The Growing Complexity Of Non-Compete Clauses In Family Business

Last fortnight, there were news reports of Bajaj Auto Ltd. starting the operations of its subsidiary non-banking financial company Bajaj Auto Credit Ltd. To scale it up, Bajaj Auto will invest Rs 3,000 crore over the next two years into BACL.In the partition among the late Rahul Bajaj’s sons in 2008, the eldest son Rajiv Bajaj was given control of the flagship firm Bajaj Auto, while his younger sibling Sanjiv Bajaj was to manage Bajaj Finserv Ltd. Bajaj Auto manufactures and markets two-wheelers and three-wheelers, while Bajaj Finserv is into the entire gamut of financial services.More than a year back, there was a sharp dispute over the use of the “Hero” brand between the Naveen Munjal-led Hero Electric and Pawan Munjal’s Hero Motocorp Ltd. Even though the issue went to court, the matter was resolved only through arbitration.On the other hand, last month, the Venu Srinivasan-led TVS Group signed a non-compete agreement even among the four nuclear family members, who apart from Venu include his wife Mallika Srinivasan, Lakshmi Venu and Sudarshan Venu. Traditionally, a non-compete agreement would be signed between the two factions of a business group so that one group does not trespass into sectors where the other group operates during a pre-decided period. But today, in an era where business opportunities are virtually unlimited and new sunrise industries are rising at a fast pace, business groups are rethinking the very idea and application of non-compete.Says MSA Kumar, noted family business advisor, “I have often seen non-compete issues particularly around the use of a company’s mother brand. Brand is an intangible asset and difficult to divide.” Adds Rishi Bhatnagar, New Delhi-based senior corporate lawyer, “Non-compete clauses have not lost their relevance because it allows the divided family business groups some breathing space. Additionally, it is not for perpetuity but for a limited period. But new facets of it are emerging.”Bhatnagar argues that one of the best cases of the application of non-compete is the Reliance Group. The division of the group between the two brothers Mukesh and Anil Ambani in 2005 saw the oil and gas business going to Mukesh and the rest—including infrastructure, financial services and telecom—being given to the younger sibling Anil. In this case, there was a non-compete clause. However, with the passage of time, Mukesh entered financial services and telecom with Jio and made a success of them, while most of Anil’s group companies turned lemons.He also adds that non-compete agreements have other advantages like retaining employees during a family division and strengthening the entire supply like distributors and vendors.There are a number of reasons why this issue is in the spotlight now. First, business family partitions are increasingly becoming planned exercises, even when they are not amicable. Second, family business groups have greater access to advisors, mediators and CEO coaches who smoothen the landscape with tools and techniques like family constitution and mediation frameworks. Three, opportunities for smart businesses are growing by leaps and bounds. Therefore, non-compete clauses often limit family business groups. Four, daughters and sons-in-law are increasingly wanting their share of the business pie, which was not so much the case before. Finally, the joint family system that pervaded large parts of Indian family groups are now breaking down and nuclear families are becoming the norm. This was seen in the case of the TVS Group recently. Division and non-compete are easier to execute in nuclear families..The New Guard: Challenges And Opportunities In A Family Business.While the implementation of non-compete clause enters an interesting phase, experts suggest that there are many ways in which they can be executed in a more creative manner.For example, if there is such an agreement within two groups of the same family, the first right of refusal can be given within the group. The fact is that competition from outside is at a much greater force than ever before. For example, take the case of the Bajaj family. Bajaj Finserv is tasting strong competition from the market place, from players like Mahindras and Tatas.Today, the division of a group is largely done along the lines of verticals like, for example, how it was done in the case of Reliance. However, if there are not too many verticals in the parent business group, then partition and non-competes can also be done along geographies.Finally, often such non-compete agreements are done without much detailing. Kumar argues that the time has come for such pacts to be done in a much more granular form. For example, rather than just mentioning financial services, segments and sub-segments like insurance could also be added into the agreement.Clearly, we are witnessing a new phase in the application of non-compete agreements in Indian family business groups..How To Succeed At Succession Planning In Family Businesses.George Skaria is the former editor of Indian Management and Asian Management Review.The views expressed here are those of the author, and do not necessarily represent the views of NDTV Profit or its editorial team.

The Growing Complexity Of Non-Compete Clauses In Family Business

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