Separately, Sandeep Parekh has an interesting analysis in the Business Standard about the interplay between non-compete fees under the Takeover Regulations and the more basic question of whether non-compete agreements are even valid given Section 27 of the Indian Contract Act, 1872 (which makes agreements in restraint of trade void). Sandeep notes:
… 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.Another factor that may be added to Sandeep’s analysis is the possibility that non-compete agreements may be permissible if there is a sale of business along with goodwill. This is due to an exception to Section 27 of the Contract Act:
Exception 1.-One who sells the good-will of a business may agree with the buyer to refrain from carrying on a similar business, within specified local limits, so long as the buyer, or any person deriving title to the good-will from him, carries on a like business therein, provided that such limits appear to the Court reasonable, regard being had to the nature of the business.In case of a sale of a company, non-compete payments may be justified by buyers on the ground that they are obtaining the goodwill from the sellers. However, courts do have the discretion to determine whether limits of restraint are reasonable. Whether this exception will apply in the context of sale of shares in a public listed company that is followed by a takeover offer is another matter. But, whether this exception will apply when the seller does not completely exit the company (but continues to retain a partial stake) is a matter that introduces even greater complexity because it may raise a doubt as to whether there has been a sale of goodwill at all in order for the exception to apply. As Sandeep too observes, many of these questions merit no easy answers.