Restrictive Covenants in M&A Transactions in Russia and Foreign Jurisdictions

In this paper, covenants not to compete in the sale of a business transactions are researched in relation to the legal systems of the Russian Federation, the United States of America, the European Union and the Federal Republic of Germany. The analysis of non-solicitation covenants in M&A transactions in Russian law is also provided. Non-compete and non-solicitation in the sale of a business are clauses (covenants) that allow the purchaser to restrain the seller’s actions in order to protect business ties, commercially sensitive information, as well as other unidentifiable intangible assets, which may constitute a significant part of the total cost of the business. In the absence of such conditions, the seller who is familiar with the disadvantages and advantages of the sold company can set up a competing "next-door business" and take actions to solicit customers and employees which will reduce the cost of the business he sold previously. Non-compete and non-solicitation covenants are widespread in foreign and Russian M&A transactions. However, in Russian law, there is no legal regulation of these provisions and relevant judicial practice. The main goal of the research is to determine the fundamental possibility and certain conditions for acceptable and enforceable restrictive covenants in M&A transactions. Structurally, this research includes four chapters and 16 paragraphs, besides the introduction, conclusion, and list of references. The first chapter consists of three paragraphs (1) the concept and legal nature of covenants, (2) their types and application spheres, and (3) the history of origin and development of restrictive covenants in the Anglo-American legal system. The second chapter is fully devoted to the analysis of the non-compete clauses and includes: (4) the content of non-competes; (5) the general analysis of the admissibility of such conditions; (6) the reasons for applying non-compete in the sale of a business; and (7) the reasonableness of the certain terms of such agreements. The third chapter provides (8) a general overview of the application of the non-competition clauses in foreign countries and their status in (9) the United States, (10) the EU, and (11) the Federal Republic of Germany. The last chapter is devoted to restrictive covenants in the sale of a business context in Russia and the following questions are discussed: (12) antitrust regulation of non-competes; (13) the admissibility of non-competes regarding other legal relationships under Russian law; (14) non-competition agreements as a waiver of rights; (15) the admissibility of a non-solicitation in M&A context in Russia; and (16) possible ways to regulate restrictive covenants in the sale of a business transactions in the Russian Federation. Based on the results of the studies, a global trend for the enforcement of non-competes was revealed if they correspond to the legitimate interests of the purchaser and are reasonable in terms. The rigid wording of the non-solicitation clause in the form of the prohibition to hire the employees of the other party to the agreement may indeed conflict with the legislation of the Russian Federation. At the same time, the condition that limits the seller precisely in the commission of active actions to solicit employees should be recognized as permissible. To ensure the proper application of the non-compete and non-solicitation clauses by the parties of a transaction for the sale of a business and the more likely possibility of their enforcement, explicit legal regulation of such agreements should be introduced into the legislation of the Russian Federation. The author’s view on the desirable regulation of non-competition and non-solicitation agreements in M&A transactions is provided in the appendix to this paper. Finally, the problematic issues that are of interest for further research regarding non-competition and non-solicitation clauses in M&A transactions under Russian law are identified.