INFORMATION NOTE ON THE SCOPE OF NON-COMPETITION OBLIGATIONS FOR THE SELLER IN SHARE TRANSFER AGREEMENTS
2 October 2024
Subject: This Information Note discusses in which cases it is possible to provide a non-competition obligation on the transferor shareholder to not compete with the transferred company for a certain period of time, and in which cases it is not.
Article 7 of the Law on the Protection of Competition prohibits merger or acquisitions, where one or more enterprises acquire all or part of another enterprise’s assets, shares, or management control, that significantly reduces effective competition in a relevant market within the country, either by creating or strengthening a dominant position.
“Ancillary restraints”, which are the key concept in this regard, determine the limits of the seller's non-compete obligation in share transfer agreements falling within the scope of Article 7 of the Law on the Protection of Competition, and are deemed to be lawful. The reason for this is that non- competition clauses are considered as complementary to the transaction of mergers and acquisitions and thus they are regarded as ancillary restraints. According to the Competition Authority’s decision dated 23.02.2011 and numbered K. 11 -10 / 186-62, in order for a restriction to be considered as an ancillary restraint, it must meet the following conditions:
- Direct Relevance and Necessity. The ancillary restriction must be directly related to and necessary for the sale transaction.
- There must be a close connection between the restriction and the transaction, meaning an economic unity.
- If the restriction does not apply, the transaction will not take place or will be jeopardized, or it will bear significant uncertainty and increased costs.
- Proportionality. The non-competition obligation shall be reasonably proportional, i.e. it’s scope shall not exceed a reasonable level in terms of the obligor(s), subject matter, duration, geographical area and parties.
- In terms of duration, a non-complete period of 3 years is generally considered reasonable. However, in cases where customer dependence lasts longer and the nature of the transferred know-how necessitates it, non-compete obligations exceeding three years may also be acceptable. (Please see RK 28.09.2023, K. 23- 46/865-306 where the Competition Authority permitted a 5 year non-compete obligation).
- The subject matter is determined according to the scope of goods and services that constitute the field of activity of the company whose shares are transferred and is considered reasonable.
- The limits of ancillary restrictions in terms of geographical area are determined according to the geographical area in which the target company operates. To deem the limitation reasonable, it is not necessary for operations to have commenced. The fact that an investment has been made is sufficient to provide an ancillary restriction.
- Unless unavoidable as a result of the share transfer, the prohibition on competition should not influence the economic behavior of third parties or other undertakings. In this context, non-compete clauses imposed on economic units forming an economic unity with the seller and the seller’s agents are considered reasonable in terms of the parties involved.
There is no specific regulation on non-compete clauses for the seller that fall outside the scope of Article 7 of the Law on the Protection of Competition. While the Court of Cassation’s rulings on such cases are not always consistent, certain approaches have been accepted in case law as follows:
- In the event that the seller transfers partial equity, the seller may be subject to the prohibition of competition as long as it remains a shareholder.
- If the seller sells its entire stake and has an ongoing service contract with the company, the non-compete obligation cannot exceed 2 years, as the seller will also be considered an employee under Art. 445 of TCO. This exception does not apply to sellers who are also in the management of the company. The Court of Cassation did not consider the sellers in the board of directors as employees.
Given the contradictions in the Court of Cassation decisions, Assoc. Prof. Dr. Burçak Yıldız in her article titled “On the Scope of the Non-Competition Obligations for the Seller in Joint Stock Company Share Transfer Agreements”, recommends that the “Guidelines on the Related Undertaking, Turnover and Ancillary Restrictions in Mergers and Acquisitions” published by the Competition Authority be considered as reference in sales transactions that do not fall within the scope of Article 7 of the Law on the Protection of Competition.