FAS Russia Clarifications on the Permissibility of Non-Compete Agreements in the Sale of Businesses

On 11 June 2021, FAS Russia issued clarification No. 19 “On the Specifics of State Antimonopoly Control over Economic Concentration” (Clarifications). In addition to other important clarifications on the application of competition law, FAS Russia took a relatively liberal stance in relation to non-compete agreements entered into in connection with the sale of a business, indicating that such agreements may be treated as permissible if certain conditions are met.¹

FAS Russia previously published “Clarifications on the Procedure and Methodology for Analysing Joint Activity Agreements” dated 7 July 2013 (JV Clarifications), which expressly permitted the inclusion of non-compete provisions (including non-solicit provisions) in joint activity agreements subject to certain conditions being met. The JV Clarifications could serve as guidance in the negotiation and completion of not only joint venture transactions, but also sale and purchase transactions that contain elements of a joint activity agreement.

Until recently, however, there have been no specific regulations or clarifications as to the permissibility or manner of antimonopoly approval of non-compete provisions in business sale and purchase transactions which did not contain elements of a joint activity agreement. Because of this, there was a risk that such provisions could per se be viewed as agreements which might lead to the division of the product market (and therefore be viewed as a cartel) or as other anti-competitive agreements (Article 11 of Federal Law No. 135-FZ of 26 July 2006 “On the Protection of Competition” (Competition Law)). Therefore, there was a risk that such conditions would be found to be in breach of the Competition Law.

In the Clarifications, FAS Russia expressed the position that the public danger of non-compete provisions in agreements to acquire shares, interests, rights or assets is lower than in joint activity agreements concluded between competitors. According to the Clarifications, “the very expression of the seller's will to transfer a certain business segment to the buyer ... indicates an independent and legitimate desire to refuse to continue entrepreneurial activity in that market”. However, according to the Clarifications, not all non-compete agreements entered into in connection with business sale and purchase transactions may be treated as permissible: such agreements must meet the criteria set out in the Clarifications.

1. Conditions for Non-Compete Agreements in business sale and purchase transactions to be permissible

The conditions for the permissibility of non-compete agreements set out in the Clarifications, generally, follow the approach previously elaborated by FAS Russia in relation to joint activity agreements.²

According to the Clarifications, the main criterion for deciding if a non-compete arrangement is permissible is whether or not its parties are able to restrict competition. Non-compete clauses may be recognised as compliant with competition law provided that all of the following conditions together are met:

1. Relevance to the Purpose of the Transaction

Clauses of an agreement whereby the seller agrees not to compete must be consistent with the purpose and nature of the agreement in question, namely:

a) they should be connected with the activities of the business entity (business segment) being acquired (Target); and

b) they should seek to : (i) ensure the efficient and profitable operation of the Target; (ii) safeguard and secure the efficient investment that the purchaser intends to make in the Target's development; and (iii) ensure the return of the investments made by the purchaser in the Target.

2. Product Markets Subject to Restrictions

Non-compete provisions may only apply to the product market in which the Target operates and to adjacent markets.

“Adjacent product markets” are not defined in the Clarifications. We believe that, given the similarity of the subject matter of regulation, FAS Russia may in practice be guided by the definition of this term given in the JV Clarifications. The JV Clarifications define adjacent markets as markets for goods (work, services) which:

a) are used for the manufacture and transportation of goods (work, services) which constitute the product boundaries of the affected product market;

b) are manufactured (performed, provided) using goods (work, services) which constitute the product boundaries of the affected product market; or

c) are complementary, during the course of their consumption, with goods (work, services) which constitute the product boundaries of the affected goods market.

3. Duration of Non-Compete Restrictions

The duration of non-compete restrictions may not exceed the term necessary to ensure the return on investment, ie, the payback period of the investment project and the period for profit generation. The Clarifications estimate the usual payback period of a project to be around five years, and the period for profit generation – one to two years after the investment project becomes profitable.

This approach is similar to that previously taken by FAS Russia in the JV Clarifications in relation to the permissible duration of similar provisions in joint activity agreements.

4. Ban on Information Exchange to Maintain Anti-Competitive Arrangements

Non-compete provisions should not provide for the exchange of information which may facilitate the maintenance of a cartel or concerted actions restricting competition or other anticompetitive agreements.

