6.6 In case the agreements/ other
documents relating to the combination contain a non-compete clause or the
parties to the combination have executed/ or propose to execute a
non-competition agreement, in relation to the combination, the following
details must be provided:
6.6.1 Scope, including: (i) the
enterprises covered by the non-compete provision; and (ii) period; geographic
scope and the products/ services covered under the non-compete clauses.
6.6.2 Justification for the
non-compete provisions covering each of the elements as mentioned above.
Practice followed
Execution of contracts with post-termination exclusivity clauses could
be questioned by CCI as being restrictive and exclusionary if: (a) the term of
such clauses exceeds a reasonable period; (b) the subject matter of exclusivity
is extremely wide; and (c) the geographical scope of exclusivity is extremely
wide.
As a general practice, duration of post-termination exclusivity or
non-compete for more than 3 years (unless it can be justified on an objective
basis) has not been looked upon favourably by the CCI because as per CCI such a
practice leads to market foreclosure.
The CCI has sought behavioural commitments in - Orchid
Chemicals and Pharmaceuticals Limited/Hospira Healthcare India Private Limited:[1]
The transaction in this case related to the pharmaceutical sector
and the non-compete obligation as entered into between the parties is set out
below:
·
- the product scope of the non-compete extended to the target enterprise and the promoter of the target enterprise in relation to certain business activities relating to the business division that was transferred, i.e. research, development and testing of injectable formulations of certain kinds of active pharmaceutical ingredients; and
- the time period of non-competition extended to 5 years on the target enterprise and 8 years on the promoter.
As a
justification for the same the parties to the Hospira-Orchid combination
review contended that the incorporation of such non-compete clauses was a standard
industry practice, which was ‘generally considered necessary for the effective
implementation of the proposed combination and allows the acquirer to obtain
full value from the acquired assets’.
Being
questioned by the CCI, the parties suggested certain modifications in the Hospira-Orchid
matter by offering to reduce the time period to four years in relation to the
domestic market in India and removed certain R&D restrictions, which were
accepted by the CCI
CCI in its order noted:
“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, so as to ensure that such obligations
do not result in an appreciable adverse effect on competition.”
While
reviewing the combination notification, CCI may ask for the agreement to be
submitted to it for review.
In view
of the CCI, the non-compete clause should only cover those products which are
being currently developed, manufactured or sold by the target entities; and
thus acquirer was issued notice to provide a justification for the above
non-compete clauses. The blanket restrictions as to scope (time period and the
products covered) are generally questioned by CCI and are not favourably seen.
Guidance Notes
The
justification for the length/ scope of the non-compete agreement may be
provided by taking into account, inter alia, the following factors:
- Time taken by a new entrant to gain at least 5% in the relevant market
- Nature of the industry
- Time required for obtaining regulatory approvals in the industry and the gestation period specific to the sector
- Any other transaction with specific details
The
above are very rough and very broad guidelines for determining/ assessing the
AAEC of such non-compete clauses in the agreements. Therefore, it will be expedient
for the parties to carefully draft the non-competition agreement and carefully
conduct its due diligence while ascertaining the scope and nature of the
industry involved and the non-compete sought.
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