Statoil Ire. Ltd./Clare Oil Co. Ltd. Share Purchase Agreement and Service Employment Agreement. [1998] IECA 490 (30th January, 1998)

1. Draft arrangements for the purchase by Statoil of the entire issued share capital of Clare Oil from its shareholders, and a draft employment agreements between Clare Oil and a shareholder, were notified to the Authority by Statoil on 14 August 1997. The notification requested a certificate under Section 4(4) of the Competition Act or, in the event of a refusal by the Authority to issue a certificate, a licence under Section 4(2).

3. Statoil Ireland Ltd is part of a group of companies, the ultimate parent of which is Den Norske Stats Oljeselskap - the Norwegian state oil company. This company is principally engaged in the exploration, production, transportation, refining and marketing of petroleum and petroleum-based products. Statoil Ireland Ltd is a direct subsidiary of Statoil Investments Ireland Ltd. The total turnover of Statoil Investments Ireland Ltd for the financial year ending 31 December 1995 was IR£[ ]. Other related companies (as per 1995 accounts) are Ard Services Ltd., a wholly-owned subsidiary in the retail distribution of oil products and Leeside Oil Terminal Company Ltd., a wholly-owned subsidiary which manages distribution terminals in various locations.

4. Clare Oil Company Ltd. is a company incorporated in the State under the directorship of John J. Hehir and Michael Moloney. It is engaged in the distribution of petroleum products. It has an authorised share capital of 3,000 Ordinary shares of IR£1 each, of which 100 are fully paid up. Mr Hehir and Mr Moloney hold 50 Ordinary shares each. In 1996 Clare Oil made a profit before taxation of IR£[ ] on a turnover of IR£[ ]

5. Statoil simultaneously notified a number of other merger, share purchase and asset purchase agreements with oil distribution companies, namely Rabbitt Oil Company Limited, Baldoyle Oil Company Limited and Shreelawn Oil Company Limited. These agreements are the subject of separate decisions by the Authority. However, the cumulative effect of the agreements in the relevant market is considered as part of the assessment of this agreement.

6. The market concerns certain petroleum products - commercial derv or diesel, gasoil and kerosene - which are collectively referred to as “middle distillates”. Although commercial derv (transportation fuel) and gasoil are physically the same product, they cannot in practice be substituted for each other because they attract different excise duties. In fact, penalties may be imposed where one is used in place of the other. While the products differ in their uses and in the levels of excise which they attract, there is relatively high supply-side substitutability.

“The motor fuel market, particularly in the case of diesel, may [...] be classified into retail and commercial markets. Thus, while many private individuals purchase motor fuels only from filling stations, companies purchase in bulk, particularly in the case of diesel... Gas oil is used for heating in households and in industrial and commercial premises. The market can therefore [...] be divided between the retail market for households and a commercial market.”

8. In that report the Authority defined motor fuels, both residential and commercial, and gas oil, both residential and commercial, as two of the four main market areas to be considered in assessing that transaction. (The other two market areas - fuel oil and lubricants - are not involved in the current transaction). In the case of motor fuels, petrol and diesel were not interchangeable in the case of a particular vehicle, for example. Nevertheless if the price differential between petrol and diesel became large enough, there might be some shift in demand from one type of vehicle to the other.

9. In the motor fuels market, sales to retail outlets account for over 95% of total gasoline deliveries into consumption and over 37% of total deliveries of automotive diesel oil. The remaining 63% of automotive oil is supplied by road tanker to transport organisations for industrial companies operating their own fleets [2]. It is the latter sector which is concerned in the notified transaction.

10. The heating gas oil market is divided between three sectors: Domestic - about 20%, Commercial - a little under 40%, and Industrial, including transport and agriculture, accounting for the balance of a little over 40% [3]. In its report on the Statoil/Conoco merger the Authority noted that there were a large number of small suppliers engaged in the gas oil market. Natural gas, LPG, electricity and solid fuels all constituted alternative sources of heating. Nevertheless for the most part the choice of fuel would be determined by the heating system installed in a specific premises or home. It was common for householders in particular to use subsidiary sources of heating. Thus households with oil central heating might also use solid fuel or have small electric heaters. The Authority believed that the capital costs involved in switching from one type of heating to another limited the degree to which different fuel types could be regarded as close substitutes. This would frequently be less true of firms, where the balance between the relative savings from switching to lower cost fuels and the switching costs involved might be rather different.

11. Kerosene, like gasoil, is used as a heating fuel in domestic and industrial use. Most modern burners can use either without adjustment, though older burners (over seven years old) require adjustment before switching between the two. Kerosene is also used to a limited extent as a raw material in certain industrial processes, for example in firelighter production.

15. Commercial derv, gasoil and kerosene are some of a range of petroleum products which are covered by the Fuel (Petroleum Oils) Order, 1983, as amended (the Fuels Order). Under the terms of this order, until January 1997 any person who imported gasoline or gas oil into the State was obliged to purchase 35% of their requirements of those products from the Irish National Petroleum Corporation at a price determined by the Minister for Energy. In November 1996 the terms of the Fuels Order were amended so that, inter alia, the purchase obligation was reduced from 35% to 20%, effective from January 1997.

18. Wholesaling companies, who are presently all importers, are mainly supplied by one of the refineries noted in Stage 1. Wholesaling companies in Ireland are dominated by companies integrated back to the refining stage, such as Esso, Shell, Texaco, Statoil and Burmah. Approximately 70% of imports into the State are supplied by these companies and the remainder by companies not vertically integrated (e.g. Tedcastles, Campus, Emo, Morris, Estuary, Maxol).

19. The full range of petroleum products is normally imported into the State by these wholesalers. There are a small number of wholesalers who specialise only in heating oils (heating gas oil and kerosene) and limited quantities of diesel fuel, but with no gasoline. This is often because the depot facilities required to import gasoline are more specialised and require higher investment.

