COMPETITION AUTHORITY

Competition Authority Decision no. 405 of 22 June 1995 relating to a proceeding under Section 4 of the Competition Act, 1991

Notification Nos. CA/16/94 and CA/17/94 ‑ Fexco Innovations Ltd./BIG Estates Ltd.

Decision No. 405

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Competition Authority decision no. 405 of 22 June 1995 relating to a proceeding under Section 4 of the Competition Act, 1991

Notification Nos. CA/16/94 and CA/17/94 ‑ Fexco Innovations Ltd./BIG Estates Ltd.

Decision No. 405.

Introduction

1.	Arrangements for the establishment of a joint venture between BIG Estates Ltd. (BIG), and the Foreign Exchange Company of Ireland (Fexco), to operate in the business of providing VAT refunds to visitors from non‑EU countries were notified to the Competition Authority on 10 June, 1994.  The notified arrangements involved two related agreements, one provides for the purchase by BIG of certain assets (CA/16/94), and the other a shareholders agreement (CA/17/94), regulating the operation of the joint venture.  The notification requested a certificate, or in the event of a refusal by the Authority to grant a certificate, a licence.

The Facts

(a)	The Subject of the Notification

2.	Cashback was a joint venture which was owned 50/50 by Fexco and VAT Refunders Ltd., the latter being a wholly owned subsidiary of Rochglen.  By means of an agreement, dated 30 July 1993, between Rochglen and Fexco, Fexco purchased the entire share capital of Vat Refunders Ltd. from Rochglen.  The present arrangements involve the establishment of what the parties have described as a long‑term co‑operative joint venture.  This involves the purchase by BIG of approximately 51% of the shares in Cashback together with a shareholders agreement which sets out the basis on which Cashback will be run in the future.  The notification concerns an asset sale agreement and a shareholders agreement which were entered into in order to establish the joint venture.

(b)	The Parties

3.	The parties to the agreements are BIG and Fexco in the case of the asset sale agreement and Fexco, BIG  and Cashback in the case of the shareholders agreement.  Fexco is a wholly owned subsidiary of Gainscove, a holding company with its registered offices in Killorglin Co. Kerry.  Fexco and its subsidiaries are trading companies which are engaged in the provision of a wide range of services including inter alia the provision of Bureau de Change services, administration of the Prize Bonds Scheme on behalf of the National Treasury Management Agency (NTMA), data processing for Government bodies and overseas companies, acting as an agent for Western Union and software development.

4.	Cashback is a limited company which obtains refunds for visitors from non EU countries in respect of VAT paid by them on goods purchased within the State.  Prior to 30 July 1993 the issued share capital of Cashback was owned 50/50 by Fexco and VAT Refunders Ltd.  On that date Fexco acquired the entire share capital of Vat Refunders Ltd., thereby making Cashback a wholly owned subsidiary of Fexco.  In practice 49% of the shares in Cashback are owned by Fexco and approximately 51% by Fexco Innovations.

5.	BIG is a wholly owned subsidiary of the Bank of Ireland group and is an associated company of First Rate Bureau de Change Limited (First Rate), itself a wholly owned subsidiary of Bank of Ireland.  BIG will be operated as part of the First Rate business.  First Rate is a special purpose foreign exchange company that offers foreign exchange facilities through a wide range of retail outlets throughout the State.  Since 1992 First Rate has been involved in the VAT refunding business under the name `TaxSaver'.

(c)	The Product and the Market

6.	Cashback is engaged in the business of obtaining VAT refunds for visitors from non EU countries in respect of VAT paid on goods purchased by them within the State.  All visitors from non EU countries are entitled to a refund of VAT paid on goods purchased within the EU, provided the goods in question are shipped out of the EU.  Such refunds may be claimed by visitors at their port of exit from the EU.  Cashback provides refunds to such visitors in two ways.  Customers may obtain a refund in cash from Cashback at either Shannon or Dublin Airport.  Alternatively they can have a refund sent by mail in the event that they do not wish to wait at those airports to have their claim processed or they leave Ireland through some other port or land frontier crossing.

7.	The relevant market is that for the service of providing VAT refunds to non EU visitors.  Such visitors are entitled to VAT refunds on all goods bought within the EU once they are shipped abroad.  Such VAT refunds thus apply in respect of such goods bought in any retail outlet within the State.  The market is described in greater detail in Forex/Rochglen (Decision no. 272, 20 January 1994).
  
