 "Non-compete fee: The debate goes on")
There can be no case to interfere: Somasekhar Sundaresan
Binding the controlling mind of the seller of a business not to compete with the buyer, and paying a fee for it, is as old as the hills in common law countries such as India. As a matter of contract law, agreements that restrain trade are void. However, agreements that restrain the seller or the controlling mind of the seller, from being involved in the same business within specified local limits that appear reasonable to the court, are permitted.
Competition regulators may review such agreements closely while considering their effects on competition in the relevant markets. Securities regulators may review them to see if the business that was sold by a listed company was undervalued to enable the persons controlling the business to get a disproportionate payment towards non-compete fees. Therefore, exposure to scrutiny is a given - whether by a court or by a regulator.
It is possible that the seller would simply be unable to compete even if money is put into his hands by the purchaser. Likewise, it is possible that a seller who may have been incapable of effectively competing (which is why the business got sold) lays her hands on money paid by the buyer of the business, and becomes capable of competing. Regulators are armed with extraordinary powers to scrutinise in minute detail and to act as they will. Contracting parties would need to explain and justify the restraints agreed to, the effect of restraints, and how they computed the fee amount. This is hard work for the parties and for the regulators.
Policy-makers prone to banning anything they cannot easily understand may desire a ban on non-compete arrangements. However, one must remember that non-compete arrangements serve the vital purpose of protecting shareholders of the buyer from cannibalising of the business by the seller. So long as the business being sold has not been under-valued and the computation of quantum of the non-compete fee is commercially logical, there can be no case to interfere with commercial-contractual sovereignty in the conduct of business.
The writer is a practising legal counsel
Just an excuse to pay more to promoters: Hetal DalalThe recent merger between Max Group's life insurance business and HDFC Standard Life has brought the debate over non-compete fees to the forefront. Institutional Investor Advisory Services opposed the payment of the Rs 850-crore non-compete fees. But, the Max Group labelled the non-compete fees 'an essential pre-condition to the merger' and investors chose not to call its bluff.
At a broader level, non-compete fees to promoters violate the basic tenet of good corporate governance - that all shareholders must be treated equally. Promoter getting paid a bit more on the side has the potential to create unfair incentives, which may include setting valuations that favour the promoters at the cost of minority shareholders. Non-compete payments have been misused in the past, which compelled the Securities and Exchange Board of India to change the takeover codes - now, the offer price must not be less than what was paid to promoters.
It is fallacious to assume that the promoters alone are capable of building a competing business of equal size and in the same time. Beyond the acumen and skill of the promoters, the business will have benefited from a favourable environment and available opportunities. To assume that all the stars will align themselves once again to create another such business is naïve. Let's also take a practical stance - how many promoters can one think of that have started a similar business (as that which was sold)? Of them, how many had a second equally-successful run?
Non-compete fees, in the Indian context, are rewards for the past - they do not thwart future competition. The real threat to today's businesses emanate from disruptive technology, not from another competing business. Non-compete fees will eliminate one potential competitor - it does not materially change the industry's competitive dynamics. And, most companies have learnt to differentiate themselves and grow, despite a competitive environment. Therefore, in the longer run, eliminating the promoter from potentially entering the business line achieves nothing.
Perhaps there may be circumstances that legitimise non-compete fees, but these will need to be compelling.
The writer is chief operating officer, Institutional Investor Advisory Services
