor.

	[Home] [Databases] [World Law] [Multidatabase Search] [Help] [Feedback]
	Irish Competition Authority Decisions
You are here: BAILII >> Databases >> Irish Competition Authority Decisions >> Dairygold/Muileann Ui Luasa Teo [1993] IECA 22 (11th June, 1993) URL: http://www.bailii.org/ie/cases/IECompA/1993/22.html Cite as: [1993] IECA 22

Irish Competition Authority Decisions

Dairygold/Muileann Ui Luasa Teo [1993] IECA 22 (11th June, 1993)