Hariharan, who is a Foreign Lawyer in Rodyk & Davidson LLP’s Corporate and
Competition Law Practice in Singapore. Soumya obtained her BSL.LL.B degree
from ILS Law College and has an LL.M degree (Corporate & Financial Services
Law) from the National University of Singapore.
of competition law risks arising from non-compete clauses and how they have
been dealt with by the European Commission]
clauses in Merger and Acquisition (“M&A”)
jurisdictions recognize that certain contractual restrictions in the form of
non-compete clauses may be directly related and necessary for the successful
implementation of a merger. However there are times when non-compete clauses
incorporated in M&A transactions and joint ventures carry the risk of
infringing competition law.
timelines and affect the transaction from obtaining a favorable clearance from
the competition law regulator. Companies stand a risk of investigation by the competition
law regulators and financial penalties can be imposed for illegal non-compete
clauses in M&A transactions carry certain competition law risks, in light
of recent decisions rendered by the European Commission (“EC”) and the
Competition Commission of India (“CCI”). The article also highlights the
importance of drafting non-compete clauses in compliance with competition law.
non-compete obligations from the Vendor. To effect a successful transaction, certain
restrictions on competition between the Parties are required to the extent that
they are directly related and necessary for the implementation of the merger.
“ancillary restraints” in competition law parlance. The most common examples of
ancillary restraints include non-compete clauses, license agreements, purchase
and supply agreements.
obligations for the effective implementation of the proposed merger that allows
the Acquirer to obtain full value from the acquired assets including tangible
and intangible assets such as know-how and goodwill. In Europe, the 2005 Notice on restrictions directly related and necessary to concentrations
(the “Ancillary Restraints Notice”)
provides clarity and guidance on the treatment of non-compete clauses.
of competition law, i.e. cases where the non-compete clause is not directly
related and necessary for the implementation of the merger.
non-compete clauses. One of the cases
deals with an illegal non-compete entered into by two telecom operators, where
the non-compete clause operated as a market sharing agreement. The second case
deals with a non-compete clause that was operative post the termination of the
joint venture which was considered excessive in scope and duration by the EC. The
following cases serve as effective guidance to those companies that plan to
incorporate non-compete clauses in their M&A transactions.
Telecom in relation to a non-compete clause in the context of Telefónica’s
acquisition of sole control of the Brazilian mobile operator Vivo. They were
fined EUR 79 million for a breach of Article 101 of the Treaty on the
Functioning of the European Union (TFEU) which prohibits anti competitive
undertakings and concerted practices which may affect trade within EU member
states and which have as their object or effect the prevention, restriction or
distortion of competition within the EU market.
jointly owned by both Telefónica and Portugal Telecom. The parties entered into
a non-compete clause in their purchase agreement as a part of the acquisition which
required Telefónica and Portugal Telecom not to compete with each other in
Spain and Portugal from the end of September 2010.
Portugal Telecom deliberately agreed to stay out of each other’s home markets
rather than competing with each other. The
parties terminated the non-compete agreement in early February 2011 nearly four
months into operation by offering commitments to the EC. It is useful to note that in this case, the EC
commenced investigations on its own initiative and fined Telefónica and
Portugal Telecom notwithstanding the short duration of the infringement.
combined their activities in nuclear technology and nuclear power plants. The Shareholders
Agreement for the joint venture included a non-compete clause for a period of
11 years from the termination of the joint venture. The non-compete clause covered
the core nuclear services of the joint venture as well as non-core products and
services in relation to which the joint venture was not active. In 2009,
Siemens withdrew from the joint venture and Areva acquired sole control over
the joint venture.
relating to the non-compete clause. The
EC adopted a preliminary decision in 2011 that Siemens and Areva had infringed
Article 101 due to the non-compete obligation being excessive in scope and
duration. According to the EC the scope of the non-compete clause was excessive
because it prevented Siemens from competing in markets where Areva NP was only
a re-seller of Siemens products.
to limit the scope of the non-compete clause to Areva NP’s core products and
services for a period of three years after Siemens exit from the joint venture.
Under the commitments the non-compete obligations would only apply to certain
core products and services offered by the joint venture company solely
controlled by Areva.
Commission investigated Telefónica and Portugal Telecom in 2011 and investigated Areva and
Siemens in 2010.
dated 23/01/2013 http://europa.eu/rapid/press-release_IP-13-39_en.htm
European Commission fined Telefonica and Portugal Telecom EUR 66894000 and EUR
12290000 respectively for agreeing not to compete with each other.
COMP/39736 dated 18/06/2012