Acquisition Of Company: May Fell Into Thug Trap

 

 

The Non-Compete clause in acquisition of high stake business forms a central and most important clause in which buyers insist that Sellers enter into an obligation not to compete with the Buyer, the acquired entity and its business for a given period. This type of a restrictive clause is termed “covenant not to compete”, “promise not to compete”, or “contract not to compete”.

A non-compete covenant may be aimed at preventing various events, which can occur after the entity is sold, e.g. a Seller may start operating a competing business or set up a new company that will compete with the acquired entity or any of its activities; solicit employees or contact former clients; take away the data base, confidential records, know-how, IPR’s or otherwise interfere with the business sold. All the above actions could impair the entity’s goodwill. A non-compete provision is often supplemented by a penalty clause. The aim of such a provision is to protect and preserve the value of the acquired entity and to obtain some sort of certainty that the Seller does not re-enter the market soon after the sale has been completed. Without the non-compete clause the sale of business agreements would be meaning less and the companies won’t spend billion of dollars for acquiring the entity for operational convenience, increased profitability, if they have to again face the stiff competition.

What if one lures a established business house to sell an entity with a covenant in the Purchase Agreement that bars the seller to take on competing business for a period of say 5 years and induces the established business house to enter into a contract and gets purchase consideration and later on through their proxies opens up a competing company with a similar line of business with the database, technical know-how, IPR they sold to the buyer along with the entity. Is it mere violation of the terms of contract when they from the very beginning at the time, when they induced the buyer to enter into contract, have malafide intention to set up a competing parallel business with poaching of key employees along with database, technical know how, trade secrets & IPR’s and the inclusion of non-compete clause was mere a farce to induce the buyer to cough up millions of dollars in acquiring the business set-up under the belief & false representation by the seller that he would not re-enter the market for a specified period of time after the sale has been completed. It is a well crafted design to cheat the innocent corporate house in the garb of commercial contract.

One such case of cheating came to notice recently where the directors of lesser known logistics company approached a renowned logistics company having its offices all over India to sell their entity. The management of renowned logistics company was led to believe that after the take over of the company, the promoters directors of the vendor company won’t re-enter the market scene & compete with the buyer company for a period of five years and the buyer company would have an competitive edge with the competitive state of art software developed by the vendor company through its IT department for inventory management solutions and databases comprising of business strategies, methodologies, client profile containing specific client profile, client inventory details, inventory cost data etc. The buyer logistics company with offices all over India induced by the vendor, seen it as a golden opportunity to acquire the company to get competitive edge in the market, expand its market share and attain near monopoly. The buyer company and the vendor company entered into a Share Purchase Agreement (SPA) for the purchase of 100 % shareholding from the existing shareholders/directors of the vendor company. There was one Non-Compete Clause of the SPA which barred the erstwhile directors (sellers) to take on competing business involving providing logistic services in relation to warehousing and transportation to third parties for a period of 5 years from the execution of the agreement. It seemed to be a smooth business takeover where the buyers spend around Rs. 60 Crores to take over the entity from the vendor. However, it was not the case; the crooked vendor directors have something else in mind. They have devised a meticulously planned well crafted strategy to cheat the well known logistics company and make them poorer by Rs. 60 Crores.

 

“415 CHEATING.

Explanation : A dishonest concealment of facts is a deception within the meaning of this section.”

So, isn’t it a clear case of cheating. What do you think?

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[i] The maxim means loss or injury to someone which does not give that person a right to sue the person causing the loss.