Nationwide Terminal Operators [6]
Location	Operator 1	Operator 2	Operator 3	Operator 4	Operator 5
Dublin	Statoil	Esso/Texaco	Shell	Burmah	Tedcastles
Cork	Statoil	Esso/Texaco	Shell
Galway	Statoil	Shell
New Ross	Esso	Texaco	Campus	Emo
Limerick	Texaco	Shell
Sligo	Esso
Waterford	Emo Oil
Shannon	Esso
Arklow	Statoil
Fiddown	Morris
Foynes	Estuary
Drogheda	Maxol
Dundalk	Campus
Fenit	Shell
Greenore	Shell

23. Distributors are supplied by a number of wholesalers including five international operators (Shell, Esso, Texaco, Statoil and Burmah) and six Irish brands (Maxol, Tedcastles, Campus, Emo, Estuary and Morris). The distributors draw from the wholesalers’ coastal terminals (or from dry terminals inland) for resale to a range of domestic, industrial, commercial and agricultural customers. This is a bulk-breaking operation.

24. There are many more companies involved in this stage. Some of these companies may be vertically integrated up to Stage 2 or Stage 1 through wholly-owned subsidiaries. The majority of companies at Stage 3 are independently-owned. However, despite this, for most of them, the nature of their contracts with their suppliers means that they are vertically integrated through exclusive purchasing contracts or territorial arrangements.

25. Some of the distributors choose to sell the products under the brand name of the wholesaler (which is identified on tankers and points of sale) whilst others choose to operate under their own name. There is no difference in the way in which prices are determined: the relation between wholesalers and distributors is arm’s-length, whether the distributor is branded or unbranded. In each case, final prices are independently set by the distributor.

“Inland distribution is almost exclusively by road transport over a poor road network, which, at present, includes only a minimal amount of motorway-standard road (approximately 50 km in total). With a population density of 50 persons/km ² (the lowest in the EU) the task of supplying the whole country results in an extensive network of storage locations, currently around 200, most of which are operated by local distributors. The main supplying companies have directly operated distribution facilities at Dublin, Cork, Limerick and Galway and some have plants in a few other locations. Some major companies have concluded significant exchange and sharing arrangements in order to reduce distribution costs. Further developments in this area are under consideration. Road delivery from the company-operated plants is generally in trucks up to 36,000 litres capacity, often making up to 5/6 deliveries per trip. In recent years most major companies have negotiated new arrangements, frequently involving contracting out of truck operation, in order to reduce road delivery costs. Large capacity trucks are also used to deliver product to the numerous small plants operated by distributors or resellers from which very small trucks are used for deliveries to customers with whom restricted access is frequently a problem. Overall truck utilisation is low compared to other EU countries and costs are consequently higher.”

27. Retailing is the stage of the industry where products are delivered to the final customer. The largest number of companies is present at Stage 4. This stage of the market is dominated by either sales from vertically integrated companies to the consumer (e.g. from petrol stations or wholly-owned marketing subsidiaries) or by independently owned distributors which may also be present at Stage 3 or uniquely at Stage 4. Most of these distributors operate small inland depots from which they supply the domestic sector and also smaller deliveries to industrial customers in the commercial sector. It is estimated that around 20% [8] of heating gas oil sales are made by independent distributors with product sourced either from direct imports or by purchases from Whitegate refinery.

28. The OPAL report states that practically all of the sales of heating/non-automotive gas oil in the domestic sector (which accounts for approximately 30% of all such sales) are undertaken by branded resellers, supplied by the major international companies mentioned earlier, together with Maxol. It goes on to state that “Many of these resellers are very small, as reflected in the high number of storage locations referred to earlier, and there is additionally a number of local operators selling imported product in a limited area. This localised ‘small-drop’ business is a feature which is consistent with the rural nature of the greater part of the country and is undoubtedly another opportunity for rationalisation and reduction in unit costs, but only when the road system has been significantly improved.”

Direct deliveries of motor gasolines (i.e. sales not made through petrol stations) to bulk customers are of very little significance, representing less than 3.5% [9] of retail sales. However, in the automotive diesel oil sector, bulk deliveries to industrial/commercial customers and public transport undertakings together amount to over 60% [10] of total autodiesel deliveries. This segment is predominantly supplied by the major international companies.

29. The following table summarises the retail market shares of the parties to the notified transaction, and to the other transactions notified at or around the same time by Statoil, in the retail distribution of bulk oil products. It should be noted that the figures for Statoil relate to products which it sells directly to larger customers. Statoil state that wholesalers typically sell a relatively small share of their products - around [ ] - directly to large customers. In the case of Statoil, the direct customers include entities with outlets dispersed throughout the country, which purchase their fuel directly - for example, [

30. Statoil operates in Ireland through its indirect wholly owned subsidiary, Statoil Ireland Ltd. SIL is a direct subsidiary of Statoil Investments Ireland Ltd. In 1992 SIL entered the Irish market for motor fuels by acquiring the BP network of filling stations. In 1996, following a referral by the Minister to the Competition Authority, it acquired a large part of the Jet network. Statoil is therefore vertically integrated from stages 1 through to 4, as described above, in the market for retail motor fuels.

31. In 1995 Statoil also acquired the entire issued share capital of Aran Energy plc (Aran). Aran’s main business is oil and gas exploration, development and production. It also had, at that time, an involvement in the importation and sale of oil products through its 85% owned subsidiary, Estuary Fuel Ltd. Estuary is a regionally important oil distributor in the south-west. As well as distributing heavy fuel oil, diesel and kerosene to industrial and agricultural customers and home heating oil, Estuary owns about 50 petrol stations mainly in the south-west region. In 1997 Statoil sold Estuary to a management buyout team.

32. As described above, Statoil is also already to some extent vertically integrated from stages 1 to 4 of the markets for commercial derv, gas oil and kerosene, in that it sells these products directly to some large customers. Statoil estimates that it has market shares of [ ], [ ] and [ ] respectively, at the wholesale level, and [ ], [ ] and [ ], respectively, at the retail level, in these markets.

33. Vertical integration by contract is common in the markets for commercial derv, gas oil and kerosene. All the distributors which are party to the notified arrangements are already supplied by Statoil on a branded or unbranded basis, although Shreelawn also imports some of its requirements, amounting to [ ] of the total market for commercial derv and [ ] of the total market for gasoil. Statoil state that the overall quantity of Statoil products which reach the final market will therefore not significantly change; in other words, Statoil is not acquiring interests in distributors who were previously distributing other wholesalers’ products, thereby increasing its wholesale market share.

