By: Sophia Lozano Chernitsky
One of the most common elements in a merger and acquisition transaction is the non-compete clause, which is usually included in the main agreement that gives rise to the transaction.
Although a non-compete clause is considered a “standard” element in a share purchase agreement (SPA), for example, it is currently regulated in the Notification of Concentration Guidelines (the “Guidelines”) issued by the Federal Antitrust Commission (now the National Antitrust Commission) (the “Commission”).
The Guidelines regulate, among other matters, non-compete clauses, as they are one of the elements subject to revision by the Commission while evaluating a concentration of economic agents. During this revision, the Commission focuses on determining whether the existence of the non-compete clause is justified and whether it is likely to affect the competition and free market access.
The essential element that the Commission takes into consideration while determining whether the clause is justified or not is if the transaction involves the transfer of assets that do not have property rights or regulatory protection and therefore must be protected by the non-compete clause. This can include, for example, customer lists, processes that are not registered as trade secrets, or human capital.
Once the existence of the non-compete clause has been justified, the Guidelines set forth certain parameters to assess whether it is likely to affect competition and free market access.
These parameters are the following:
1. Obligated Parties: The parties subject to the non-compete shall be the seller and the companies that form a part of the economic interest group which the seller belongs to.
2. Coverage: With regards to the coverage of the non-compete obligation, the following aspects are taken into consideration:
(i) That the coverage is limited to the products and/or services offered through the business that is the subject of the transaction;
(ii) That the products and/or services included are at an advanced stage of development at the time of notifying the concentration; and
(iii) That goods and/ or services that are fully developed but have not been commercialized at the time of the notification are included.
3. Term: That the non-compete obligation shall remain in force for up to 3 (three) years after the transaction’s closing.
4. Geographic Coverage: The Commission considers that the non-compete obligation is unlikely to affect competition in the following cases:
(i) When it covers the territory served by the company or the assets involved in the transaction prior to it; and
(ii) When it includes regions in which the business that is the subject of the transaction is in an advanced stage of expansion, investments have been made, or any action to expand the territory has been taken.
It is common that, if a non-compete clause falls within the aforementioned parameters, it does not require further justification or detail. A simple explanation of the terms of the clause will suffice.
It is always the Commission’s job to evaluate the information presented and determine in each case whether the non-compete agreements affect the process of competition and free market access.
