Competition Law Risks: Non-Compete Clauses in M&A Transactions – Part 2

[The following post is contributed by Soumya Hariharan, who is a Foreign
Lawyer at Rodyk & Davidson LLP’s Corporate & Competition Law Practice
in Singapore. Soumya obtained her BSL.LLB degree from ILS Law College and has an
LL.M degree (Corporate & Financial Services Law) from the National
University of Singapore. She can be reached at [email protected]
These views are personal.
After dealing the general overview of the issues in
the previous
post
, Soumya now discusses the manner in which the CCI has dealt with the
issue in India and also provides some pointers to drafting non-compete clauses
such as they withstand scrutiny under law]
Treatment of Non-Compete Clauses in India
The merger control regime in India came into force only in 2011 and the
CCI in one of its recent decisions, accepted modifications in relation to the
non-compete obligations entered into between the parties to the combination.[1]
This has been the first time the CCI has provided clarity on how it views
non-compete obligations in relation to proposed combinations in India.
Orchid Chemicals and Pharmaceuticals Limited (“Orchid”) and Hospira
Healthcare India Private Limited (“Hospira”) filed a notice under Section 6(2)
of the Competition Act 2002; pursuant to the execution of a Business Transfer
Agreement (“BTA”).
The CCI observed that the BTA contained a non-compete clause, which
required Orchid and its promoter not to undertake certain business activities
pertaining to the transferred business for a period of eight years and five
years, respectively. The non-compete clause also restricted research,
development and testing of Penem (including Carbapenem) and Penicillin API’
(Active Pharmaceuticals Ingredients) for injectable formulations. The CCI
opined that non-compete obligations if necessary to be incorporated should be
reasonable, particularly in respect of (a) the duration over which such
restraint is enforceable; and (b) the business activities, geographical areas
and person(s) subject to such restraint in order to ensure that such
non-compete obligations do not result in an appreciable adverse effect on
competition.  
The parties to this combination, offered modifications under the
provisions of Regulations 19(2) of the Combination Regulations. The parties
agreed to (a) limit the duration of the non-compete obligation to four years in
relation to the domestic market in India; and (b) provide in the BTA that
orchid shall be allowed to conduct research, development and testing on such
new molecules, which would result in the development of new Penem (including
Carbapenem) and Penicillin API’ for injectable formulations, which are
currently not existent worldwide.
The CCI accepted the modifications offered by the parties and also
directed them to make the necessary amendments in the BTA to incorporate the
modifications.  The CCI approved the
proposed combination under Section 31(1) of the Competition Act 2002. This
decision of the CCI is helpful as it provides a basic framework as to how the CCI
interprets non-compete obligations in an Indian context It is possible that the
CCI may provide greater clarity in the treatment of non-compete clause in
subsequent cases notified before it.
Drafting an Approriate Non-Compete Clause
The trend in Europe indicates that competition law regulators are
keeping a keen watch on the use of non-compete clauses in M&A transactions.
Non-compete clauses are of great commercial importance and parties must ensure
that they are drafted in compliance with competition law.
The cases discussed above also serve to remind that the investigation
into the non-compete obligations did not arise from complaints by third parties
or competitors but was initiated by the EC itself.
Parties that wish to incorporate non-compete clauses should have a
two-fold objective while drafting them i.e. non-compete clauses should be
drafted appropriately not only to obtain a favorable merger clearance but also
to avoid any anti-competitive concerns arising from the operation of such
clauses. As a general rule, for non-compete clauses to be considered ancillary
restraints they must be directly related and necessary for the operation of the
transaction.
Some of the main points that parties could bear in mind while drafting
non-compete clauses, include:
– the duration of the non-compete should be reasonable
in length;
– the scope of the non-compete activity must relate to
the particular economic activity in order to avoid broad non-compete
obligations that prohibit competition outside the scope of the transaction;
– any restrictions imposed by the use of the
non-compete clause must be  directly
related and reasonably necessary for the implementation of the transaction;
– any geographic restrictions imposed by way of
non-compete obligations must not operate as market-sharing arrangements; and
– in relation to India, the operation of the
non-compete clause does not result in an appreciable adverse effect on
competition.
It would be prudent for companies to engage competition lawyers early in
the transaction, to carry a competitive analysis on the use of non-compete
clauses. The analysis would help companies to identify the geographic coverage,
required duration and the legitimate scope of the non-compete to ensure that
the non-compete clause is drafted appropriately taking into account the
possible anti-competitive effect such an obligation would have on the
transaction.
– Soumya Hariharan

[Concluded]



[1] Orchid
Chemicals/ Hospira Healthcare (C-2012/09/79)

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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