25 August 2010

Takeover non compete fee - kosher?

I have a view in today's Business Standard - arguing that under the Indian law of contracts, non compete fees are void and impermissible. In view of rulings of the Securities Appellate Tribunal however, these would however be upheld - till the time the Supreme Court rules against them. Here is an excerpt:

"The Indian law against restraint of trade and profession is peculiar in that it is deliberately absolute unlike many other jurisdictions like the UK which allows a reasonable restraint of trade and profession. The SAT overruled Sebi, quoting section 27 of the Act, but instead of relying on the Indian commentary, it relied on the UK commentary.

The difference in the law meant that section 27 was not interpreted properly. In other words, on a correct interpretation of the Indian Contract Act, the Sebi regulation allowing non-compete payments itself stands on weak legs. If the law made by Parliament disallows non-compete payments, it is clear that a regulation by Sebi cannot possibly allow it and be the basis of discriminating between shareholders. This fine legal issue will no doubt be resolved by the Supreme Court in due course.


Thus, it can be said that as on date such a fee can be paid by the buyer to the seller of shares to the exclusion of the public shareholders — including to public institutional shareholders like mutual funds. But doing so would entail adverse consequences for public and investor relations and on the corporate governance norms of the buyer. Upsetting a large number of shareholders and analysts also has consequences for a company’s future capital-raising plans, with an invisible cost attached to such action."

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