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Non-competition clause in share purchase agreements and competition law

June 29, 2015
Matthijs Brons, M&A attorney, Höcker Advocaten, Netherlands

Hocker-logoIn an acquisition, the purchaser will often want to agree a non-competition clause with the seller. In that case it is extremely important to bear in mind the restrictions imposed by competition law.

When one company acquires the shares in another company (the target company), then after the transaction the purchaser will want to prevent the seller from conducting activities that compete with those of the target company. A seller generally has thorough knowledge of the activities of the target company. If the seller carries out competing activities, these could cause immense damage to the target company and its profitability. To protect its investment, the purchaser will therefore generally want to include a non-competition clause in the share purchase agreement.

Section 6 of the Dutch Competition Act prohibits agreements between companies that restrict competition, subject to their being declared void. Agreements between “small” businesses as meant in section 7 of the Competition Act do not come under the scope of section 6. Section 10 of the Competition Act provides an exception to section 6 for restrictions to competition that are directly related and necessary to the formation of concentrations (including acquisitions).

In its “Commission Notice on restrictions directly related and necessary to concentrations” the European Commission set out rules for assessing the permissibility of non-competition clauses (and other “ancillary restrictions”) in share purchase agreements. These rules are applied by the Netherlands Authority for Consumers & Markets. The main rules in the Notice, on non-competition clauses, can be summarized as follows:

1. Non-competition clauses are justified for periods of up to three years when the takeover includes both elements of goodwill and knowhow. When only goodwill is included, but no knowhow, periods of up to two years are justified.

2. The geographical scope of a non-competition clause should be limited to the area in which the target company offered the relevant products or services before the acquisition. The geographical scope of the non-competition clause may be extended to include territories the target company was planning to enter at the time of the transaction, provided that it had already invested in preparations for this move.

3. Non-competition clauses must remain limited to the products and services that formed the economic activity of the target company before the acquisition. It is not permissible to extend the non-competition clause to include the activities of the acquiring undertaking, for example.

The importance of compliance with these (as well as other rules arising from the Notice) is underscored by the sanction on breach: according to case law of the Dutch Supreme Court, a non-competition clause that is incompatible with section 6 of the Dutch Competition Act is null and void and is not converted into a provision that would be permissible. The reasoning behind this approach is that the prohibition in section 6 would otherwise not be enough of a deterrent:  the parties would too readily opt for a non-competition clause that was too broadly formulated, knowing that, after being declared incompatible with section 6, it could be converted into a mitigated version. The fact that a breach of section 6 leads to nullity of the non-competition clause rather than conversion means that it is crucial to have a thorough knowledge of the Notice and to formulate the non-competition clause in an acquisition contract very precisely.Matthijs Brons - Hocker Advocaten kleur

About the author
Matthijs Brons is a partner at Höcker Advocaten. Matthijs has a general corporate law practice with emphasis on transactions. He negotiates and advises on commercial contracts, joint ventures, management buy-outs, restarts, participations and shareholders agreements and oversees mergers and acquisitions.