This article is written by Sun Hwa Choi who is pursuing Diploma in M&A, Institutional Finance and Investment Laws (including PE and VC transactions) from Lawsikho.
Table of Contents
Introduction
CCI invites public comments on the amendment to the Combination Regulations that omit the requirement to provide non-competitive information.
In a recent announcement on its website by the Competition Commission of India (“CCI”), the CCI has invited public comments on the proposed amendment to the Competition Commission of India (Procedure on transaction of business relating to combinations) Amendment Regulations, 2020 (“Combination Regulations”).
The proposed amendment omits paragraph 5.7 from the FORM I filings to find information on non-competitive restrictions agreed between the parties for combination and justification. The proposed amendment aims to omit the pre-evaluation of non-compete clauses in accordance with the merger review process, i.e. section 6 of the Competition Act of 2002 (‘Act’).
All non-compete clauses are now subject to investigation under the antitrust provisions of the Act i.e. section 3 and/or section 4. The Commission has previously issued a Guide to Non-Compete Restrictions (“Guideline Note”) describing situations in which non-compete restriction is considered to be ancillary’ or ‘not ancillary’.
Interestingly, a finding that the non-compete restrictions was ‘not incidental’ does not automatically raise an allegation of a violation of the Act provisions, and the CCI could not call this provision anti-compete without performing a compete damage analysis. The rationale for the CCI is that defining a general set of standards for anti-compete restrictions assessments may not be appropriate in a modern business environment.
In addition, considering the strict period stipulated in the Act for combination approval, it may not be possible to conduct a detailed review on a case-by-case basis as part of the combination review process (If 210 days have passed from the date of notification of the combination, the combination is considered approved.) The proposed amendment is expected to provide flexibility to the parties to combination in determining anti-compete restrictions while reducing the information burden.
However, the CCI has nonetheless included a warning that the parties must conduct a self-assessment to ensure that non-compete contracts do not violate Section 3 and/or Section 4 of the law.
Opinions: By removing the requirement for self-declaration of non-compete clause, the proposed amendment proposed in FORM 1 of the existing union regulations imposes a burdensome responsibility for the parties to conduct a self-assessment of the provisions in advance and verify the provisions prior to filing a notice under FORM I, it may not be considered as likely to adversely affect competition. For this assessment, the previous guidance note are still useful as they provide sufficient guidance on the parties’ non-compete obligations.
In addition, hidden doubts that the current Guideline Note relate only to the compete assessment of merger cases under Section 6 of the Act has now been stopped by the CCI. It is now clear that the Guidance Note are equally valid for different contracts/transaction between the parties, regardless of whether they qualify as a combination under section 5 of the Act, examples of exemptions available: e.g. de minimis, etc.
Furthermore, the changes proposed in FORM 1 of the existing Combination regulations are consistent with the CCI’s decision-making practices since the end of 2018, where the CCI has the right to review non-compete provisions under Section 3 and/or Section 4 of the Act. rather than instructing the parties to make modifications as part of the combination approval process, it is not incidental according to the guidance note.
However, the proposed change is intended to shift the burden on the trading parties to ensure that the anti-compete provisions contained in the transaction document are in compliance, especially based on the evaluation framework provided in accordance with the guidelines, which is still useful.
CCI’s Decision to Eliminate Non-Compete Restrictions in Combinations
The Competition Commission of India (“CCI”) has released a press release on May 15, 2020 seeking public opinion on non-competition restriction testing under the regulation of combinations. In particular, CCI previously mandated that the CCI brought together parties to provide information on non-competition restrictions for the purpose of examining the authenticity of certain combinations pursuant to Section 5.7 of Form I (Procedure for Combined Transactions on Business) Amendment Regulations, 2019.
By means of this note, the CCI has shown its intention to provide parties with flexibility in determining non-competitive restrictions by omitting section 5.7 of the amendment Regulations. It also reduced the information burden on CCI by transferring the responsibility to the parties.