36. The products concerned are imported into the State, or purchased from Whitegate, for the most part by organisations which operate on a national or multi-national basis. These organisations also operate on a national basis at the retail level, mainly in the market for gasoline but to some extent also in the market for commercial derv. The remainder of the market for commercial derv, and the markets for gasoil and kerosene, are served by locally- or regionally-based distributors.

37. In its decision on BP/Mobil [12], the European Commission agreed with the parties’ submission that the market for non-retail fuel products (diesel, fuel oil, gas oil and LPG) was at least national. This was because, even if the products were distributed on a sub-national basis, there was price transparency, overlapping supply boundaries, exchange and supply agreements between the suppliers, and some purchasers who bought on a national basis. This was confirmed by the Commission’s investigation, and some third parties argued that the market definition was wider than national.

38. The Authority considers that the same factors apply here. The product is undifferentiated and customers, both large and small, can very easily compare prices of competing suppliers by means of a phone call. There is a large number of competing suppliers widely spread throughout the State. Although the transport costs for bulk fuel mean that an individual distributor can only serve a particular catchment area in his vicinity, any individual customer is likely to be in the catchment area of a number of competing suppliers. These areas will overlap so that while, for example, a distributor in Donegal is not in direct competition with one in Kerry, neither of them could raise prices independently without losing customers to other local distributors. In this context, it is relevant to note the European Commission’s Draft Notice on the Definition of the Relevant Market, which states that:

“In certain cases, the existence of chains of substitution might lead to the definition of a relevant market where products or areas at the extremes of the market are not directly substitutable. An example might be provided by the geographical dimension of a product with significant transport costs. In such cases, deliveries from a given plant are limited to a certain area around each plant by the impact of transport costs. In principle, such area could constitute the relevant geographic market. However, if the distribution of plants is such that there are considerable overlaps between the areas around different plants, it is possible that the pricing of these products will be constrained by a chain substitution effect, and lead to define a broader geographic market.”

39. As mentioned there are over 300 distributors of petroleum products in Ireland, some of which are ‘branded’ (i.e. they carry the importer/supplier’s logo) and some ‘unbranded’ (i.e. they sell products under their own chosen trade name); they also vary significantly in size, from large distributors covering a whole region, to smaller ones operating on a relatively limited radius from their location. The high density of distributors throughout the country, and the significant overlaps in the territories served by neighbouring distributors, ought thus to ensure that any price premium in one area would be quickly eroded by competition from suppliers in ‘overlapping’ areas.

42. The Authority accepts that, in the cases of gasoil and kerosene, there are a number of substitute sources of energy available, including natural gas, LPG, electricity and solid fuel. Indeed, as noted in the Statoil/Conoco merger report, petrol could potentially be regarded as a substitute for diesel if a price differential emerged which was large enough to justify customers switching between them (and absorbing the associated switching costs). However, there are two factors which the Authority considers indicate that a narrow market definition is acceptable in this case:

43. The notified arrangements concern a draft agreement between Statoil and the shareholders of Clare Oil for the purchase by Statoil of the entire issued share capital of Clare Oil, and a draft employment agreement between an unnamed company and Mr Michael Moloney. On completion of the share purchase agreement the purchaser and each of the vendors intend to enter into an employment agreement in these terms.

45. Section 3 sets out the share purchase and sale conditions. The purchaser is to purchase the shares for a consideration of IR£[ ]. Section 4 deals with warranties and Section 5 with the conduct of business prior to completion. Section 5.3 lists “Prohibited Transactions” under the agreement, with effect from the date of the agreement and for the duration thereof. This is an inventory of actions which the vendors are prohibited from taking without the prior written consent of the purchaser [

46. Section 6.0 headed ‘Further Covenants’ contains non-compete clauses at Section 6.2. Clause 6.2 (a)(i) restricts the Vendors from competing with the Purchaser in the Relevant Business within the Territory from the date of the agreement until two years from the date of Completion. Clauses 6.2(a) (ii) and (iii) contain covenants by the Vendor relating to non-solicit of customers and employees, respectively, as follows:

49. Section 6 deals with protective covenants. 6.1 relates to trade secrets and requires the Executive to keep secret any confidential information entrusted to him and not to use such information in a way which might damage the Company or the Group. This restriction applies indefinitely after the termination of the agreement, but does not apply to information or knowledge which may reasonably be said to have come into the public domain. [

]. Section 6.3 sets out restrictive covenants. Under Clause 6.3(a) the Executive agrees that, where the Company or any Member of the Group has obtained trade secrets or confidential information from any third party under an agreement including restrictions on disclosure, he will not knowingly infringe such restrictions. Under clause 6.3(b) the Executive agrees that, for a year from the date of termination of the Agreement and within the Prohibited Area, he will not in relation to the Products solicit customers of the Group or represent himself as being connected with the Group.

51. Statoil state that it is important to emphasise again that all the distributors which are party to the notified arrangements are already supplied by Statoil on a branded or unbranded basis. The overall quantity of Statoil products which reach the final market will therefore not significantly change: in other words, Statoil is not acquiring interests in distributors who were previously distributing other wholesalers’ products, thereby increasing its wholesale market share.

52. According to Statoil and as discussed below, the rationale for these arrangements is to be found in a review by Statoil of the distribution network for its products, which has revealed some opportunities for rationalisation and improvements through the combination of some small distributors (particularly in the aftermath of last year’s Conoco acquisition and in the expectation of further competitive pressures from natural gas).

53. The notified arrangements have a vertical dimension, since Statoil’s purpose is to acquire interests in downstream distribution. In relation to these vertical effects, Statoil submit that there is no foreclosure of the relevant markets either from the upstream perspective of independent distributors or end-users seeking supply. In this regard, it should again be emphasised that Shreelawn Oil, Clare Oil and Rabbitt Oil are already supplied by Statoil, and therefore there is no change in ‘access to the market’ for an upstream supplier, or ‘access to supplies’ for a downstream distributor. In particular, the notified arrangements do not, even where taken together with the other arrangements notified by Statoil and other parties, prevent other wholesalers from supplying end-users directly or from finding distributors. In this connection, it should be noted that there are 300 independent distributors in Ireland.

