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Mergers And Acquisitions: No Need To Regulate The Non-Compete Fee

It is usual to find non-compete provision in mergers and acquisitions deals. This provision imposes restriction on parties to carry on similar business. The provision prevents joint venture partners from competing in similar business as that of their joint venture entity. This restriction could be during the term of the venture and even after its termination.

The provision could also prevent the selling shareholder who exits a company to not compete in the business of that company. Non-compete is valid in law for the duration of the joint venture but not thereafter. This is because the Indian contract law provides that any agreement in restraint of trade is void. It says that every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.

But there is an exception to this rule, i.e, when a business is sold with its goodwill. The seller in such a case could agree with the buyer to refrain from carrying on a similar business. Such refrain has to be within some agreed geographical limit. Depending on the nature of the business, the limit, so set, should appear reasonable to the court.

Therefore, when a business or shares in a company are sold, the parties usually agree to a non-compete for a certain period and for a certain agreed geographical limit. As a consideration for this non-compete arrangement, the seller is paid a non-compete fee by the acquirer. Thus, a seller is well within her right to agree to a non-compete and get a fee for it.

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