Lexis PSL Competition Practice Note
®
Corporate transactions and competition risk
Produced in partnership with K&L Gates LLP
There are generally three principal categories of provisions in the transaction agreement (eg sale and
purchase agreement) that will need to be considered from a competition law perspective:
• merger control conditions to closing
• competition warranties; and
• non-compete covenants
For the purposes of this Practice Note, the individual parties are referred to as ‘seller’ and ‘buyer’
(though similar considerations will generally be relevant to the parties to a joint venture).
Merger control conditions to closing
It is common for the parties to a transaction agreement to agree
that the transaction shall be conditional upon merger control
approvals having been received and no relevant competition
authority having raised objections to the transaction.
The precise text of such a condition, and whether indeed it is
necessary or desirable, requires establishing as early as possible
(ideally before drafting and negotiating the text of the transaction
agreement):
• if the transaction falls within the scope of any national or
supranational (eg the EU or COMESA) merger control rules (see
further Application of merger control rules to joint ventures
below)
• if so, whether these require mandatory pre-notification-ie
whether the deal cannot be completed until approval from the
relevant authorities has been obtained
• if, even if there are no mandatory pre-notification
requirements in a particular jurisdiction (eg the UK), it is
sensible to voluntarily notify the transaction to the competition
authorities to obtain certainty that it will not be examined (and
potentially blocked or made subject to remedies) following
completion
• if the transaction gives rise to any substantive competition
concerns in any jurisdiction, and
• having regard to the answers to the above questions, the timing
implications for the transaction.
This assessment will inform the parties of the potential merger
control risks affecting the transaction (if any), which they will then
respectively seek to allocate and protect themselves against in
the transaction agreement. In general, the seller will try to ensure,
and the buyer will try to resist, that the buyer has to proceed with
the deal (ie to completion) even if the competition authorities
require the buyer to sell off all or parts of the business in order for
the deal to be cleared.
It will also enable the parties to determine whether there needs to
be a gap between signing and completion (ie during which merger
clearances are sought), how long this needs to be and what each
parties’ protections are in case unconditional merger clearances
are not obtained.
Application of merger control rules to joint ventures
The application of EU merger control rules to a joint venture
depends on whether it is ‘full-function’ or purely co-operative in
nature, that is, whether or not it performs on a lasting basis all the
functions of an autonomous economic entity on the market.
A full-function joint venture is potentially subject to the EUMR,
and therefore to a formal clearance decision from the European
Commission and the drafting considerations in this section, if:
Corporate transactions
and competition risk
• it amounts to a ‘concentration’ within the meaning of the
EUMR, and
• it has an EU dimension, that is, the relevant turnover thresholds
in the EUMR are met.
See further, Analysing joint ventures under merger rules.
A purely cooperative non full-function joint venture will not
require formal clearance under the EUMR, however it should be
assessed under Article 101 TFEU to ensure it does not breach the
EU prohibition against anti-competitive agreements.
References:
Art 101 TFEU
See further, The legal treatment of cooperative joint ventures
under EU competition law.
Finally, a joint venture (whether it is full function or purely
co-operative) that does not have an EU dimension may still
be subject to national merger control rules, which need to
be carefully considered on a case-by-case basis (see Multijurisdictional merger grid).
Drafting considerations from the seller’s
perspective
Typically the seller will prepare the first draft of the transaction
agreement. The seller will generally at the outset try to allocate
as much of the merger control risk as possible to the buyer by
making the agreement as unconditional as possible with respect
to merger clearances.
At the very least, a seller should only agree to merger control
conditions that are reasonably necessary (and should insist
on having a say as to what is or is not reasonably necessary).
The seller will generally seek to ensure that there is no merger
control condition for jurisdictions where prior clearance is not
required by law (eg where filing is only voluntary, or where filing is
mandatory but can follow completion).
In addition, the seller should consider whether the wording of the
condition affords it sufficient protection against the buyer simply
‘walking away’ if, following their examination of the deal, the
competition authorities require remedies to be given. The seller
could try to limit the condition so that the deal will only not be
completed if it is blocked outright by the competition authorities;
or-as a compromise position-if the authorities require
unacceptably onerous remedies to be given. The parties would
then need to agree on an acceptable threshold for remedies (see
further ‘Drafting considerations from the buyer’s perspective’
below).
A seller in a strong position may wish to include a ‘hell or high
water’ provision in the transaction agreement. Under such a
provision, which is becoming increasingly common (especially in
competitive auctions), the buyer takes on all of the competition
risk in a transaction, including agreeing to take ‘all actions’
necessary to avoid or resolve any competition impediments
(such as making any divestments required for completion).
