Court endorses non-compete clauses in share acquisitions

Restrictive non-compete covenants are common in share purchase and subscription transactions in India. Standard provisions include restrictions on the promoters, sellers or joint venture partners from engaging in competing business for a specified time period. Such provisions are aimed primarily at protecting investment value and business know-how.

However, investors have faced various practical issues in enforcing such provisions because of the broad restriction set out under section 27 of the Indian Contract Act, 1872. Further, Indian courts have frequently refused to enforce post-termination non-compete clauses in employment contracts.

In a welcome development, Delhi High Court in its recent order in Lal Pathlabs Pvt Ltd v Arvinder Singh (2014) acknowledged India’s need for economic development through foreign investment and noted that non-compete clauses are an essential part of mergers and acquisitions in India. The single judge recognized that holding non-compete clauses to be non-enforceable would be a serious impediment to foreign investment.

Zakir Merchant is a partner and Ashraya Rao is a senior associate at Khaitan & Co. The views of the authors are personal, and should not be considered as those of the firm.