54. All wholesalers are already present in every area with their own brands, and in addition they supply a variety of other distributors from their terminals. In addition, new entry into distribution will not be difficult, and therefore a supplier not currently present in Ireland could easily achieve entry by arranging to draw the product from one of the terminals and setting up a distribution arm.

56. Although Statoil considers that the notified arrangements should be seen as essentially vertical in character, because there is no resultant significant change in its share of the relevant wholesale markets, the effect on horizontal competition should be addressed since Statoil itself directly supplies some end-users, and may thus be regarded as competing to some extent in the same retail market as Shreelawn Oil, Clare Oil and Rabbitt Oil.

57. However, Statoil submit that even if Statoil, Shreelawn Oil, Clare Oil and Rabbitt Oil were to be regarded as competitors in the distribution of products to a few large final customers, there will be no lessening of competition in the relevant markets. This is because the intensity of competition from other brands and distributors is such that Statoil has no ability to implement a price increase in any portion of the markets and this is not materially changed by the notified arrangements.

58. As discussed, the share of the final distribution which will be directly controlled by Statoil as a result of the notified arrangements is trivial. The share of distributors carrying the Statoil brand (which are, however, wholly independent in their pricing decisions) is also small. Most importantly, as seen in the discussion of the relevant market, Statoil and its distributors face strong competition from a number of other wholesalers. Several wholesalers are present throughout the country, and there are numerous coastal terminals, owned by different operators, from which the product can be drawn. There are also several dry terminals inland. In all parts of the country there is a large number of distributors who can easily obtain supplies. The number of import facilities and terminals, the presence of many importers and the variety of national and local brands operating in each region suggest a pattern of intense competition.

59. For example, a large number of importers and brands are present in Cork/Munster. They include Texaco, Statoil, Burmah, Esso, Shell, Maxol, Tedcastle, East Cork Oil, Estuary, Amber Oil, Campus, Emo and Morris. There are three terminals in Cork alone, owned respectively by Esso/Texaco (joint ownership), Shell and Statoil. Other distributors are able to draw their products from these: for example, Burmah, Tedcastle, Campus and Maxol draw from Shell’s terminal. In addition, there are no less than 50 distributors in the Cork area alone and around 80 in the whole of Munster. The main distributors are Suttons (Esso), Tedcastles, South of Ireland (Shell), East Cork Oil (Shreelawn) and Amber Oil, as well as a number of smaller distributors selling branded Statoil, Texaco, Burmah, Maxol and Estuary products.

60. This in turn suggests that it would be very difficult for an operator like Statoil to successfully raise prices in future, as any such attempts would be likely to be defeated by customers switching to other suppliers. Customers, even small local ones, appear to have a variety of alternative sources from which they can buy, at no significant extra cost to them (the price of a telephone call).

61. In addition to the presence of a large number of operators in any area, any price increase would be likely to be untenable because it would attract entry . As discussed above under the “geographic market definition”, barriers to entry into distribution are low, as there are no sunk costs of entry. This again constrains the ability of any distributor (and certainly of Statoil) to raise prices in the retail market.

62. Statoil believe that the non-competition provisions contained in Section 6.2 of the Share Purchase Agreement and Section 6 of the Employment Agreements are ancillary restrictions integral to the merger and should thus be included in a certificate. Statoil believe that these provisions are reasonable in terms of duration, geographical scope and product covered and are essential to the viability of the transfer of shares by the vendor and the successful operation of the business.

66. Statoil’s general view is that the distribution in Ireland of the relevant products is not as efficient as it should be and that, as the 1996 OPAL Report predicts, rationalisation of the network is inevitable. The acquisition of Conoco has meant in particular that Statoil has found itself with much larger number of small distributors than other wholesalers: currently Statoil supplies a network of [ ] distributors, including a number of very small operators, while others rely on a smaller number of larger distributors - e.g., Shell sells to [ ] larger distributors, Burmah to [ ], and Esso has only [ ] distributors. Most importantly, the acquisition has left behind some territorial conflicts between Statoil distributors and former Jet-branded distributors wishing to convert to Statoil-branded, and these have to be resolved.

67. Statoil add that they, like their competitors, have to address the increasing competitive pressures posed by natural gas. There is a growing perception that inter-fuel substitution - away from gasoil and kerosene into natural gas - will inevitably reduce the customer base for heating oil. Statoil’s view is that the distributors will find themselves in future with a lower density of customers over their territory, as an increasing proportion of households switches to natural gas for domestic heating. The process of substitution is evident from the figures in the 1996 Annual Report of the Irish Gas Board, which shows that domestic sales of gas have increased (in value) from £52m in 1992 to £88m in 1996, that is by over 70%. Though the gas network currently covers only the south-east part of the country, the penetration is set to increase.

68. They state that the industry perception that existing distributors will become less viable as their customer base dwindles, and delivery costs per unit will increase further, is expected to induce a process of consolidation in distribution, as distributors are forced to seek ways to reduce the average delivery costs by entering into arrangements which achieve the necessary economies of scale.

69. Statoil submit that the pattern of substitution away from heating oil into natural gas for domestic users has clear precedents in other countries. In Denmark, for example, the number of households heated by heating oil dropped between 1988 and 1993 from around 900,000 to 650,000. This decline has been more than compensated by the increase in the penetration of natural gas (from 100,000 households in 1998 to 300,000 in 1993) and district heating, which also uses gas (from around 1 million households in 1988 to around 1,300,00 in 1993). As a result of this continuing process, the number of Statoil customers using oil in Denmark has fallen from around [

70. They add that besides the threat to heating oil distributors from substitution into gas, a threat is perceived to exist also to distributors of commercial derv, from the developing environmental legislation. There is currently an environmental incentive for the hauliers to get rid of their own depots (which are not seen as environmentally sound). This will reduce the volumes of derv which hauliers buy from distributors and store in their depots on the premises, and increase the volumes which are bought instead by hauliers from petrol stations. This is expected to bring the proportion of derv sold through retail outlets in Ireland - currently 15-20% - closer to the European average of around 50%.

