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The Warsaw Voice » Law » November 21, 2007
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Lesser Known Antitrust Risks of M&A Transactions
November 21, 2007   
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Firms planning mergers and acquisitions often limit their attention to antitrust regulations to checking the merger control requirement. They forget that their share purchase, business purchase, or joint venture agreements are subject to normal rules on anticompetitive agreements just as any other contract.

Competition laws prohibit competition-restricting agreements between businesses. Yet the application of this rule to M&A transactions meets resistance on the part of firms. Acquirers are surprised to learn that it is not obvious that they could restrict the seller's ability to compete in the line of business of the target assets, even though this may undermine the economic rationale of the deal. No matter how natural and necessary for the protection of its legitimate interests such a clause may appear to the purchaser, it qualifies as a competition restricting agreement. Failure to screen it for antitrust risks may result in its invalidity and financial sanctions.

Competition-restricting clauses in M&A agreements are exempt from normal antitrust rules only if the implementation of the transaction without them would be impossible or considerably more difficult in terms of its conditions, cost or timing. This will be the case in particular if they are needed to protect the value of the purchased assets or to enable the start-up of a joint-venture company. They are then dubbed "ancillary restraints" and enjoy more liberal treatment by competition authorities.

Although Polish law does not regulate ancillary restraints, they appeared in jurisprudence as early as in 1927. The Supreme Court then ruled that a clause obligating shareholders terminating a joint-venture company not to compete in its line of business is permissible if it is limited in time and territorial scope. The first postwar judgment on this subject was issued only a little over a year ago. The Competition and Consumer Protection Court confirmed that a mutual obligation of the purchaser (Nowa Era Sp. z o.o.) and of the seller (PPWK S.A.) not to compete with each other for up to 10 years following the transaction is prohibited.

Nevertheless, the court decided in this case to cancel the fines imposed on the parties, because of factors including the lack of clear guidelines in Polish law as to the permitted scope of such clauses. In the future, however, one should not count on similar compassion-this ruling already establishes certain standards for the assessment of ancillary restraints. Importantly, it states that the tenets of EC "soft" law on ancillary restraints should be adopted in Polish case-law. Such an approach is beneficial for Polish businesses, enabling them to draw on the developed EC jurisprudence on this subject.

On the other hand, some statements of the court deviate from the EC standard. For example, the ruling indicates that the maximum permissible duration of a non-compete clause is five years. However, EC law both imposes as a rule a shorter maximum period (of two to three years, depending on the circumstances) and allows exceptionally much longer periods, for instance of up to 10 years. Some uncertainty therefore still persists as to the criteria which the competition authority will apply to assess competition-restricting clauses in M&A agreements in the future.

Nonetheless it seems safe to assume that it will be guided by the fundamental EC rules on ancillary restraints. They pronounce, for example, that restrictions which benefit the vendor are either considered not to be directly related and necessary to the implementation of the transaction at all, or their scope and duration need to be more limited. Some clauses, such as arrangements conferring preferred-supplier or preferred-purchaser status on the seller or the target assets, are automatically excluded from the ancillary restraints category. In any event, the duration, geographical scope, subject matter, and the persons bound by non-compete obligations must not exceed what is reasonably necessary to implement the transaction.

Unfortunately, merger control and ancillary restraints are not the end of antitrust worries for parties to M&A transactions. They also have to remember not to engage in what is called "gun-jumping," defined as the consummation of a transaction prior to merger control clearance or actual closing, even if after receipt of the clearance. Again, these are often actions that appear normal and necessary in a business context. Nonetheless, the exchange of sensitive information, even for the purpose of negotiations or conducting a due diligence examination of the target, must remain within strict boundaries. One should also beware of a premature integration of the parties' businesses through transfers of personnel, changing business cards or letterheads, disseminating joint marketing materials, or the target acting as the buyer's agent in customer negotiations. Similarly, limitations on the target's ability to conduct business before the closing in order to protect the value of the investment must not exceed what is necessary to achieve this end.

Agnieszka Stefanowicz-Barańska
Pola Ciupa
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