CCI’s Decision to Eliminate Non-Compete Restrictions in Combinations

[Vishal Rajvansh is a third year student at National University of Studies and Research in Law, Ranchi]

The Competition Commission of India (“CCI”) has released a press note dated 15 May 2020 seeking public comments regarding the examination of non-compete restrictions under the regulation of combinations. Notably, the CCI had earlier mandated the parties to a combination to furnish information on non-compete restrictions for the purpose of examining the authenticity of the particular combination under para 5.7 of Form I in Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Amendment Regulations, 2019. Through the instrumentality of this note, the CCI has exhibited its intention to omit para 5.7 of the Amendment Regulations thereby providing flexibility to the parties in determining non-compete restrictions. It has also reduced the information burden on the CCI by transferring the onus to the parties.

The CCI’s insight into non-compete obligations firstly rooted in Orchid Chemicals/ Hospira Healthcare combination where the CCI observed that “non-compete obligations, if deemed 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, to ensure that such obligations do not result in an appreciable adverse effect on competition.” However, several qualms still existed as to the scope and ambit of such non-compete obligations. The CCI has, therefore, issued a Guidance Note on non-compete restrictions to enable parties to a combination to achieve clarity and legal certainty concerning the treatment of non-compete restrictions.

The Guidance Note provided requisite precision on the scope and ambit of non-compete restrictions in M&A transactions.  However, there still existed quandaries of whether the non-compete clauses (“NCC”) not complying with the principles laid down by the Guidance Note constituted an ancillary restraint or not. Notably, the EU Ancillary Notice identifies that exceptional circumstances may exist which may justify departing from the principles laid down by the Notice. Meanwhile, when the CCI was expected to expand the scope of the Guidance Note to cover other ancillary restraints such as purchase or supply obligations, confidentiality clauses or non-solicitation clauses like the EC guideline, it rather decided to shift the onus to the parties themselves to self-assess their NCCs and ensure that those clauses do not have the potential to cause an adverse effect on competition. The proposed amendment aims to dispense with the ex-ante assessment of NCCs and the combination review process under section 6 of the Act. All NCCs will now be subjected to scrutiny under section 3 and section 4 of the Act.

The CCI’s rationale was that prescribing a general set of standards for assessment of non-compete restrictions may not be appropriate in modern business environments. Further, conducting a detailed examination on a case by case basis as part of the combination review process may not be feasible considering the tight time cap of 210 days for combination approvals prescribed under the Act.

The Role of Guidance Note on Ancillary Restraints

Evidently, NCC form the essentials of a contract as it serves vitally for various corporate transactions. They provide purchasers some protection against competition from sellers so that they may benefit by obtaining the full value of the transferred assets (both tangible and intangible). Such non-compete clauses can be necessary for purchasers to gain the loyalty of customers and to fully utilise the know-how acquired. The CCI considers NCCs to be ancillary restraints viz restrictions which directly relate to the transaction intended to ensure that the commercial freedom of the parties do not poach the fairness of the competition. The guidelines set by the European Commission (“EC”) affirm that NCCs must be directly related to and necessary for the implementation of the transaction. Notably, EC guidelines allow specific imposition of restrictions on licences of patents, similar rights, or know-how methods, which can be considered necessary for the implementation of the transaction. Likewise, the CCI’s Guidance Note states that non-compete restrictions that are not ancillary to the combination do not automatically infringe upon the provisions of the Act, yet commission’s approval of such combination will not include the non-compete restrictions. Consequently, in the absence of such restrictions, the combination cannot be implemented or can only be implemented under much more uncertain conditions, at a substantially higher cost, over an appreciably longer period or with considerably higher difficulty.

Conclusion

Pertinently, NCC is implemented in a transaction to preserve the value of the investments being made by the acquirer, with the aim to support the underlying economic activity. The implementation of ancillary restraints requires a balance between fostering a healthy business transaction and maintaining fair competition in the market. Furthermore, it is imperative to ensure that the ancillary restraints do not move beyond the strict necessity. Thus, the CCI should consider such restraints holistically after considering the complications that can ascend due to the lack of such restrictions. Even if the CCI bestows upon the parties the onerous liability to form their NCCs as per their comfort without subjecting them to a review and approving any combination, the parties might take unintended benefit of such freedom. The CCI seems to be struggling to review non-compete clauses within the 30-day merger review timeframe. It has been suggested that the period be reduced to 20 days in the draft Competition (Amendment) Bill, 2020. Due to this, the CCI intends to scrap the NCC restrictions. However, it feels like a hasty move.  While this move of the CCI might reduce the burden on them, it might give rise to alternate hardships for the CCI in the combinations where NCCs are not in conformity with the Guidance Note. Although this move can prove to be best for the parties to a combination as well as the CCI if the formation of NCCs is mandated to follow the Guidance Note thereby taking away the option of forming NCCs as per the whims and fancies of the parties.

– Vishal Rajvansh

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