Non-Compete in M&A: Not Ancillary Restraints?

Ukraine's merger control re­gime has never been par­ticularly friendly towards notifying parties: underde­veloped "effects doctrine" making rea­sonably nexus-less and unproblematic transactions notifiable, no fast-track procedure or slim-form application, extensive disclosure requirements, etc. On top of this, quite often the parties have to seek a Antimonopoly Commit­tee's permission for the non-compe­tition obligations accompanying the transaction — and this may be a long way to go.

EU Approach

In the EU the approval of con­centration covers also all restrictions directly related and necessary to the implementation of the concentration, which are known as "ancillary re­straints". Two notices of the EU Com­mission address this issue, in particu­lar, the EC Merger Regulation provides that ancillary restraints are covered by the merger clearance and are thus not subject to the prohibition of restric­tive agreements in Article 101(1) EC, while the EU Commission Notice on Restrictions Directly Related and Necessary to Concentrations (Ancil­lary Restraints Notice) further details the Commission's position regarding ancillary restraints in the context of mergers, acquisitions, and joint ven­tures. The Ancillary Restraints Notice explains that all agreements, which carry out the main object of the con­centration, such as those relating to the sale of shares or assets of an undertaking, are integral parts of the concentration. If such agreements contain ancillary restraints, these are automatically covered by the decision declaring the concentration compa­tible with the Common Market.

The Ancillary Restraints Notice discusses specific types of ancillary re­straints: those related to acquisitions and joint ventures. With respect to acquisitions, the Ancillary Restraints Notice confirms that non-competition obligations, which are imposed on the seller in the context of the transfer of an undertaking (for a reasonable pe­riod, of course) can be directly related and necessary to the implementation of the concentration. In order to ob­tain the full value of the assets being transferred, the purchaser must be able to benefit from some protection against competition from the seller in order to gain the loyalty of cus­tomers and to assimilate and exploit the know-how. Such non-competition clauses guarantee the transfer to the purchaser of the full value of the as­sets, which include both physical as­sets and intangible assets, such as goodwill. These are not only directly related to the acquisition, but are also necessary to its implementation be­cause, without them, there would be reasonable grounds to expect that the sale of the undertaking could not be accomplished. Likewise, the same ar­rangements between the parent un­dertakings and a joint venture reflect the need to fully utilise the joint ven­ture's assets, enable the joint venture to take the benefit of the know-how and goodwill provided by its parents, protect the parents' interests against competitive acts, etc.

What about Ukraine?

Unlike in the EU, there is no reli­able exemption for ancillary restraints in Ukraine. Rather, these are treated as potentially anticompetitive concerted practices requiring specific authoriza­tion by the Antimonopoly Committee, and such permission is to be sought by filing a separate notification.

Apart from being procedurally out­side the merger review, the permission exercise also involves quite extensive disclosure requirements (it is good though that lots of the relevant items may be incorporated by reference to the "main" (merger) notification) and, more importantly, a longer waiting pe­riod — up to 3 months of substantive review in Phase I (compared to up to 1 month in merger cases). Although to date, the authority's prevailing practice has been to review and authorize con­centration-related non-compete arran­gements within the merger review pe­riod, this is not guaranteed. Thus, the notifying parties should be prepared that inclusion of a non-competition clause may considerably impact the timing of the Ukrainian clearance and, as a consequence, the entire deal. It is also worth mentioning that the au­thority may extend the review period by another 3 months or more through opening a Phase II investigation, which, reportedly, has already hap­pened in at least one transaction.

Any de minimis Escape?

There used to be a de minimis exemption that applied to non-com-pete clauses — the Antimonopoly Committee's Regulation on Block Exemptions (No.27-r) provided that concerted practices are deemed permis­sible to the extent that the combined market share of the parties in the re­levant market was below 5%. Not any longer, at least for competing or po­tentially competing parties. Aiming to carve out hardcore horizontals, in Au­gust 2009, the Antimonopoly Commit­tee amended the Regulation to exclude the applicability of the said exemption to horizontal and mixed arrangements that involve "restricting, including by way of discontinuing, of production or sale of products". Given that horizontal concerted practices are rather broadly defined by the law to cover potential competition and adjacent markets, this provision effectively removes a possibility to rely on the de minimis exemption for many parties planning an acquisition or a joint venture.

Are Joint Ventures "Specialized" Enough?

With reference to the Commit­tee's Regulation on the Specialization Exemption (No.880-r), it may be ar­gued that joint venture partners can enjoy the "specialization" exemption. Specialization is defined as horizon­tal concerted practices contemplating the focus of efforts and resources of the parties on production and sale of certain products resulting in improve­ment (rationalization) of the relevant processes. Assuming that the parties to a joint venture are capable of proving the said nature of the arrangement and the attendant efficiencies, their non-competition agreement may be exempt from the authorization requi­rement, provided that their combined market share does not exceed 25%, neither of them is dominant (and they are not among the collectively dominant players), the duration of the agreement is not more than 5 years, and some other conditions are met (e.g., the arrangement does not result in a number of hardcore restrictions, specified in the Regulation).

What about Enforcement Practice?

There appears to be no unanimity in the approaches of filers to addres­sing non-competitive arrangements in M&A transactions notified in Ukraine. Some of them obtain separate clear­ances for concerted practices, other prefer to expressly mention non­competition in the merger notifica­tion, hoping for the reasonability of the competition body. It should be noted that separate notification has become a dominating practice over the last few years owing, among other things, to the massive media coverage received by the Committee's blessing for 2-year non-compete undertakings by the Chernovetskiy family follo­wing their sale of Pravex-Bank to In­tesa Sanpaolo. This deal has indeed set a market standard for large domestic transactions, prompting competition counsels to advocate the notifiability of non-compete arrangements to their clients.

Ukrainian competition practi­tioners got even more concerned in early 2009 when the Antimonopoly Committee went after Kyivstar and its jointly controlling sharehol­ders — Norwegian Telenor and Rus­sian Alfa — questioning the legitimacy of the non-competition provisions of the Kyivstar shareholders agreement. After almost a year of anti-monopoly proceedings the parties eventually succeeded in to defending the arrange­ment, arguing that it had been indis­pensable in order to integrate their resources, focus efforts on the joint venture more intensely and efficiently, and secure good faith cooperation, as well as continuity and stability of their joint business. Despite being a helpful precedent for justification of ancillary restraints, this case can hardly remove the risk of adverse treatment of the relevant arrangements by the Antimo-nopoly Committee.

What Should Be Done?

This is a good question. Perhaps, the legal community should approach the Antimonopoly Committee and point out the enormous and unreaso­nable burden that getting permis­sion brings for the notifying parties. It is conceivable that the authority may not be particularly happy to let it go, after all, a fairly big portion of the filing fee goes to the Committee's budget. Though at least a kind of sim­plified procedure for such type of noti­fication could work as a good compro­mise for both the body and the market. Anditwould certainly worklikeacharm, if the procedure by which permission is gained, is synchronized with merger review in terms of timing.