8.	Cashback has no written contracts with any retailers.  It offers a service to all non EU visitors in respect of goods purchased in any retail outlet within the State.  There are two other firms offering a specialist service in direct competition to Cashback.  These are Taxback Ltd. and TaxSaver.  According to the parties Cashback accounted for 43% of the relevant market while TaxSaver accounted for just 1%.  Taxback was estimated to account for a further 5% of the market.  A number of larger retail outlets provide a VAT refund service themselves.  In most cases, however, they do so by deducting the VAT from the purchase price and posting the goods to an address outside the EU.  The charge for postage and packing will, to some degree at least, offset any saving on VAT, so that this may be a less attractive proposition for customers.  As against this, there is a limit to the amount of goods which individuals can carry and many visitors would want to have such purchases posted to their home address anyway.  It is also open to such visitors to claim refunds directly from the Revenue Commissioners, although they might face certain difficulties in contacting the appropriate agencies, particularly if they have left the country.  The parties have argued that VAT refunds by retailers and the Revenue Commissioners are part of the relevant market, although neither of these appear to be close substitutes for the services provided by Cashback.  The notifying parties have stated that any new supplier of the service could in fact set up quite easily if they wished.

(d)	The Arrangements

9.	The arrangements involve an asset sale agreement and a shareholders agreement.  The Asset Sale Agreement incorporates a number of other agreements.  These are detailed in Clause 2 of the agreement which provides that Fexco shall procure that:
	
	(i)	Fexco Innovations Limited (FIL) would sell its shares which represent approximately 51% of the ordinary shares in Cashback to BIG;
	(ii)	FIL would also sell certain chattels to BIG;
	(iii)	FIL would enter into a sub-licence agreement with BIG in respect of a patent and certain licensed software;
	(iv)	VAT refunders Ltd. would assign certain leasehold property to BIG and would enter into a contingent liability agreement with Udaras na Gaelteachta and BIG; and
	(v)	Seirbhisi Riomhaireachta an Daingin (SRDT) would conclude a novation agreement in respect of the service agreement with BIG.  The service agreement is an agreement dated 10 May 1994 between SRDT and Cashback whereby SRDT provides to Cashback a service for the establishment and management of at least 25% of its VAT refund system including computer hardware, operational software and the services of personnel.

Clause 2 also provides that the total consideration to be paid by BIG is an aggregate amount in respect of all of the above transactions with no separate or specific value or part of the total consideration to be allocated to any one of them.  Clause 2 provides that upon completion FEXCO will deliver the agreements detailed in clause 2 to BIG.

The Share Sale Agreement.

10.	This is an agreement dated 10 May 1994 between FIL, BIG and Fexco whereby BIG has agreed to purchase from FIL all of its shares in Cashback which represent approximately 51% of the issued share capital of that company.  Clause 2(E) provides that neither party would be obliged to complete the sale unless the Shareholders Agreement was completed and executed between them.  Clause 10 provides that if the Competition Authority declines to grant a certificate or licence in respect of the Share Sale Agreement, the Asset Sale Agreement and the Shareholders Agreement, the parties agree to do all acts, procure all requisite approvals and consents and make all payments necessary to return the parties to the status quo ante the entering into and execution of those agreements. 

The Sub-Licence Agreement

11.	This is a non-exclusive agreement under which FIL licences BIG to use software developed and used in connection with the VAT refund data processing operation.  The agreement is to operate until 30 December 2007, unless BIG elects to continue.  Clause 3(a) provides that where either party makes an improvement to the software it will be the owner of such improvements.  Clause 11 provides that the agreement was prepared to comply with the provisions of EU Regulation No. 2349/84, the Patent Licensing Block exemption.  It provides that if any provision of the agreement should be void or unenforceable due to its being in contravention of the EEC Treaty or any Regulations thereunder, then such provision(s) would be deemed to severed and deleted.

The Novation Agreement.

12.	This agreement provides that BIG would assume the obligations of SRDT under the service agreement and that SRDT would be discharged from its obligations under that agreement.
    
The Shareholders Agreement.

13.	This is an agreement dated 10 May 1994 between FIL, BIG and Fexco regulating the future operation of Cashback.  Clause 7 provides that each shareholder will do its utmost to ensure that any of its subsidiaries will promote and expand the business in the territory and will not allow anything to be done which would be detrimental to the company's trading prospects.  Clause 12 provides that the number of directors shall be not more than six nor less than three.  The quorum for a board meeting is three.  No business may be transacted at a board meeting without each of the directors representing both shareholders being given reasonable notice.  For so long as Fexco holds not less than 49% of the shares in Cashback and BIG holds not less than 51% of the shares each is entitled to nominate three directors.  One of the BIG nominees shall be Chairman.  Decisions of the board are to be taken on the basis of a simple majority with the Chairman having a casting vote.

