[The following post is contributed by Soumya
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.
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.
These views are personal.
In this first part, Soumya provides a broad overview
of competition law risks arising from non-compete clauses and how they have
been dealt with by the European Commission]
of competition law risks arising from non-compete clauses and how they have
been dealt with by the European Commission]
Competition law regulators have been actively investigating non-compete
clauses in Merger and Acquisition (“M&A”)
transactions.[1] Most
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.
clauses in Merger and Acquisition (“M&A”)
transactions.[1] Most
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.
Non-compete clauses that carry competition law risks can delay deal
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.
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.
This series of posts aims to give a broad overview on how 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.
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.
Ancillary Restraints and Non-Compete Clauses
Non-compete clauses are usually negotiated in most M&A transactions and it is fairly common for the Acquirer to require
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.
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.
Such restrictions, negotiated by the Parties are referred to as
“ancillary restraints” in competition law parlance. The most common examples of
ancillary restraints include non-compete clauses, license agreements, purchase
and supply agreements.
“ancillary restraints” in competition law parlance. The most common examples of
ancillary restraints include non-compete clauses, license agreements, purchase
and supply agreements.
Usually it is standard business practice to incorporate non-compete
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.
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.
The EC has been scrutinizing non-compete clauses that may result in a breach
of competition law, i.e. cases where the non-compete clause is not directly
related and necessary for the implementation of the merger.
of competition law, i.e. cases where the non-compete clause is not directly
related and necessary for the implementation of the merger.
Two recent decisions of the EC provide further clarity as to how it interprets
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.
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.
Telefónica and Portugal Telecom[2]
In 2011, the EC investigated two large telecom players Telefónica and Portugal
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
agreements.[3]
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
agreements.[3]
Article 101 prohibits all agreements, decisions and practices between
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.
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.
In 2010, Telefónica acquired sole control of Vivo which was until then
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.
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.
The EC held that by implementing the non-compete clause, Telefónica and
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.
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.
Siemens and
Areva[4]
Areva[4]
In 2001 Areva and Siemens established a joint venture Areva NP, which
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.
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.
In 2010 the EC opened an investigation over the competition concerns
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.
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 address the concerns of the EC both Siemens and Areva offered commitments,
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.
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.
– Soumya Hariharan
[1] The European
Commission investigated Telefónica and Portugal Telecom in 2011 and investigated Areva and
Siemens in 2010.
Commission investigated Telefónica and Portugal Telecom in 2011 and investigated Areva and
Siemens in 2010.
[2] See Press Release
dated 23/01/2013 http://europa.eu/rapid/press-release_IP-13-39_en.htm
dated 23/01/2013 http://europa.eu/rapid/press-release_IP-13-39_en.htm
[3] The
European Commission fined Telefonica and Portugal Telecom EUR 66894000 and EUR
12290000 respectively for agreeing not to compete with each other.
European Commission fined Telefonica and Portugal Telecom EUR 66894000 and EUR
12290000 respectively for agreeing not to compete with each other.
[4] Case
COMP/39736 dated 18/06/2012
COMP/39736 dated 18/06/2012