Miran Legal

Attorney

11.10.2022

Side Limitations İn Acquisition Contracts

In order to prevent indirect violation of the provisions of non-competition, side limitations that include the parties and their relevant relations are usually established. The concept of side limitation is directly related to the concentration process. It means the limitation necessary for the merger or acquisition process to be implemented and to show the expected effect.  As can be seen from the definition, the limitations in question must include two features. The first of these is to be relevant to the condensation process directly, in other words, having a relation. Another feature is a condition that must be done in order for the expected effect of the condensation process to occur, in other words, the presence of necessity. In addition to the nature of the limitation, its duration and scope will also be taken into account in determining whether it is necessary. 

 

            If side restrictions are raised in relation to the acquisition, the restrictions will have to be not beyond the scope of the acquisition. If the determined limitations are sufficient to pass the goods or rights requested to be acquired by the acquisition process, the determined limitation will be considered in accordance with the law. The Competition Board is authorized to conduct an examination on this issue. The issue of side limitations' compliance with the law will be subjected to a detailed examination by the Board in accordance with the elements of each concrete event. There are various anticipated side limitations in practice, and it is possible to increase their number. The most common side limitations are as follows:

 

1. Non-Competition

            In acquisitions, in order for the acquired right or assets to be fully transferred to the buyer, the seller undertaking may be obliged not to compete with the buyer for a certain period of time. This requirement arises especially in order to obtain a clientele and the know-how to show its effect.

 

            It is generally accepted by the Competition Board that non-competition obligations that do not exceed a period of three years are generally reasonable. However, according to the elements of the concrete event, if it is necessary to increase this period in accordance with customer dependence or know-how, non-compete obligations exceeding three years can also be assessed within the side limitation.

 

            In joint ventures, long-term or indefinite non-competition obligations of the parent undertakings not to compete with the joint venture may be considered as a side limitation by the Competition Board.

 

As a rule, the non-competition obligation should be limited to the goods and services that make up the field of activity of the undertaking that was acquired before the transaction. In turn, according to the elements of the concrete event, goods and services that have completed their development but have not yet passed the marketing stage may also be included in this range.

 

Again, the non-competititon obligation must be limited to the field in which the acquired undertaking operates. However, if an undertaking that was in the seller's position before the acquisition had made investments in order to enter new regions, or in similar exceptional cases, the non-competition in terms of the relevant regions will be considered reasonable.

 

Non-compete obligations imposed on the seller undertaking and all establishments forming an economic integrity can be accepted as a reasonable side limitation. Non-compete obligation for persons holding the title of vendor or user will not be considered as a reasonable limitation since it will not be considered a necessary and relevant.

 

Obligations of the seller, such as not employing employees of the acquired undertaking, not disclosing and not using trade secrets, will also be considered as a side limitation within the framework of the non-competition.

 

Non-competition is usually imposed on the seller in acquisition contracts. Because the seller is the party who has information about the establishment in question, knows the market and is active in it. Additionally, the buyer will be considered unfamiliar with the market unless stated otherwise. By using the advantage that the seller has after commissioning his business, they can be prevented from doing the transfer business for a certain period of time in order to prevent them from withdrawing their old customer profile to themselves. Non-competition, as a rule, includes this limitation. 

 

However, in some cases, a non-competition on the buyer is also possible. This will be especially relevant in cases where only part of the business has been sold and an agreement has been reached that the seller will continue its business. Naturally, in these cases, the seller will ask the buyer to do the work that they have acquired in such a way that the buyer will not be a direct competitor to them. For example, in cases such as patent license or trademark license acquisition, it will be more fair for the transferee to use the relevant rights only in the regions allocated to them. For this purpose, the transferor and the transferee will not operate in the same geographical region and will be prevented from competing with each other. The element examined here by the Competition Board is whether the buyer is completely prevented from using the asset they have inherited or not. If the side limitation imposed does not completely prevent the buyer from using the inherited asset, it will be considered a legal and valid limitation.

 

2. Procurement Regulations

            In acquisition contracts, the possibility of the undertaking being in the buyer position after the process experiencing difficulties at the distribution stage will be set forth. Reasons such as the buyer's lack of knowledge about the market, being unfamiliar with the requirements of the market, or not knowing the ongoing layout of the acquired undertaking may put the buyer in a difficult position. In this case, the seller will agree to distribute the products produced by the buyer for another period of time. In this way, the new subject which entered the market by acquisition will be able to overcome the difficulties of entering the market with less damage and go through the process more comfortably. This event, also called the distribution agreement, is also taken into account by the Competition Board. The Competition Board mainly examines whether there will be difficulties in competitors' entry into the market.

3. Information Exchange

            In the implementation of acquisition contracts, provisions are usually made on the exchange of information between the transferee and the transferor undertakings. However, this information exchange may cause competition-limiting effects. In the presence of provisions providing for the exchange of information, the Competition Board conducts a detailed examination of the relevant provisions in terms of their impact after their implementation.

 

4. Contract Manufacturing Provision

            The transferor is able to request that some of the products produced in the acquired undertaking be produced on their behalf for a while longer. This situation especially occurs when the transfer process does not cover some of the products produced at the establishment. The seller may request that the production of certain products not covered by the acquisition continue until they have established or found a new facility. The main goal here is to prevent interruption at the production stage of the product produced by the seller. For this reason, in practice, contract manufacturing, in other words, contract manufacturing provisions are put into the acquisition contract for a certain period of time. Such provisions are considered valid as long as they do not have a limiting effect on competition.

 

5. Transitional Services

            After the acquisition, a transition period will begin between the two parties. In order for the parties to survive this transition period more comfortably and with minimal damage, side restrictions are envisaged that have various provisions and consequences for both sides. After the acquisition, it may be mandatory for the transferor to assist the transferee in terms of some business and transactions in order for the transferee to adapt to the market and continue its activities. This will become even more important, especially if the transferee has never operated in the relevant market before the acquisition.

 

 
 CONCLUSION

            An acquisition, which is a type of concentration, is a transaction that, by its nature, closely concerns competition law. In practice, following the realization of the acquisition, various limitations are foreseen that the transferor will be subject to in order for the transferee to adapt to the market in a more comfortable way. The most common side limitations in practice are summarized in this article. In order to prevent one of the parties from imposing conditions that aggravate the situation of the other more than necessary, at the stage of determining the limitations in question, the way has been opened for the audit of side limitations in acquisition contracts by the Competition Board. In this way, competition between undertakings in the Market will be preserved by providing for side restrictions between the parties in accordance with their intended purpose.