M&A: Competition Regulator Proposes To Make Non-Competes Less Restrictive
Even though competition law frowns upon them, non-compete clauses are an integral part of most mergers and acquisitions. The scope and extent of such clauses needs to be disclosed while seeking the Competition Commission of India’s approval.
To give deal-makers clarity, the regulator had issued a guidance note on this laying down the acceptable duration and scope of non-compete clauses. Broadly, the regulator has been comfortable with non-compete clauses that seek to restrict the seller for three-four years and to the main products of the business being acquired.
But in a lot of deals, lawyers told BloombergQuint, the duration of non-compete clauses and the restrictions it placed on the seller becomes a back-and-forth issue between the parties and the regulator. That’s because CCI’s guidance is sector agnostic which, experts say, makes it commercially impractical.
The regulator is now recognising that. In a recent proposal, the CCI has said:
It has been observed that prescribing a general set of standards for assessment of non-compete restrictions may not be appropriate in modern business environments. While it may be possible to conduct a detailed examination on case by case basis, the same may, however, not be feasible considering the timelines followed in combination cases.
Competition Commission of India
And so, it has proposed to do away with the disclosure requirement on non-compete restrictions and their justification that needs to be provided while seeking CCI’s approval. But this is not to give businesses a free hand. Parties will be responsible for ensuring that their non-compete arrangements don’t fall foul of the anti-competitive agreement and abuse of dominance provisions of the law.
This is a welcome proposal, Aparna Mehra, partner at Shardul Amarchand Mangaldas, said, as it will mean parties won’t have to provide detailed information and justifications in the filing. Of course, the transaction documents that will be shared with the CCI will contain the non-compete clauses, she said.
The fact that details regarding the non-compete clause are not required to be provided upfront as part of the merger filing does not necessarily remove the clause from the scope of antitrust laws. This proposal will allow capital intensive industries or where customer loyalty is for a longer period to justify a longer non-compete period.Aparna Mehra, Partner, Shardul Amarchand Mangaldas
The move is in line with the CCI’s new-found approach on self-assessment by parties and lawyers, Mehra said.
In practice, the self-assessment has been a reality since CCI issued its guidance note three years ago.
In none of its orders, the CCI has explicitly blessed non-compete clauses or as it’s called in competition law parlance, regarded then as ancillary to the deal. But in more than twenty cases, Mehra pointed out, the regulator has recorded that the clause is not ancillary and therefore, the parties have had to make an independent assessment.
This approach is also in line with some international jurisdictions where the review of the non-compete arrangement is not a part of deal approval, Avaantika Kakkar, partner at Cyril Amarchand Mangaldas, told BloombergQuint. The proposal is reasonable since CCI’s guidance was not always possible to adhere to because not every transaction is justified with a standard form non-compete, she said.
In some sectors, 5-7 years may be usual and in others, such as, infrastructure, there may be longer non-compete arrangements. While the guidance did limit the scope and duration of the non-compete provision, it is not as if the CCI refused to accept objective justification for longer agreement.Avaantika Kakkar, Partner, Cyril Amarchand Mangaldas
The regulator was aware that one size would not fit all but the justifications required by the regulator did add to review timelines. The stretched deal-approval time will be addressed if the regulator implements this proposal, Kakkar said.