72. Some of the proposed acquisitions are also aimed at resolving territorial conflicts between distributors which have arisen out of Statoil’s 1996 take-over of Conoco. Many of Statoil’s supply contracts currently in existence grant territorial exclusivity to branded distributors (though this practice is being phased out in the new contracts); as a result, if a former Jet-branded distributor in the same area wishes to switch to ‘Statoil branded’, this infringes the exclusive right of the existing Statoil distributor. [

74. Finally, they state that the notified acquisitions will also permit more efficient advertising and marketing of Statoil product. There are advantages arising from the rationalisation of information technology systems. This will contribute to reducing time lags between each stage of the distribution process, enable a more immediate response to orders and facilitate stock control. The arrangements will also promote the observance of safety and environmental standards. Statoil is able to invest in safety and environmental protection measures which various independent distributors, would find difficult to do independently given the costs involved.

75. Statoil submit that given the degree of price competition in the relevant markets, consumers will be allowed a fair share of the resulting benefits. They maintain that consumers, and the general public, will benefit from any safety and environmental protection measures which Statoil will be able to take. Statoil believe that there are no terms which are not indispensable to the attainment of the above objectives. In particular, Statoil consider that the non-compete provisions contained in the agreements are ancillary restrictions which are to be regarded as an integral part of the merger.

77. Statoil’s share of sales in the national retail market (whether directly or through controlled distributors) will, as a consequence of the notified agreements, increase from [ ] to [ ] for commercial derv, from [ ] to [ ] for gasoil and from [ ] to [ ] for kerosene. Statoil is not thereby afforded the possibility of eliminating competition in respect of a substantial part of the relevant products. Indeed, the notified agreements should be seen as a response to the need to reduce costs if Statoil is to remain a competitive player in the market.

80. They argue that the fuel market is highly concentrated and state that this was recognised by the Competition Authority when it stated its concern at the degree of concentration in this market in their 1996 Statoil/Conoco Report. They accept that this concentration is higher in the motor fuels sector of the market than in others. However they argue that the relevant market is the regional rather than the national market as fuel is a heavy, bulky product for which transport costs are high and the lengths to which commercial or residential consumers will go to source supplies limited. They argue that when the regional market is considered, market concentration in all sectors is quite pronounced.

81. [ ] state that the Authority’s 1996 Report highlights major barriers to entry and that access to the Whitegate Refinery is exclusive to importers (those suppliers who have their own terminals and import a portion of their needs from outside Ireland) [13]. Thus a new entrant needs to purchase an existing company with terminal facilities and become an importer. [ ] point out that a sister company of one of Statoil’s targets, Shreelawn, has such a terminal in Cork. [ ] argue that if Statoil are given approval for their intended purchases it may only serve to close of further opportunities for market entry.

83. The Authority sought clarification as to the scope of Clauses 6.2(a) (ii) and (iii). The Authority was concerned that the clauses be limited to restricting the vendors from soliciting customers and employees only in relation to the Relevant Businesses. Statoil confirmed in writing to the Authority that the scope of the non-competition covenants in the clauses was so limited and waived any rights to a more expansive interpretation of the Clause.

84. On 2 January 1998 the Authority advertised its intention to grant a certificate to the notified arrangements. Interested third parties were invited to send their observations within two weeks from the date of publication of the notice. Copies of the summary of the facts regarding the notification were made available. A submission was received from Lee McEvoy, Solicitors. These comments related to the Authority’s definition of the relevant market, namely, the definition of a product market and the geographic market.

85. In particular, the comments related to the markets for gasoil and kerosene for domestic and commercial use (heating fuels market). Lee McEvoy believed that there was sufficient substitutability between heating fuels in the space heating market to render a wider market definition correct. It was their contention that the production and distribution of solid fuels should form part of the wider space heating market. The Commission’s Notice on the definition of a market was cited in support of this claim. [15]

86. Lee McEvoy believed that there was a single market for fuel for space heating. While they recognised that there could be sub-divisions in the market, they argued that the existence of a sub-division did not per se imply that there were separate markets. One such sub-division in the market for fuel for space heating would be between domestic and commercial user groups. Another would be the distinction between point and space heating. They asserted that whether or not there were two distinct markets in terms of the above examples depended on technical and economic evidence.

87. As far as point heating in domestic houses was concerned there was a strong substitutability between heating fuels. In relation to space heating, Lee McEvoy asserted that solid fuels, gas, oil and electricity were technically substitutable as energy sources for heating. The degree to which they were “in the same market” depended on the degree to which they were economic substitutes. Lee McEvoy adopted two measures of substitutability:

88. Lee McEvoy argued that, while the Authority correctly identified switching costs as a possible source of segmentation which would warrant treating alternative fuels as separate product markets, high switching costs were a necessary, but not sufficient, condition for considering alternative fuels as separate product markets. To support this claim they quoted the case of Chanelle v Pfizer. Pfizer and the Court asserted that the product Synulox should not be treated as a separate product market because while it might be the only reliable treatment for certain conditions in mammals, it could also be used as a treatment for other conditions for which there were several substitutes available. If Pfizer could increase price for all users it would lose profits. Moreover, repackaging the product in order to segment the market would still not enable Pfizer to price discriminate between users. On this basis, Lee McEvoy argued that substantial switching costs did not mean that fuels should be considered as being in different markets.

89. In relation to domestic and commercial markets for space heating, Lee McEvoy submitted that, unless there existed a set of barriers to arbitraging between these markets, they could not be separated. Given the large number of wholesale distributors supplying both users, they did not believe price discrimination between users was possible. In fact they asserted that they were not aware of any price discrimination between domestic and commercial user groups.

91. Lee McEvoy asserted that, while fuel products might not be perfect substitutes, the CPED estimates of McDowell and Thom (1995) would not permit one to say that solid fuels and gasoil were in separate markets as far as household usage was concerned. They also asserted that these CPED estimates were supported by further evidence of long run substitutability. Looking at fuel shares in total residential energy consumption revealed that the share of solid fuel fell to about 40% of household in the late 1990s. This fall was accounted for by growth in shares of oil, from 15% to 34%, and gas, from 0% to 20%. Solid fuel had regained some market share as a result of the second oil shock and the requirement that all new houses install a solid fuel heating system.

