It is almost impossible to imagine documentation for the sale of a business without a seller non-compete. The commercial reasons are obvious: a buyer wants to preserve the full value of the business, including know-how, reputation and customers, directly reflected in the price. That value would erode if the seller immediately started a similar business with its customer contacts and expertise.
Yet non-compete agreements between undertakings are among the most serious infringements of Polish and EU competition law, constituting market-sharing arrangements. Parties risk fines of up to 10% of turnover, responsible managers up to PLN 2 million, and the arrangement itself is void.
How can protection for a buyer of shares or a business be reconciled with competition law?
Ancillary restraints
The EU doctrine of ancillary restraints, summarised in the Commission’s 2005 Notice on restrictions directly related and necessary to concentrations (the Notice), offers a solution. Anticompetitive clauses necessary and directly related to a main transaction are generally permissible and fall outside Article 101 TFEU’s prohibition. Despite no express statutory basis, UOKiK also applies the doctrine under national law.
A clause must satisfy three basic criteria:
- Necessity
Without it, the main transaction would be impossible or more difficult. Necessity must be objective, rather than based on the parties’ subjective preferences.
- A direct connection with the main transaction
A close, inseparable link must exist. Merely agreeing a clause at the same time or in the same context is insufficient.
- Proportionality
The restraint must not exceed what is actually necessary for, and directly related to, the main transaction.
Applying the doctrine in M&A
Although applicable to agreements between undertakings generally, the doctrine is especially important in M&A. A buyer of a business, whether assets or shares, naturally seeks to protect its value by preventing the seller from competing for an agreed period. Otherwise the seller’s market knowledge, know-how and customer relationships could quickly divert substantial clientele and reduce value.
A seller non-compete will therefore usually be necessary. Both the Notice and UOKiK decisions confirm this. However, it is not necessary where a transaction involves only tangible fixed assets, such as land, buildings or equipment, or exclusive intellectual property rights. Only protection of goodwill, including customers, or know-how is objectively necessary.
A direct connection is generally established where, as usual, the non-compete forms part of the share or business sale agreement.
Proportionality conditions in M&A
Additional requirements concern (a) persons covered, (b) duration, (c) subject matter and (d) territory.
- Persons covered
The restriction may apply only to the seller. Restrictions on the buyer are impermissible, for example where the seller seeks, as part of the “price”, protection from buyer competition in another market.
The Notice allows coverage of the seller, its subsidiaries and commercial agents. Restrictions on others, especially reseller distributors and users, are not justified ancillary restraints.
The wording is somewhat unclear, but the seller can arguably undertake a non-compete covering its entire corporate group, not just subsidiaries. Otherwise complex groups could readily circumvent it. Some Commission decisions support this, and UOKiK appears to agree in decision DDI-92/2002.
Controversy arises where an individual seller is required to guarantee that close family members will not compete. The aim is to prevent covert support for a formally family-run competitor, which is difficult to prove. This resembles a corporate group, yet relatives are not formally dependent, may not be undertakings and cannot readily be expected to refrain from business. In my view, the non-compete’s purpose supports such seller guarantees under competition law. Unfortunately, in IV CSK 29/14 (2014), the Supreme Court, considering civil law, held such guarantees invalid because relatives had no own obligation towards the buyer. This creates a serious risk to clauses requiring sellers to ensure family compliance.
- Duration
The Notice permits three years where goodwill and know-how transfer, or two years for goodwill alone. Most transactions use three years, theoretically requiring significant know-how transfer, although authorities are unlikely to challenge restrictions not exceeding that period. Longer terms, such as five years, have sometimes been accepted, for example UOKiK DDI-92/2002. Anything beyond three years is nevertheless risky and requires special justification.
- Subject matter
The restriction generally covers only products and services offered by the sold business. It may extend to products or services at an advanced development stage or developed but not launched. This can be difficult, requiring a skilful definition of the relevant product market, including substitutes, especially where precise drafting is desired.
Acquiring or holding shares in competitors may also be prohibited, except financial investments conferring no material influence, including management influence, on the seller or its group. In practice, the exception usually permits holdings below a specified percentage in listed companies, providing clear boundaries.
- Territory
The restriction may cover only territories where the sold business offered products or services before the transaction, plus areas of planned expansion supported by investment at the transaction date. Buyers cannot obtain protection in territories outside actual operations or expansion backed by specific investment.
A typical business sale may therefore include a proportionate non-compete covering the seller and its group. Assessment should consider the detailed guidelines above and the overarching purpose: preserving the acquired business’s full value for the buyer. Anything not exclusively serving that purpose may draw adverse authority action and substantial sanctions.
Coming in part II: non-competes in joint ventures and important procedural aspects.
