Non-compete agreements (NCAs) have become a standard feature of merger and acquisition deals. Such agreements seek to protect the acquirer of a business by restraining the seller from participating in a similar business or using know-how related to the business and thereby competing with the acquirer. Acquirers often pay a significant amount for the goodwill of the business and for such non-compete obligations.
NCAs have been scrutinized in India against the backdrop of section 27 of the Indian Contract Act, 1872, which makes an agreement that restrains anyone from exercising a lawful profession, trade, or business of any kind, void. However, as per various judicial pronouncements, reasonable restraint is permitted under certain circumstances. Further, as an exception to section 27, a seller of goodwill can agree not to carry on a similar business within the specified local limits, so long as the buyer, or any person deriving title to the goodwill from the buyer, carries on a like business there, and provided that such limits appear reasonable to the court.
Courts have held that reasonableness of restraint depends on various factors, and any covenant to prevent divulgence of trade secrets or business connections has to be reasonable to ensure adequate protection to the covenantee. Normally negative covenants operative during the term of a contract have been held to be permissible while those operative after the termination of a contract have been held to be in violation of section 27.
Since the coming into effect of the Competition Act, 2002, NCAs are also subject to the scrutiny of the Competition Commission of India (CCI). Two recent CCI decisions – both relating to acquisitions in the pharmaceutical sector – highlight the competition law concerns that may arise out of NCAs.
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Udwadia Udeshi & Argus Partners is a full-service law firm with offices in Mumbai, Delhi, Bangalore, Kolkata and Chennai. Adity Chaudhury is a managing associate at the firm. The views expressed by the author are personal and do not reflect the views of the firm.
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