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Implications of CCI’s Proposal to Dispense with Assessment of Non-Compete Restrictions under Merger

[Niti is a Research Associate at the Competition Commission of India.]


Since merger and acquisition (M&A) transactions largely entail huge investments on the part of the entities involved and also impact consumers, market competitors and the economy at large, it becomes imperative to assess them under antitrust law to prevent any disruption of the competition in the market. In India, M&A transactions are scrutinized from an antitrust angle by the Competition Commission of India (CCI) under the Competition Act 2002 (Act) and the combination regulations framed thereunder. CCI regulates M&A transactions by defining financial thresholds for such transactions, and if any transaction exceeds these thresholds, it qualifies as a ‘combination’ under Section 5 of the Act and must be notified (in the prescribed form) to CCI by the parties involved for its prior approval. Upon being notified, the CCI assesses the probable impact of the combination under Section 6, 29, 30 and 31 of the Act in order to ensure that the enhancement of market power, resulting from such combination, does not 'cause an appreciable adverse effect on competition within the relevant market'. As a step forward in this direction, on 15 May 2020, the CCI issued a press release inviting public comments regarding the examination of non-compete restrictions (NCRs) under regulation of combinations.


What is an NCR in the context of M&A transactions?


An NCR, put simply, is a restriction imposed by one party to a contract on the other party, prohibiting the latter from competing with the former in terms of the nature, form or scope of its business, profession or trade. In India, an NCR is governed by Section 27 of the Indian Contract Act, 1872, which identifies all such restrictive contractual terms as being void, except those relating to the sale of goodwill of a business so long as the restriction imposed appears reasonable to the court as regards the nature of the business. In the context of M&A transactions, NCRs put an obligation on the seller of a business to not compete with the acquirer of the business for the duration agreed upon between the parties. An NCR thus aims at enabling the buyer of a business to reap the benefits of its investment and protecting it against potential competition from the seller.


The scope of the proposed amendment


The amendment proposed by CCI aims at doing away with the ex-ante analysis of NCR stipulated in an M&A transaction by CCI under Sections 6, 29, 30 and 31 of the Act and the combination regulations. At present, paragraph 5.7 of notice in Form I requires parties to provide details of NCR relating to the proposed transaction, as required by Regulation 5(3A) of the combination regulations. CCI has based its proposed amendment on the ground that “prescribing a general set of standards for assessment of non-compete restrictions may not be appropriate in modern business environments”. It has further taken into consideration the strict timelines of 210 days prescribed under the Act for approval of M&A transactions. Once the proposed amendment materializes, parties will not be required to notify NCR under M&A transaction to CCI. Further, the competition concerns, if any, arising from NCR will be examined under Sections 3 and 4 of the Act. However, at the same time, a higher level of responsibility is entrusted to the parties to ensure that the “non-compete arrangements are competition compliant”.


CCI’s decisional practice


In 2012, for the first time, CCI was tasked with the assessment of an NCR in the case of Orchid / Hospira regarding a merger review wherein it emphasized that an NCR should be reasonable in terms of (i) duration; (ii) business activities; (iii) geographical areas; and (iv) person(s) affected by such NCR for it to qualify as necessary for incorporation in an M&A transaction, which later found mention in the Guidance Note on NCR. On a subsequent occasion, in the case of Advent / MacRitchie Investments, the CCI expanded on the parameter of duration and approved a combination after the duration of NCR was reduced from 5 years to 3 years.


Analysis and conclusion


The proposed amendment may appear to be reducing the burden both on the CCI, regarding merger review and on the parties due to reduction in information burden. However, it puts a greater obligation on parties regarding the drafting and conducting a detailed self-assessment of the NCRs, before notifying any proposed transaction to CCI, such that the NCRs may not be considered as likely to cause adverse effect on competition. In this regard, parties may be expected to seek guidance from CCI’s Guidance Note on NCR that is a consolidation of CCI’s decisional practice and provides insights into CCI’s approach towards treating an NCR as ‘ancillary’ or ‘non-ancillary’, depending on peculiar facts of the case. As per the Guidance Note, an NCR that directly relates to and is “necessary to the implementation of the combination” will qualify as being ‘ancillary’ and merits approval. Notably, the Guidance Note clarifies that though non-ancillary NCR are not “presumed” to be violating the Act, yet CCI’s approval of such combination will not include the NCR.


It must be noted that the Guidance Note only discusses the general principles considered by CCI while assessing an NCR and does not identify any exceptional circumstance(s) that may justify any departure from general principles, as provided under European Commission’s Notice on Ancillary NCR. Therefore, when caught with a novel / unprecedented circumstance, the parties to an M&A transaction will be left without guidance and may have to take decisions regarding NCRs based on their independent business and legal acumen without being completely confident about their legality. Another aspect requiring attention is the fact that once the proposed amendment materializes, the CCI will scrutinize NCRs under Sections 3 and 4 of the Act. Section 3 of the Act enlists certain agreements which are presumed to have an appreciable adverse effect on competition; however, it exempts joint ventures which increase efficiency in production, supply, distribution, storage, acquisition or control of goods or services. Thus, though currently the efficiency defence is available exclusively in case of joint ventures, it may be applied to NCRs by CCI if warranted by the specific facts of the case. For instance, an NCR relating to a horizontal merger may not merit approval due to its anti-competitive nature; however, its efficiency may help it sail through and successfully obtain approval from CCI. Thus, if efficiency defence is considered by CCI while reviewing NCRs under Section 3 of the Act, it will have a material bearing on the future of M&A transactions and can be a game-changer in this regard. However, it will be much clearer with time how CCI envisions the efficiency defence in the context of NCRs.


The proposed amendment may also be seen as CCI’s endeavour to align its merger review practice with international standards. However, another reason for it may be the amendment proposed to Section 29 of the Act to shorten the duration for forming a prima facie opinion by CCI regarding an M&A transaction from 30 days to 20 days. However, it will only be clear with time to see if CCI succeeds in achieving the objective behind such proposed amendment, wherein a significant role will be played by the parties through self-assessment of the NCRs.

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