Non-competition arrangements have been widely used in Russian transactional practice, especially in conjunction with merger and acquisition (M&A) transactions. However, authorities have historically treated them with precaution, which is based on the assumption that large businesses use such arrangements for market monopolisation. This is due to a general provision of the Competition Law that prohibits any agreements aimed at restricting or limiting competition, with the exception of certain statutory exemptions. Indeed, the Competition Law expressly allows non-competition provisions to be included in vertical agreements if each party holds less than 25% of the market. In addition, parties to an agency agreement are directly permitted under the Civil Code to negotiate certain exclusivity provisions, while franchise contracts may set out an almost-unlimited list of limitations.
Unlike to the aforementioned agreements, the law does not provide relevant exemptions for M&A deals, joint venture or shareholders' agreements, where non-competition provisions may be of the utmost importance. Therefore, most non-competition clauses in such agreements are at risk of being unenforceable or even illegal.
The risk is clear, considering that the Competition Law sets a relatively low threshold for M&A transactions to be reviewed by the Federal Antitrust Service (FAS), which issues clearances for all transactions where joint market capitalisation of the parties exceeds:
- 7 billion roubles; and
- the value of target assets is at least 400 million roubles.
Such transactions are valid and effective from the perspective of general civil law, regardless of any inconsistencies with competition law. In this regard, the Supreme Court has specified that cooperation between parties under a civil transaction does not constitute a violation of the Competition Law per se. However, on the practical side, there is a substantial risk that the FAS would refuse to grant an approval if it considered that the transaction documents provide for non-competition arrangements.
As a result, companies' legal teams that are active on the large-scale M&A market have had to find ways to avoid disclosing non-competition provisions to the FAS. For instance, there have been some borderline practices under which relevant provisions were cut from documents that were submitted to the FAS or included in "classified" stand-alone documents.
Due to the law's vague wording and inconsistent transactional practice, on 11 June 2021, the FAS issued the Merger Control Guidelines, which introduced a more liberal and consistent approach to non-competition provisions set within M&A transactions or agreed between shareholders, including:
- share deals;
- asset deals;
- joint-venture arrangements; and
- shareholders' agreements.
Such provisions will most likely be considered to align with the Competition Law if they cumulatively comply with a number of cornerstone criteria, including that:
- non-competition commitments are only given with regard to, and related with effective and profitable functioning of, a target company and its commercial activity;
- such provisions do not cover markets falling outside commercial activity of a target company;
- provisions are only valid for a limited period, which ensures return on investments and reasonable profit for a buyer (indicatively, one to two years once the return on investment is achieved); and
- there is no exchange of information that may facilitate cartelisation of markets or other adverse joint actions between contracting parties that restrict competition.
In earlier clarifications that were issued in 2013, the FAS had not pointed out any specific features of M&A transactions, which was the reason for such a inflexible approach. This lifted substantial risks for parties because such deals were subject to review on the same terms as any ordinary commercial agreement.
Until recently, a threshold of 35% or more of the market share was one of the main criteria for the FAS to determine whether an M&A transaction restricted competition. In other words, the same arrangement between parties holding at least 35% of the market would likely be considered incompliant with the Competition Law. However, the FAS has changed its approach and no longer considers market share as fundamental evidence of restricting competition. This means that even companies with substantial market shares may provide non-competition commitments if there are other major players on the same market.
For further information on this topic please contact Alexey Nikitin and Anton Borisyuk at Borenius Attorneys Ltd by telephone (+7 812 335 22 20) or email ([email protected] and [email protected]). The Borenius Attorneys Ltd website can be accessed at www.borenius.ru/en/.