14.	Clause 14 provides that certain actions cannot be undertaken without the shareholders approval.  This provision is quite wide ranging and includes any material changes in the business as well as the opening of any new office, the acquisition or disposal of any freehold or leasehold property, the approval of accounts, payment of dividends and the employment of any staff other than those employed on the date of the agreement.

15.	Clause 15.1(a) provides that each of the shareholders will not during the course of the agreement procure or induce or endeavour to procure or induce: (i) any officer or employee of the company to cease such employment or breach any term of their employment agreement; (ii) any retailer to breach any term of the agreement appointing them.  Clause 15.1(b) prohibits the shareholders from using or disclosing any information regarding the customers of any other party to the agreement and any information regarding the affairs of any other party or their subsidiaries or associated companies.  Clause 15.2 prohibits the shareholders from doing any of the things specified in 15.1(a) for 18 months either from the termination of the agreement or  the date they cease to be shareholders in the Company.  Clause 15.3 provides that neither shareholder will do any of the things specified in 15.1(b) at any time after termination or their ceasing to be a shareholder.  Under clause 15.4 both parties agree that they will not for a period of two years after they cease to be shareholders in the business engage in a competing business in any way.  It also provides that the business of TaxSaver should be integrated with that of Cashback within 12 months of the date of the agreement.

16.	Clause 18(d) provides that the parties shall not transfer, sell, lease or part with any of their shares for a period of six years from the date of the agreement, save that either shareholder may offer to transfer its entire shareholding to the other party for £1 in which case the other party would be obliged to accept such offer.  After six years either party may sell its shares on condition that it shall first offer the other shareholder its shareholding at the same price as that offered by a third party buyer.  Clause 19 provides that the agreement should continue for a period of six years from the completion date and thereafter to each sixth anniversary of that date unless and until terminated by the shareholders.  Clause 22 provides that BIG may require Fexco to sell all of its shares in the company in the event that more than 50% of the shares of Fexco or its parent companies is acquired by any bank or member of a bank group incorporated in the State.  Clause 24.12 provides that if the Competition Authority declines to grant a certificate or licence in respect of the Share Sale Agreement, the Agreement for the Sale of Assets and the Shareholders Agreement, the parties agree to do all acts, procure all requisite approvals and consents and make all payments necessary to return the parties to the status quo ante the entering into and execution of those agreements.

(e)	Submissions of the Parties

17.	The parties submitted that they did not believe that the Mergers Acts applied to the co‑operative joint venture into which they were entering.  They stated that the turnover of both Cashback and First Rate did not exceed the Mergers Acts thresholds.  They argued that neither of the parties presently enjoyed a dominant position in the market and that the joint venture would not be in a dominant position.  They cited the view expressed by the Authority in Woodchester that a reduction in the number of competitors in the market place did not mean that a merger was automatically in breach of section 4(1).  They submitted that, while the arrangements would reduce the number of competitors in the market from three to two, it was most unlikely that this would result in any diminution of competition in the market and that as First Rate accounted for only 1% of the market any impact would  be de minimis.  They cited the Authority's decision in Fexco/Rochglen which stated inter alia that it was easy to enter the relevant market.  They also argued that firms offering a similar service in other EU countries could provide such services in respect of goods purchased in Ireland to non‑EU residents who exited from the EU through ports in those countries.

18.	The parties then cited a number of the Authority's decisions in cases involving a sale of business in support of the restrictions on competing with the business contained in the shareholders agreement.  The parties also advanced some arguments in support of their request for a licence but these are not discussed here since they were not relevant to the Authority's decision.

Assessment

(a)	Section 4(1)

19.	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

20.	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 arrangement are Fexco, BIG, FIL and Cashback.  All of them are corporate bodies engaged in the provision of services for gain and are therefore undertakings within the meaning of the Act.  The asset sale agreement is therefore an agreement between undertakings.  As clause 2 of the asset sale agreement provides for the conclusion of a number of other agreements these agreements, in the Authority's opinion constitute part of that agreement.  Section 7 of the Act provides for the notification of an agreement while sections 4(2) and 4(4) allow the Authority to licence or certify agreements.  In the Authority's opinion a party cannot notify part of an agreement and the Authority is not entitled to certify or licence part of an agreement.  

(c)	Applicability of Section 4(1)

21.	The arrangements provide for the purchase by BIG of approximately 51% of the shares in Cashback and for the future operation of the company as a joint venture between BIG and Fexco.  The parties have throughout their submission referred to the arrangement as a joint venture.  Furthermore it is a joint venture involving firms which prior to this were competitors in the relevant market.  The Competition Act does not distinguish between mergers and joint ventures and while the parties have described the arrangements as a joint venture, it is within the definition of a merger contained in the Mergers Acts.  The parties have referred to the fact that the Authority has indicated on a number of occasions in the case of a sale of business that a reduction in the number of competitors in a market need not of itself result in a lessening of competition.  The Authority does not believe that such arguments are valid in this instance.

