Non-compete Clauses: Issues To Consider On Business Sale/merger

• Published date: 13 January 2021
• Subject Matter: Corporate/Commercial Law, Anti-trust/Competition Law, Employment and HR, M&A/Private Equity, Antitrust, EU Competition , Contract of Employment
• Law Firm: Walker Morris
• Author: Gwendoline Davies, Rebecca Jackson and Jack Heward

The purchaser of a business will often want to ensure that any goodwill associated with the business is protected. In particular, they will not want the seller to set up a competing business following completion, attracting many of the business' customers, utilising business secrets to gain an unfair advantage, or poaching staff.

Walker Morris' Commercial Dispute Resolution specialists Gwendoline Davies, Rebecca Jackson and Jack Heward explain some of the ways in which UK contract and competition law can afford protection for a purchaser/employer, and some of the risks and issues to consider.

Stop press.Brexit impact

The Brexit transition period ended on 31 December 2020. From and including 1 January 2021, agreements or conduct of UK companies that have an effect within the EU from a competition perspective will still be subject to EU competition rules. UK competition law largely mirrors EU law and new section 60A of the Competition Act 1998 (CA 1998) ¹, means that, as a default position, UK authorities will ensure that competition law in the UK is dealt with in a way consistent with the treatment of corresponding competition under EU law.

For the purposes of this article, relevant principles of EU law have been retained into UK law post-Brexit, albeit the EU only has active jurisdiction over UK market aspects where an investigation was initiated before the end of the transition period.

Section 60A may, however, result in some divergence between UK and EU approaches over time, as it does allow UK authorities to depart from EU principles and case law in some limited, prescribed circumstances. Walker Morris will monitor and report on any key developments.

Competition law in the UK/EU

It is common for employers/purchasers to include in sale and purchase agreements and employment contracts various express contractual restrictions designed to prevent competitive behaviour. That is, of course, a sensible commercial option, but it is important to ensure that any such restrictions do not fall foul of competition law, or there is a risk that they will be unenforceable and/or will expose the employer/purchaser to other penalties.

Anti-competitive behaviour which may affect trade within the UK is specifically prohibited by Chapters I and II of the CA 1998, whilst mergers and certain joint ventures are considered by reference to the Enterprise Act 2002 (EA 2002). In circumstances where the effect of anti-competitive behaviour extends beyond the UK to other EU Member States, it is prohibited by Articles 101 and 102 of the Treaty on the Functioning of the European Union (TFEU).

Both UK and EU competition law prohibit market operators entering into agreements, arrangements and concerted business practices which appreciably prevent, restrict or distort competition (or where this is the intended result) and which affect or may affect trade within the UK or the EU respectively.

Specifically, that might include:

• directly or indirectly fixing purchase or selling prices or any other...