Mergers: Should non-compete fee be dropped?

The recent HDFC Life-Max Life merger has put a spotlight on the issue of non-compete fees paid to promoters. During overhaul of the takeover code in 2011, market regulator Securities and Exchange Board of India (Sebi) had disallowed payment of non-compete fees to promoters stating that a uniform price should be paid to all shareholders. A non-compete fee is paid to exiting promoters to prevent them from entering the same business again. However, non-compete fee continues to remain prevalent in mergers, raising questions whether Sebi should entirely bar such payments. According to reports, the market regulator is consider reviewing whether non-compete fees should be allowed in mergers. Four legal eagles share their views on the subject. Edited excerpts:

"The concept can't be banned by law"

Non-compete fees are an integral part of conduct of trade and business. As old as the hills, the concept can't be banned by law. What must be done is check whether the business being sold is undervalued or the person being paid could never have competed but was paid. It has to be a fact-based determination and not a blanket policy of banning something that doesn't resonate. Other markets, where no one owns any substantial stake in a company, would not have facts that justify such payment. Our market inflicts obligations on specific shareholders to play a special role as a promoter. It would be delusional to think that a minority shareholder of Tata Steel plays the same role that Tata Sons plays and must be treated on a par.

Somasekhar Sundareshan, Independent counsel

"Fees are justifiable as there are safeguards"

Such fees are justifiable in certain circumstances as it has two safeguards-shareholders and high court. The non-compete fees are typically subject to approval of court. Though, Sebi could enforce its Listing Obligation and Disclosure Requirements (LODR) rules and request court to cancel such fees.

Sandeep Parekh, Founder, Finsec Law Advisors

"Sebi should bring parity in restructuring mechanisms"

Takeover Code does not apply to schemes of arrangement under the Companies Act and, hence, minority shareholders do not enjoy the same level of protection that they would have enjoyed in the case of a takeover. Sebi has forayed into schemes of arrangement wherever a listed company exists or emerges by establishing certain procedures. Regulator needs to raise the standard now to proscribe non-compete clauses in the interests of minority shareholders to bring parity in restructuring mechanisms. No rationale to have different sets of minority-shareholder protection norms in a takeover structure and in a merger or demerger. Also, if non-compete fees were allowed to be paid to those shareholders who have not completely exited and continue to hold stakes in resultant company, it will leave many questions.

Sumit Agrawal, ex-Sebi official, and partner, Suvan Law Advisors

"Justified in some circumstances"

In all circumstances, non-compete fees cannot be justified. No quantitative way to calculate the fee. Non-compete fees can be justified if there is risk of the seller starting a competing business, or poaching clients or employees/seller has technology, among other things. Absent any justification, non-compete fees cannot be justified.

Sudhir Bassi, executive director, Khaitan and Co