92. Moreover, Lee McEvoy argued, actual switching costs were not high for domestic users (as little as IR£400) given long run substitutability. They disagreed with the Authority’s view that high switching costs were a source of low substitutability. While they accepted that switching costs for domestic users in the short run were a non-trivial cost they asserted that, even in the short run, this was not a sufficient condition to have separate fuel markets unless a) the supplier could discriminate between those with, and those without, an alternative system and b) the number of those switching constituted a small proportion of total demand. If a significant number could switch more or less costlessly, raising fuel price was predicted to cause those who could switch to do so. Between 1990 and 1997 the percentage of households using more than one heating system rose from 2% to nearly 12%, a rise of almost 10%. In 1997, eleven per cent of households had and used more than one heating system. According to Lee McEvoy the existence of a substantial number of households (11%) with more than one system was a sufficient condition for non-separability of the market. They believed that this 11 per cent could switch more or less costlessly (IR£400) so that so a price rise of about 5-10% could not be maintained without a loss in profit for the supplier.

94. The Authority does not accept the case for a wider definition of the product market, to include alternative sources of energy, such as solid fuel. The Authority has considered the arguments put forward by Lee McEvoy in the light of the Commission Notice on the Definition of the Relevant Market. The Commission defines a relevant product market as “all those products and/or services which are regarded as interchangeable or substitutable by the consumer, by reason of the products’ characteristics, their prices and their intended use.” The relevant geographic market is defined as “the area in which the undertakings concerned are involved in the supply and demand of products or services, in which the conditions of competition are sufficiently homogeneous and which can be distinguished from neighbouring areas because the conditions of competition are appreciably different in those areas.” The relevant market within which to assess a given competition issue is therefore established by the combination of the product and geographic markets.

95. In terms of demand substitution, starting from the type of products that the undertakings involved sell and the area in which they sell them, additional products and areas will be included in, or excluded from, the market definition depending on whether competition from these other products and areas affect or restrain sufficiently the pricing of the parties’ products in the short term. The question to be answered is whether the parties’ customers would switch to readily available substitutes or to suppliers located elsewhere in response to a hypothetical small (in the range 5% to 10%) but permanent relative price increase in the products and areas being considered. If substitution were enough to make the price increase unprofitable because of the resulting loss of sales, additional substitutes and areas are included in the relevant market. The question to be answered is whether consumers of gasoil and/or kerosene would switch to other heating fuels, such as solid fuels, if confronted with a permanent price increase of 5% - 10% for gasoil and/or kerosene.

96. Quantitative tests such as elasticities (the extent to which a change in the price of a good or service causes demand for it to rise or fall) and cross price elasticities (CPED - the extent to which changes in the price of one good or service causes demand for other goods or services to rise or fall) are used in establishing patterns of substitution. Lee McEvoy have submitted elasticity estimates from a study by Mc Dowell and Thom (1995) as evidence of substitutability between solid fuels and gas and oil. The estimates of 0.4 and .07 [16] are relative price elasticity estimates and not CPED estimates. The relative price elasticity estimates may not be ‘good’ estimates because the model is a reduced form model. Moreover, the model does not take account of the simultaneous events occurring between oil and gas. This is highlighted in the results of the regression. The co-efficients between coal and oil and gas are significantly weakened in the third regression, where the effects among coal, gas and oil are considered jointly. This would suggest that events between oil and gas are also affecting the estimates. This is not accounted for in the model and so the estimates given here may be under/over estimated.

97. Taking .4 and .07 as approximations for CPED, however, these estimates are small in numeric value, suggesting that the relationship between coal and oil and gas are not strong relationships. The values of the CPED estimates between coal and oil and gas suggests that the percentage change in the quantity of coal demanded is small relative to the percentage change in the price of gas and in particular oil. For instance, they suggest that a 5% increase in the price of coal would mean a 2% increase in the demand for gas and a 0.35% increase in the demand for oil, thus suggesting that such a price increase could be sustained and therefore that the markets are separate.

98. The Authority accepts that the cost of substitution between energy systems may be lower relative to annual fuel expenditure in the case of large industrial users. However, the Authority believes that while the costs involved in adapting or upgrading a system may not be significant, the initial fixed cost in installing a system might be a significant cost for domestic users in the short run.

In addition, the Authority believes that it takes time for consumers to adjust their consumption patterns to a change in price. This is true of the heating market as fuel is a capital and not consumer good. The Authority would argue that the initial response to an increase in the price of a heating fuel, particularly oil, would be conservation. Customers would not be able to switch between fuels immediately because this would require a change in their heating system. Even if customers could change relatively costlessly the Authority would argue that customers would adopt a wait and see approach (option value) to establish whether the price change was permanent and so worth their while to change their heating system.

99. Low numeric values for the CPED estimates would support this. Demand may be inelastic in the short run but may be elastic over the long run. The Authority accepts that heating fuels are substitutes in the long run but believes that the degree of substitutability is limited in the short run. The Commission Notice on the Definition of the Relevant Market (para. 16) explicitly relates the test of a small but significant non-transitory increase in prices to the effect of competition on prices in the short term.

100. The Authority considers therefore that the possibility of short run substitutability is limited to those households which have two heating systems. In 1997, only 11 % of households had and used more than one system with the remaining 89% having no alternative. For those with more than one system, it is not clear to what extent the fuel systems are genuine alternatives or are complementary. In the Statoil report [17] the Authority noted that it was common for households, in particular, to use subsidiary sources of heating. The Authority does not consider that solid fuels form a viable substitute fuel to gasoil and/or kerosene.

101. In relation to the geographic market definition, the Authority considers that the case for a wider definition than national in relation to the notified transaction has not been proven. In the domestic market, transport costs would mitigate against the supply of the products from anywhere other than Northern Ireland, and even there such supply would probably be economical only in border areas. There are differences between the tax regimes in Northern Ireland and the Republic of Ireland for the products concerned. While major customers can procure fuel contracts on an EU-wide basis, no information has been supplied indicating what percentage of the overall market such contracts would constitute.

