Competition law issues
The main aspects of competition law applicable to M&A transactions-apart from merger clearance by the competition authority concern contractual restrictions related to the transaction, particularly non-competition clauses and confidentiality obligations. In other words, assuming that the concentration itself receives clearance, it then must be determined whether other restrictions on competition agreed by the parties are covered by the clearance or must be analysed and justified separately.
Permissible scope of restrictions on competition related to concentrations
Issues of contractual restrictions directly related and necessary to the implementation of concentrations-also known as “ancillary restraints”-are subject to self-assessment by the business entities involved. Polish competition law does not contain specific regulations in this respect. Therefore, under the practice followed by the Polish competition authority, the Office of Competition and Consumer Protection (UOKiK), in construing contractual provisions involving such restrictions businesses should rely on the approach adopted in European Union law.
European Commission guidelines
In order to provide legal certainty to businesses, the European Commission has issued guidelines for assessment of ancillary restrictions, entitled “Commission Notice on restrictions directly related and necessary to concentrations” (2005/C 56/03). Under the established practice, use of the EC guidelines is also accepted by UOKiK with respect to transactions that may cause effects in Polish territory.
Apart from contractual provisions concerning the main subject matter of the transaction, such as the transfer of the target’s shares or assets, the parties to a concentration typically also agree on various other matters which are not an integral part of the concentration but may limit the freedom of the parties’ behaviour on the market. Certain limitations agreed between the parties to an M&A transaction may be beneficial to both the seller and the buyer. As a rule, however, the acquirer has much greater need for additional assurances, because it must be certain that as a result of the transaction it will be in a position to exploit the full value of the acquired enterprise. Additional contractual provisions alongside the main transaction are thus typically aimed at protecting the value transferred, maintaining the continuity of supply, or enabling the start-up of a new entity.
Conditions for applying additional restrictions on competition in connection with the concentration
The restrictions agreed by the parties as part of an M&A transaction will be subject to the rules set forth in the Commission Notice only if they are directly related to the implementation of the concentration and necessary to the implementation (the merely subjective views of the parties in this respect are insufficient).
For restrictions to be considered directly related to the implementation of the concentration, they must be closely linked to the concentration itself. It is not sufficient that an agreement has been entered into in the same context or at the same time as the concentration. Restrictions which are directly related to the concentration are economically related to the main transaction and intended to allow a smooth transition to the changed company structure after the concentration.
In turn, agreements will be regarded as necessary to the implementation of the concentration if in the absence of those agreements the concentration could not be implemented or could only be implemented under considerably more uncertain conditions, at substantially higher cost, over an appreciably longer period or with considerably greater difficulty. In determining whether a restriction is necessary, it is appropriate not only to take account of its nature, but also to ensure that its duration, subject matter and geographical field of application do not exceed what the implementation of the concentration reasonably requires.
The most frequently encountered restrictions related to concentrations involving acquisition of a business (in the form of shares, an enterprise or other assets, or other method of obtaining control over the target) are non-competition clauses imposed on the sellers. Such non-competition clauses guarantee the transfer to the purchaser of the full value of the assets transferred, which in general include both physical assets and intangible assets, such as the goodwill accumulated or the knowhow developed by the seller. These are directly related to the concentration, but to be regarded as necessary to its implementation, their duration, geographical scope, subject matter, and the persons subject to them must not exceed certain reasonable limits.
Under the Commission Notice, non-competition clauses are generally justified for periods of up to three years following the transaction, when the transfer of the undertaking includes the transfer of customer loyalty in the form of both goodwill and knowhow. When only goodwill is included, they are justified for periods of up to two years. In exceptional, economically justified circumstances, longer periods may sometimes be acceptable.
The geographical scope of a non-competition clause must be limited to the area in which the seller has offered the relevant products or services before the transfer, but can be extended to territories which the seller was planning to enter at the time of the transaction, provided that it had already invested in preparing this move.
With respect to the subject matter, non-competition clauses must be limited to products and services forming the economic activity of the business transferred (including those at an advanced stage of development at the time of the transaction, or fully developed but not yet marketed).
The entities bound by a non-competition clause may include the seller, its subsidiaries, and commercial agents. Similar restrictions on others would not be regarded as directly related and necessary to the implementation of the concentration.
Other restrictions on competition
Clauses which limit the seller’s right to purchase or hold shares in a company competing with the business transferred are permissible under the same conditions as for non-competition clauses. They may not, however, prevent the seller from purchasing or holding shares in competing companies purely for financial investment purposes (where the seller does not have a right, directly or indirectly, to exercise management functions or exert a material influence over the operations of the competing company).
The permissibility of non-solicitation and confidentiality clauses should be evaluated in a similar way to non-competition clauses.