The CCI’s insight into its non-competitive obligations is first rooted in the Orchid Chemicals/Hospira Healthcare combination observed by CCI, that “The non-competitive obligations must be reasonable, especially with respect to (a) the period in which such restrictions are enforceable, if consolidation is deemed necessary; and (b) the business activities, geographic areas, and person(s) subject to such restrictions ensure that such obligations do not have a significant adverse impact on competition.”
However, there were still some problems with the scope and limit of such non-competitive obligations. Therefore, the CCI has issued a Guidance Note on non-competitive restrictions, enabling the parties to a combination to achieve clarity and legal certainty regarding the handling of non-competitive restrictions.
The guidance note provided the necessary precision for the scope and limit of non-competitive restrictions in M&A transactions.
However, the question remains as to whether non-competition clauses (“NCC”) that do not comply with the principles laid down in the guidance note constitute ancillary restrictions.
In particular, the EU Ancillary notice identifies that unprecedented causes may remain that could justify a departure from the principles set out in the notice.
On the other hand, when it was expected that the CCI would expand the scope of the Guidance Note to include purchase or supply obligations, confidentiality provisions, or other ancillary restrictions such as non-claim provisions such as EC guidelines, rather, it has decided to self-evaluate the NCC and pass responsibility to the parties to ensure that its provisions are not likely to negatively impact competition.
The proposed amendment aims to omit the pre-evaluation of the NCCs and the combination review process under Section 6 of the Act. All NCCs are now subject to investigation under section 3 and section 4 of the Act. The rationale for the CCI was that defining a general set of standards for non-competitive restriction assessments may not be appropriate in a modern business environment.
Considering the tight time limit of 210 days for the approval of the combination as stipulated by the law, it may be impossible to carry out detailed review on a case-by-case basis as part of the combination review process.
The Role of Guidance Note on Ancillary Restraints
Obviously, the NCC forms an integral part of the contract as it plays an essential role in various corporate transactions. It protects buyers from competition with sellers so that buyers can benefit from acquiring the full value of the transferred assets (both tangible and intangible).
These non-competitive provisions may be necessary for buyers to gain customer loyalty and make full use of the know-how they have acquired. The CCI considers the NCCs to be auxiliary restrictions, such as restrictions directly related to the transaction to ensure that the commercial freedom of the parties does not undermine the fairness of competition.
Directives set by the European Commission (“EC”) confirm that the NCCs are directly relevant and necessary for the execution of the transaction. In particular, the EC directives allow certain restrictions on patent licenses, similar rights or know-how methods, which may be considered necessary for the implementation of the transaction.
Likewise, the CCI’s guidance note states that non-compete restrictions that are not incidental to the combination do not automatically violate the provisions of the Act, but the committee’s approval of such combination does not include non-compete restrictions.
As a result, in the absence of such restrictions, the combination cannot be implemented or can only be implemented under much more uncertain conditions, at significantly higher costs, over a fairly long period of time, or with significantly higher difficulties.
Conclusion
Naturally, the NCC is implemented in a transaction to preserve the value invested by the acquirer for the purpose of supporting basic economic activities. Implementing ancillary restrictions requires a balance between promoting healthy business deals and maintaining fair competition in the marketplace.
It is also necessary to ensure that secondary restraints do not go beyond strict necessities.
Therefore, the CCI should consider these limitations after considering the complications that may increase due to the absence of these limitations. Even if the CCI gives the parties a burdensome responsibility to form the NCCs, comfortably without going through reviews and approving combinations, the parties may take the unintended interests of such freedom.
The CCI seems to be struggling to review non-compete clauses within the 30-day merger review period. In the draft Competition (revised) Bill of 2020, it was proposed to shorten the period to 20 days. Because of this, the CCI is trying to abolish the NCC restrictions. But it feels like a rash move.
This movement of the CCI can reduce the burden on them, but it can cause substitution difficulties for the CCI in combinations where the NCC does not comply with the guidance note. The move could prove best for the parties to the CCI as well as a combination if the NCC’s composition is obligated to follow the guidance note, removing the option of constructing the NCCs according to the whims and fantasies of the parties.
References
http://cci.gov.in/sites/default/files/Non-Compete/Guidance_Note.pdf
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