102. Section 4(1) of the Competition Act, 1991, as amended, 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 goods or services in the State or in any part of the State are prohibited and void.”

103. Section 3(1) of the Competition Act defines an undertaking as “a person, being an individual, a body corporate or an unincorporated body engaged for gain in the production, supply or distribution of goods or the provision of a service.” The parties to this agreement are the vendors, John Joe Hehir and Michael Moloney, and Statoil Ireland Ltd. The vendors are engaged for gain in the distribution of petroleum products and are undertakings. Statoil Ireland Ltd. is engaged for gain in the import, wholesale, distribution and retail of petroleum products. The agreement is an agreement between undertakings.

104. The Authority has previously expressed the view that, in general, employees per se are not undertakings, and that therefore an agreement between an employer and an employee is not an agreement between undertakings and is not therefore within the scope of Section 4(1) [18]. However, when the employee owns or controls the undertaking, the view of the Authority, expressed in several decisions, is that the individual can then be regarded as an undertaking [19]. Furthermore, the position changes once an employee leaves an employer and seeks to set up his or her own business. They would then be regarded as an undertaking. In this case John Joe Hehir and Michael Moloney own the business and can therefore be regarded as undertakings. The draft employee agreement is also an agreement between undertakings.

105. The agreement is an agreement between undertakings for the sale of a business. The Authority has expressed its view in several previous decisions [20] that such an arrangement per se does not offend against Section 4(1). On 2 December 1997 the Authority published a Category Certificate [21] which would apply to agreements relating to mergers and/or agreements for a sale of a business. This Certificate sets out the conditions under which the Authority considers that a merger or sale of business agreement would not offend against Section 4(1). It also provides a guide to the Authority’s thinking on all aspects of such agreements, including any non-competition clauses which they may contain. It is therefore proposed to apply the analysis set out in the Category Certificate to the current transaction. The category certificate is relevant to all mergers and sales of business without limitation as to the size or turnover of the undertakings involved. Since the current transaction is one of a series notified by Statoil, which have a cumulative effect on the relevant market, its horizontal and vertical effects are assessed in conjunction with those of the other agreements mentioned in paragraph 5.

106. A merger would, in the Authority’s opinion, contravene Section 4(1) where it resulted in, or would be likely to result in, a lessening of competition in the relevant market such as would allow, for example, the merged undertaking or all of the remaining firms in the market to raise their prices, as the effect of the arrangement would be to restrict or distort competition. Other factors, such as the ease with which new competitors could enter the market, are also relevant in assessing a merger in the Authority’s view. Among the factors which the Authority believes needs to be considered in order to decide whether a merger would have the effect of preventing, restricting or distorting competition is the actual level of competition in that market, the degree of market concentration and how it is affected by the merger, the ease with which new competitors may enter the market and the extent to which imports may provide competition to domestic suppliers.

107. The Authority considers that the market for the distribution of the products in question - commercial derv, gas oil and kerosene - exhibits a high degree of competition. The products themselves are homogeneous and end-users cannot distinguish between the products of different wholesalers. There are approximately 300 distributors in Ireland with a wide geographical spread. Consumers can easily compare prices and there are few, if any, areas of the country which cannot be served by a number of distributors. The effect of the transactions on the degree of market concentration is slight; they bring Statoil’s share in the retail markets for commercial derv to [9.0%], for gasoil to [9.3%] and for kerosene to [9.0%]. In the case of all three markets the effect of the transactions on the amount of Statoil product which is sold at the retail level is slight , since the distributors concerned are already largely distributors of Statoil’s products. The transactions will increase Statoil’s share in the retail market for commercial derv by [3 million litres] out of a total of 668 million litres - an increase of less than 0.5%. They will increase Statoil’s share in the retail market for gasoil by [16 million litres] out of a total of 1,130 million litres - an increase of 1.4%. The Authority also considers that barriers to entry into the market at distribution level are low. The Authority does not consider that barriers to entry into the wholesale market are heightened by the transactions, since the market already exhibits a high degree of vertical integration by contract. Finally, apart from product supplied by Whitegate oil refinery, the market is already largely supplied by imports and this situation will not be affected by the transactions.

109. Mergers between firms which operate at different stages in the production or distribution process, i.e. between a firm and its suppliers or a firm and its distributors or retailers, generally pose less risks to competition than mergers between actual or potential competitors. In certain circumstances, however, vertical integration resulting from vertical mergers could have anti-competitive effects. Such a merger could, for example, be designed to block access either to sources of raw materials or to distribution outlets. Nevertheless the Authority believes that in general such mergers would not contravene Section 4(1). A vertical merger would be regarded as anti-competitive where it was considered likely to result in market foreclosure. Any merger between firms which had the effect of foreclosing entry into one or more markets would, in the Authority’s opinion, contravene Section 4(1).

110. In this case Statoil has a market share of [23.9%] in the wholesaling of commercial derv. After completing the various transactions it is currently undertaking, it will have a retail market share of [9.0%]. In gasoil, Statoil’s wholesale market share is [21.8%] and its retail market share will be [9.3%]. In kerosene its wholesale market share is [23.7%] and its retail market share will be [9.0%]. In all three cases the Authority considers that the size of the vertical link established by the series of transactions is not such as to create a realistic possibility of foreclosure. The Authority therefore considers that, in so far as its vertical effects are concerned, the notified agreement does not offend against Section 4(1).

111. As a general rule an agreement which contains restrictions on an undertaking competing are anti-competitive and contravene Section 4(1). In the Authority’s opinion an exception to this general rule has to be made in respect of provisions in a sale of business agreement which restrict the vendor from competing with the business being sold, provided they are subject to certain limitations. The restraint must, however, be limited in terms of its duration, geographical coverage and subject matter to what is necessary to secure the adequate transfer of the goodwill.

112. In a large number of cases [22] the Authority has taken the view that a period of two years would be adequate to secure the transfer of goodwill in the vast majority of cases and that a longer period would, therefore, in the majority of cases restrict competition. In the present case the post-completion non-compete clause (6.2(a)(i)) has a duration of two years from the date of completion. This is within the period which the Authority generally regards as acceptable. The Authority therefore considers that this clause does not offend against Section 4(1).