22.	In the first place the number of competitors in the market will be reduced from three to two as a result of the arrangements.  When such a small number of competitors is involved a reduction in their number is a matter of concern from a competition viewpoint.  In addition the arrangements do not involve a straightforward sale of business but rather they entail two competitors agreeing to operate in business jointly.  The parties have claimed that the effect on competition will be minimal since TaxSaver currently has a market share of only 1%.  The merged activities of the two shareholders will nevertheless, by their own admission, have a market share of 44%.  It is relevant that TaxSaver has only been operating in the market for two years.  It is also relevant that it is a subsidiary of the second largest banking group within the State.  In such circumstances TaxSaver must be considered as a serious competitor with the potential to significantly increase its market share.

23.	Nowhere in their submission have the notifying parties advanced any reasons for the establishment of this joint venture.  Cashback has been operating successfully for several years, while TaxSaver has been active in the market for over two years.  The joint venture is not introducing any new products, nor is there any reason to suppose that either shareholder lacks the necessary resources to operate as an independent competitor.

24.	The parties have argued that overseas firms are competitors in the market as non EU visitors could choose to claim VAT refunds from them.  The reality is that refunds can only be claimed from firms supplying such services at the port of exit from the EU.  The Authority does not believe that people will choose their exit port on the basis of the VAT refund services available.  In such circumstances such firms operating in other EU countries cannot be regarded as competitors.

25.	It is true that the Authority does not believe that there are any barriers to entry in the market in question.  Consequently as the Authority believes that it would be relatively easy for new firms to enter the market, it does not believe that the asset sale and the associated share purchase agreement prevent, restrict or distort competition in the market and do not offend against section 4(1).  

26.	The sub-licence agreement provides for the licensing by FIL of software used in the operation of the business to BIG.  The licensing of such software is an essential element in the operation of the joint venture.  In such circumstances a non-exclusive licence does not offend against section 4(1), although certain clause may do so.  In the present case none of the provisions of the agreement offend against Section 4(1).  Similarly the Novation Agreement does not offend against Section 4(1).

27.	The provisions in clause 15 of the Shareholders Agreement prevent the parties competing with the business during the life of the agreement and for a period thereafter.  The parties have referred to a number of Authority decisions in support of this.  All of these decisions have involved the sale of a business and the Authority has indicated that a restriction on the seller of a business competing with the buyer for a period may be necessary to secure the transfer of the goodwill.  The present arrangements are similar to those dealt with by the Authority in Scully/Tyrrell (Decision no. 12, 29 January 1993).  The Authority held in that case that where a sale resulted in the establishment of an undertaking run jointly by the vendor and the purchaser a restriction on competition for so long as both parties were shareholders and for up to two years after they disposed of their shares was necessary to secure the goodwill of the business.  The restrictions in the present arrangements are therefore acceptable and do not, in the Authority's opinion offend against section 4(1).

The Decision

28.	In the Authority's opinion, Fexco, FIL, BIG  and Cashback are undertakings within the meaning of Section 3(1) of the Competition Act, and the notified agreements constitute agreements between undertakings.  The Authority believes that the Asset Sale Agreement of 10 May 1994 for the purchase by BIG Estates Ltd. of approximately 51% of the share capital in Cashback Ltd. between BIG Estates Ltd. and Foreign Exchange Company of Ireland, (CA/16/94), and the Shareholders Agreement of 10 may 1994 between Foreign Exchange Company of Ireland, BIG Estates Ltd and Cashback Ltd., (CA/17/94), both notified on 10 June 1994 under section 7, do not have as their object or effect the prevention, restriction or distortion of competition.

The Certificate

29.	The Competition Authority has issued the following certificate:

The Competition Authority certifies that, in its opinion, the Asset Sale Agreement of 10 May 1994 for the purchase by BIG Estates Ltd. of approximately 51% of the share capital in Cashback Ltd. between BIG Estates Ltd. and Foreign Exchange Company of Ireland, (CA/16/94), and the Shareholders Agreement of 10 May 1994 between Foreign Exchange Company of Ireland, BIG Estates Ltd and Cashback Ltd., (CA/17/94), both notified on 10 June 1994 under section 7, do not offend against section 4(1) of the Competition Act.

For the Competition Authority

Patrick Massey
Member
22 June 1995.