At the same time, FAS Russia noted in the Clarifications that acquisitions of shares, interests, rights or assets usually exclude the existence of competitive relations and interaction between the parties after the transaction. Therefore, in practice this condition should normally be satisfied for non-compete agreements in the majority of business sale/purchase transactions where the seller sells the entire business.

Given that non-compete provisions should be assessed individually (as noted in the Clarifications), we believe that the foregoing list should not be viewed as exhaustive and FAS Russia will consider all circumstances of the case and the terms of the transaction as a whole when assessing whether the parties are able to restrict competition.

2. Procedure for Approving Non-Compete Agreements

The Clarifications indicate that non-compete provisions are part of a transaction increasing market concentration and therefore such provisions should not be approved separately from the underlying transaction. The Clarifications further specify that if the underlying transaction does not require approval and it is not obvious whether or not the non-compete provisions are permissible, the purchaser may voluntarily submit them to the antimonopoly authority (in accordance with Article 35 of the Competition Law).

The Competition Law does not require that anti-competitive agreements should be filed with, and approved by, FAS, unless such agreement is a joint activity agreement between competitors. In accordance with Article 35 of the Competition Law, entities that seek to enter into an anti-competitive agreement may (but are not obliged to) voluntarily submit it to the antimonopoly authority for review from the perspective of compliance with the competition law.

In our view, these provisions of the Competition Law and Clarifications can be interpreted so that non-compete provisions in connection with the share (participation interest) purchase do not require FAS Russia approval. It does not mean, however, that a non-compete agreement can be found to be in breach of the Competition Law, for example, if it does not meet criteria set out in the Clarifications.

3. Matters not Covered by the Clarifications

The Clarifications contain rather brief provisions in relation to non-compete agreements, including in comparison to the JV Clarifications. Therefore, in practice, parties to business sale/purchase transactions may have additional questions as to the interpretation of the Clarifications and the permissibility of certain provisions of non-compete agreements. We believe that for most of these issues, FAS Russia will likely apply an approach similar to that previously formulated in the JV Clarifications. However, we cannot entirely rule out the possibility that FAS Russia will develop a separate approach to non-compete provisions in business sale and purchase transactions (including in light of the position of FAS Russia that such provisions represent a lower risk to public interest than similar conditions in joint activity agreements).

Permissible Content of Non-Compete Obligations

The Clarifications are silent on the permissible content of non-compete obligations and do not specify which types of activities may be restricted by a non-compete agreement. FAS Russia has previously set certain guidelines in this respect in the JV Clarifications. They contain a non-exhaustive list of possible types of restrictions that may be provided for by non-compete provisions of joint activity agreements and also indicate provisions that cannot be deemed compliant with competition law.³ At the same time, given that many of the possible restrictions mentioned in the JV Clarifications are specific to joint activity agreements, it cannot be ruled out that FAS Russia will further clarify or develop a different approach with respect to the non-compete provisions in business sale/purchase transactions.

Possible Retrospective Application of the Clarifications

The Clarifications do not explicitly state that they can be applied to non-compete agreements entered into prior to the adoption of the Clarifications. As the Clarifications are not a normative legal act, are of a recommendatory nature and are not intended to change the existing regulations, it could be argued that non-compete agreements entered into prior to the adoption of the Clarifications may be deemed permissible if they meet the criteria set out in the Clarifications. However, we cannot guarantee that FAS Russia or a court would always agree with this approach.

As stated above, the Clarifications are not a normative legal act, and therefore their legal force and binding nature are generally debatable. However, taking into account the fact that the Clarifications generalise the practice of applying antitrust laws by the antimonopoly authorities, we believe that in practice FAS Russia is highly likely to follow the approach set out in the Clarifications. Furthermore, when deciding on antimonopoly cases, courts also frequently base their reasoning on clarifications of FAS Russia on competition law issues.

¹ See paragraph 3.5 of the Clarifications.
² See Section V of the JV Clarifications.
³ For example, provisions containing unconditional obligations of a party to the joint venture agreement (or entities belonging to its group) not to participate in other (investment, etc) projects with third parties related to the manufacture or implementation of a joint venture or the parties to the joint venture agreement (paragraph 4.1 of the JV Clarifications) cannot be deemed compliant with the requirements of competition law.