[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.
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]
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.
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.
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.
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.
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.
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 2005Notice 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.
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.
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]
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.
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.
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.
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.
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.
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.
- Soumya Hariharan
[1] The European
Commission investigated Telefónica and Portugal Telecom
in 2011 and investigated Areva and Siemens in 2010.
[3] The European Commission fined Telefonica and
Portugal Telecom EUR 66894000 and EUR 12290000 respectively for agreeing not to
compete with each other.
SOURCE : http://indiacorplaw.blogspot.in/
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