113. The notified agreement also contains a clause (6.2(a)(ii)) whereby the vendors undertake not to solicit the custom of any person, firm, company or corporation which is now a customer of the company. The duration of this clause is also two years from the date of completion. Statoil have confirmed in writing to the Authority that the scope of the non-solicit covenant in the clause is limited to the Relevant Businesses . In the Category Certificate for Mergers the Authority states its opinion that, in the context of a sale of business agreement, such restraints, if they are limited, are not anti-competitive, but are merely ancillary to the main purpose of the agreement, which is to secure the transfer of the goodwill of the business. Thus such restraints do not, in the Authority’s opinion, contravene Section 4(1) provided that they are for a maximum period of two years, apply only to parties which have been customers of the firm at the time of the agreement or in the previous two years and apply only in respect of the business previously carried on by the vendor . The Authority considers that the restraints contained in Clause 6.2(a)(ii) are no more than is necessary to transfer the goodwill of the business and that, accordingly, this clause does not offend against Section 4(1).

114. Clause 6.2 (a) (iii) prevents the vendors from soliciting employees of the company, for a period of two years from the date of completion. Statoil have confirmed in writing to the Authority that the scope of the non-solicit covenant in the clause is limited to the Relevant Businesses . Again, as outlined in the draft Category Certificate for Mergers, the Authority is of the opinion that, in the context of a sale of business agreement, such restraints, if they are limited, are not anti-competitive, but are merely ancillary to the main purpose of the agreement, which is to secure the transfer of the goodwill of the business. Thus such restraints do not, in the Authority’s opinion, contravene Section 4(1) provided that they are for a maximum period of two years and apply only in respect of the business previously carried on by the vendor . The Authority considers that the restraints contained in Clause 6.2(a)(iii) are no more than is necessary to transfer the goodwill of the business and that, accordingly, this clause does not offend against Section 4(1).

115. Clause 6.2(a)(iv) prevents the vendors from making use of confidential information relating to the company, its clients or customers or any person having dealings with the company at any time in the future. The Authority considers that a restriction on the use or disclosure of confidential information for an unlimited period of time would not normally contravene Section 4(1). The exception would be where it could be shown that such a restraint would have the effect of preventing the vendor from re-entering the market once a legitimate non-compete provision, as defined above, had expired - for example, where the information consisted of technical know-how. The Authority considers that the issue of technical know-how does not arise in this case and that Clause 6.2(a)(iv) does not offend against Section 4(1).

116. This agreement also contains restrictive clauses. Clause 6.1 relates to trade secrets and requires the Executive to keep secret any confidential information entrusted to him and not to use such information in a way which might damage the Company or the Group. This restriction applies indefinitely after the termination of the agreement, but does not apply to information or knowledge which may reasonably be said to have come into the public domain. For the same reasons as outlined in Paragraph 100, above, the Authority does not consider that this provision offends against Section 4(1).

118. Clause 6.3(b) restricts the Executive for a period of one year from the date of the Agreement from soliciting customers of the Group in relation to the Products, within the Prohibited Area. Since these restrictions fall within the terms outlined in Paragraph 98, above, the Authority considers that are no more than is necessary to transfer the goodwill of the business and that, accordingly, this clause does not offend against Section 4(1).

119. In the Authority’s opinion, Statoil Ireland Ltd., Clare Oil Company Ltd, John Joe Hehir and Michael Moloney are undertakings within the meaning of Section 3(1) of the Competition Act, 1991, as amended, and the notified agreements are agreements between undertakings. In the Authority’s opinion, the notified agreements do not prevent, restrict or distort competition and thus do not offend against Section 49(1) of the Competition Act.

The Competition Authority certifies that, in its opinion, on the basis of the facts in its possession, the draft Share Purchase Agreement between Statoil Ireland Ltd and John Joe Hehir and Michael Moloney for the entire issued share capital of Clare Oil Company Ltd, and a draft employment agreement with Michael Moloney, notified under Section 7 of the Competition Act on 14 August 1997 (notification no. CA/15/97) do not offend against Section 4(1) of the Competition Act, 1991, as amended.

[14] In fact the conditions, set out in Article 4 of the amended “Proposed Merger or Take-over Prohibition Order (S.I. No. 214 of 1996)” were (a) the sale to Maxol of a certain number of petrol stations; (b) the divestiture of a number of company-owned stations and (c) the divestiture of “the entire issued share capital of Estuary Fuels Limited or, as Statoil may elect, of the entire motor fuels business of Estuary Fuels Limited.”

	1990	1991	1992	1993	1994
Motor gasoline	0.89	0.91	0.97	0.95	0.99
Automotive diesel oil	0.60	0.64	0.71	0.72	0.76
Heating/non-automotive gas oil	1.07	1.12	1.15	1.15	1.31
Residual fuel oil	0.95	1.14	1.22	1.21	1.40
Other products	0.63	0.68	0.70	0.75	0.80
	4.14	4.49	4.75	4.78	5.26

		Statoil	Shreelawn	Clare	Rabbitt	[ ]	Bal- doyle
Commercial Derv	Volume (million litres)	[
	% market
Gasoil	Volume (million litres)
	% market
Kerosene	Volume (million litres)
	% market						]

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	Irish Competition Authority Decisions
You are here: BAILII >> Databases >> Irish Competition Authority Decisions >> Statoil Ire. Ltd./Clare Oil Co. Ltd. Share Purchase Agreement and Service Employment Agreement. [1998] IECA 490 (30th January, 1998) URL: http://www.bailii.org/ie/cases/IECompA/1998/490.html Cite as: [1998] IECA 490

Wholesalers’ national Market Shares in the Commercial Derv, Gasoil and Kerosene Markets (current figures) (%) [7]
Primary Supplier	Commercial Derv	Gasoil	Kerosene
Statoil	[
Esso
Shell
Texaco
Maxol
Tedcastles
Burmah
Estuary
Others			]

Irish Competition Authority Decisions

Statoil Ire. Ltd./Clare Oil Co. Ltd. Share Purchase Agreement and Service Employment Agreement. [1998] IECA 490 (30th January, 1998)