Finally, the seller should consider whether it wants any additional
rights with respect to the merger control process. For example:
• the right for it and/or its legal counsel to be provided with and to
review, comment on and/or approve communications with or
submissions to the competition authorities (and to be given a
reasonable opportunity to do so), and
• the right for it and/or its legal counsel to attend meetings and/
or telephone calls with the competition authorities (or be
provided with detailed updates and/or meeting notes) etc
Drafting considerations from the buyer’s
perspective
The buyer will generally seek to reduce its risk and obtain
legal certainty by trying to make the transaction agreement
as conditional as possible, that is, by seeking to include all the
merger control conditions it considers desirable, whether or
not they are legally necessary. This is to try to protect itself
from having to proceed with the deal should the competition
authorities require remedies to be given.
The buyer should carefully review the seller’s proposed terms to
ensure they are commercially acceptable. In particular:
• the buyer should consider whether:
• the named jurisdictions to which the condition applies (which
are often listed in a schedule to the transaction agreement), or
• if jurisdictions are not specifically named, the description
used in the condition (eg ‘all jurisdictions where merger control
clearance is legally required’), are sufficiently comprehensive
to protect the buyer from unacceptably high risk. It may be
that although there is no legal requirement for pre-completion
filing and/or clearance in a particular jurisdiction, there are
potentially significant competition concerns there and a
non-trivial risk of the competition authorities intervening in
the deal and requiring remedies in order for it to proceed.
The buyer should try to undertake a risk assessment of the
potential competition concerns in such jurisdictions as early as
possible to ascertain whether it is sensible to include them in
the condition
• the buyer should also try to ensure that it would not be forced
to proceed with the transaction in circumstances where
a competition authority clears the transaction but only
subject to the buyer giving remedies that it (the buyer) deems
unacceptable. The buyer will need to consider what level of
remedies (if any) would be acceptable to it. This will involve
an assessment of the commercial impact and implications of
potential remedies. For example, divestments over a particular
threshold could undermine the rationale for the deal. If the
seller does not agree that completion shall be subject to
receiving unconditional merger clearances, or the parties
cannot agree on a remedies threshold, the buyer may wish to
attempt to introduce indemnities against the seller to provide it
with some protection should remedies later be required
• finally, a buyer will generally try to resist a ‘hell or high water’
clause (at least where it considers there are potential
Corporate transactions
and competition risk
competition concerns). Where the buyer is unable to strike this
out completely (eg where it feels it needs to accept the clause
in order to appear attractive compared to other bidders), it
should try to ensure that it is not subject to other onerous
obligations and that it has full control over the merger control
process (as it is carrying the completion risk). For example,
if the buyer accepts a ‘hell or high water’ clause, it should
resist the seller’s rights to review or approve the filings or
correspondence or be heavily involved in proceedings with the
competition authorities
Competition warranties
The buyer enters into the purchase agreement on the basis
of, and in reliance on, warranties, which the seller warrants and
represents to be true and not misleading.
Warranties serve two key purposes:
• first, warranties force the seller to disclose-prior to the
agreement being entered into-issues or potential issues that
may enable the buyer to negotiate a price reduction, obtain
protective indemnities or withdraw from the deal, if sufficiently
serious (ie they ‘flush out’ the problems with the target), and
• second, if a warranty is breached by the seller, it forms the
basis for a legal claim by the buyer against the seller.
As competition law infringements can expose a company (and
its employees) to significant financial and other liability, and the
due diligence review of contracts and other documents will not
necessarily disclose all competition infringements (as these may
amount to unwritten agreements or undocumented conduct), a
buyer will generally try to obtain as comprehensive and broad a
list of warranties as possible, including that:
• there are no actual or potential infringements of competition
law by the target and/or seller group (including offending
business practices or contracts)
• there are no actual or potential complaints, allegations
or threats by any third parties regarding competition law
infringements by the target and/or seller group
• there are no actual, potential or threatened investigations or
proceedings by any authorities concerning alleged competition
law infringements by the target and/or seller group, and
• the target and/or seller group have not given any competitionrelated undertakings to any authorities which affect the
target’s business activities.
Drafting considerations from the seller’s
perspective
The seller will try to limit the competition warranties as much as
possible (for example, to a warranty that there are no ongoing
formal investigations by competition authorities), and may in fact
exclude them altogether from the first draft of the transaction
agreement.
The seller should carefully review and amend the proposed
warranty language from the buyer to ensure it is not exposed due
to language being overly broad. For example, the seller may wish
to limit competition warranties to:
• facts within its actual knowledge or that of specific individuals
(eg ‘as far as seller is aware’ or ‘as far as X, Y and Z are aware’)
(if the buyer accepts such a change, it may insist on adding
language such as ‘having made all reasonable inquiries’)
• conduct or issues which are material
• actual issues that have come to its attention only (ie not
‘potential’ or ‘threatened’ issues, as it may not yet be aware of
these), and
• current conduct only (ie at the date of the agreement).
