A non-competitive clause aims to bind one party not to enter into or start a similar profession or trade in competition against the other party.
Non-competitive clauses are explained in the Guidelines on Undertakings Concerned, Turnover and Ancillary Restraints in Mergers and Acquisitions (“Guidelines”). They are deemed a type of ancillary restraint, provided that their scope in terms of duration, subject matter, geographic area and persons does not exceed the reasonably necessary level. Guidance provided under the Guidelines about the duration, subject, geographic area and persons related to the non-competitive clause are as follows:
- Duration: Non-competitive clauses that do not exceed three years are generally accepted as reasonable. However, non-competitive clauses longer than three years may also be accepted, in cases where the customer tie-in lasts longer or it is required by the nature of the know-how transferred. Particularly in joint ventures, long-term or indefinite non-competitive clauses preventing the parent companies from competing with the joint venture may be accepted as ancillary restraints.
- Subject matter: Non-competitive clauses must be limited to those goods and services comprising the area of operation of the target company before the transaction. Goods and services having almost completed the development phase but not yet entered the marketing phase may also be included within this framework.
- Geographic area: Non-competitive clauses must be limited to the area of operation of the target company before the transaction. However, in exceptional circumstances (i.e. when the seller has made investments to enter into new regions), non-competitive clauses concerning additional regions may also be accepted as necessary and reasonable.
- Persons concerned: Non-competitive clauses concerning the seller itself and those economic units and agencies which constitute an economic unit with the seller may be accepted as reasonable. On the contrary, any non-competitive clauses that spill over to third parties, especially those concerning the dealers of the seller or the dealers of the users, will not be accepted as necessary and related restraints.