Drafting considerations from the buyer’s
perspective
The buyer should reject any proposed language that is overly
restrictive. In particular:
• the buyer should have regard to the nature of the target’s
business, to ensure it has covered all possible infringements
• the buyer should always try to ensure that any third party
complaints, allegations or threats, or matters that could give
rise to these, are covered-most competition law infringements
will not necessarily have been formally investigated by
competition authorities
• the buyer should as far as possible reject a knowledge qualifier
or ensure it is not so limited in scope that it potentially excludes
key issues from being disclosed or restricts later recourse
against the seller
• the buyer should reject a ‘materiality’ qualifier. Lack of
materiality is no protection against competition liability (ie a
company can still be substantially fined and sanctioned, and
still suffer significant damage, even if the anti-competitive
agreement or conduct is low in value or minor), and
• the buyer should resist a time limit, as even if no investigation or
proceedings have commenced at the date of the agreement,
they may be launched years after the acquisition.
The buyer should also consider the other warranties in the
transaction agreement (eg the warranties dealing with litigation
or disputes and compliance with law) and whether these should
be amended to afford it some or additional protection against
competition infringements. However, the buyer should resist
arguments from the seller that competition infringements are
covered by such other general warranties.
Non-compete covenants
It is prohibited under EU and UK competition law for companies
that are actual or potential competitors to agree not to compete
with each other, including by sharing geographic markets or
customer groups (see Prohibition on restrictive agreements-an
introduction).
References:
Art 101 TFEU
Competition Act 1998, s 2
Corporate transactions
and competition risk
However, there are some limited exceptions to this general rule
which apply to an agreement by a seller not to compete in a
particular geographic area and/or for particular customers for a
specified period of time, in the context of an M&A transaction or
joint venture. EU and UK competition law recognise that in these
contexts some restrictions on the seller’s activities are necessary
to avoid the economic rationale of the transaction being
undermined (ie the purchaser spending a lot of money to acquire
a business, knowhow and goodwill, only for the seller to set up in
competition soon afterwards).
Therefore EU and UK competition law apply a so-called ‘ancillary
restraints’ doctrine to contractual restrictions, such as noncompete obligations, that are ‘directly related to and necessary’
for the successful implementation of the transaction. Detailed
guidance on the application of this doctrine is provided in the
Commission’s Ancillary Restraints Notice .The parties need to
carefully consider whether the non-compete obligations in the
transaction agreement are ancillary restraints within the meaning
of the Commission’s Notice. If the ancillary restraints doctrine
does not apply, the provisions need to be assessed for legality in
light of Article 101 TFEU or Chapter I of the Competition Act 1998.
References:
EU guidelines on ancillary restrictions
Non-compete obligations will generally be considered as ancillary
to the extent that they are necessary to enable the full value of
the assets to be transferred to the buyer, which in general include
both physical assets and intangible assets (such as the goodwill
or the know-how). The provisions must be designed to provide
the buyer with some protection against competition from the
seller in order to gain the loyalty of customers and to assimilate
and exploit the knowhow. They must not only be directly related
to the concentration but also be necessary to its implementation
because, without them, there would be reasonable grounds to
expect that the sale of the business or of part of it could not be
accomplished.
References:
EU guidelines on ancillary restrictions, para 18
In addition, a non-compete clause must be reasonable in terms
of its duration, geographic coverage and the products and
services affected. It is accepted under EU and UK competition
law that a three-year duration will be acceptable where both
goodwill and knowhow have been acquired, and a two-year
duration will be acceptable where only goodwill has been
acquired.
See further An overview of the substantive assessment of EU
mergers - Ancillary restraints.
Other restraints
The parties may also agree to other restrictions in the context of
the transaction which raise potential competition issues, such
as in an intellectual property licence and/or supply agreement.
Regard should be had to the specific principles applicable to
such agreements.
Intellectual property and knowhow licence
A seller will often retain ownership of intellectual property and
knowhow rights, and simply licence these to the buyer (this
enables the seller to keep exploiting the rights itself and/or
licensing them to others). Restrictions in the licence agreement
on the use of the intellectual property or knowhow rights may
be accepted as ‘ancillary restraints’ to the extent that they are
objectively necessary for the implementation of the transaction.
Unlike non-compete obligations, the restrictions may generally
be granted for the entire duration of the patents, trade marks or
similar intellectual property rights, or the normal economic life of
the knowhow.
Supply agreements
Where the target business was previously dependent on another
part of the seller group for raw materials, it may be acceptable for
the seller and buyer to agree that the seller will continue to supply
the raw materials to the target for a transitional period, in order to
ensure that the target has sufficient supplies to continue operating
while it sources new suppliers. Such an ancillary agreement should
generally not, however, contain any exclusivity provisions (ie
obliging the buyer to buy all of its requirements from the seller) as
these are usually not acceptable in these circumstances.
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are trademarks of Reed Elsevier Properties Inc. © LexisNexis 2015 0815-010. The information in this document is current as of August 2015 and is subject to change without notice.