Additional scrutiny of restraints in sale agreements under the new mandatory merger regime

The Treasury Laws Amendment (Mergers and Acquisitions Reform) Act 2024 (Merger Reform) introduces significant changes to Australia's merger control regime, and importantly signals increased scrutiny of goodwill protection restraints (including non-competes) in sale contracts. Going forward, merger parties can expect an increased risk of enforcement action by the ACCC in relation to such restraints, and should ensure that they are carefully drafted so that they do not go beyond what is strictly necessary to protect the goodwill of the target business.

Goodwill protection restraints in sale contracts

It is common practice during the sale of a business to include restraints to safeguard the value of the business's goodwill, for the benefit of the purchaser. These are typically intended to prevent the seller from engaging in actions that could damage the business's reputation or harm its relationships with customers, employees or suppliers after the transaction closes. A typical example is a non-compete clause restraining the seller from engaging in activities that directly compete with the target business for a specified period, or in a specified area where the target business competes.

Goodwill exemption under the current law

Generally, a provision in an agreement which imposes restrictions on the freedom of merger parties to compete post-transaction is a prohibited cartel provision under Part IV of the Competition and Consumer Act 2010 (CCA), and attracts substantial penalties. However, section 51(2) of the CCA lists a number of matters that are to be disregarded in determining whether there is a breach of Part IV.

Relevantly, section 51(2)(e) provides:

"(2) In determining whether a contravention of a provision of this Part other than section 45D, 45DA, 45DB, 45E, 45EA or 48 has been committed, regard shall not be had:

….

(e) in the case of a contract for the sale of a business or of shares in the capital of a body corporate carrying on a business—to any provision of the contract that is solely for the protection of the purchaser in respect of the goodwill of the business; or…" (Goodwill Exemption)"

Accordingly, section 51(2)(e) exempts restraints in share or business sale contracts from contravening Part IV only so far as the restraint is necessary for the protection of the purchaser in respect of the goodwill of the business to be acquired.

The exemption under section 51(2)(e) is largely untested by the Courts and currently merger parties self-assess the necessity of restraint to protect the goodwill of the target business.

Factors such as product and geographic scope and duration of restraints influence whether a provision qualifies as necessary.^[1] For example, restraints that prevent the vendor from competing in a product line or geographic area where the target is not active are unlikely to be solely for the protection of the goodwill of the target business.

What are the changes?

The new laws make it clear that restraints will be actively scrutinised by the ACCC under the new regime by modifying this absolute exemption that is currently provided in section 51(2)(e). The key features are:

• The ACCC will now have the authority to declare the Goodwill Exemption (under section 51(2)(e)) does not apply to a restraint in a sale contract, where the ACCC is satisfied the provision is not necessary for the protection of the purchaser in respect of the goodwill of the business. For example, where the contract includes a non-compete clause where the duration or scope is broader than necessary to protect the goodwill in the target business.
• Notification forms (which are yet to be released) are likely to require parties to specify restraints in contracts that rely on the goodwill exemption (Goodwill Protection Provisions). The new laws allow a determination by the Minister to require the notification to specify any goodwill protection provisions of the contract. We expect in practice this will form part of the standard notification form.
• The ACCC will be required to report on Goodwill Protection Provisions in its annual report, which over time will provide parties with guidance on the scope and limits of the exemption. Under the new laws the ACCC will be required to report on the kinds of Goodwill Protection Provisions specified in notifications, the number of declarations the ACCC has made that the Goodwill Exemption does not apply, and the circumstances of those declarations.
• The ACCC will retain its powers to take enforcement action in the Federal Court for breaches of the CCA. Even if the ACCC does not make a declaration in respect of the goodwill, this does not limit the powers of the ACCC from commencing court proceedings for breach of Part IV of the CCA on the basis that a restraint in a sale contract is not solely for the protection of the purchaser in respect of the goodwill of the business and so goes beyond the scope of the Goodwill Exemption. This is not changed from the current position, but the ACCC has not to date taken enforcement action against goodwill protection provisions. In practice, we expect the ACCC would be more likely to use the new declaration power than take the traditional enforcement path.

Interaction with other laws

The CCA does not affect the operation of the laws relating to restraint of trade to the extent that they are capable of operating concurrently with the CCA (section 4M).

• Common law: At common law, a goodwill protection provision will be valid if it affords no more protection than is reasonably necessary to protect the interests of the party in whose favour it is imposed and it is reasonable having regard to the interests of the public (McHugh v Australian Jockey Club Ltd [2014] FCAFC 45 at [4]). The "reasonableness" test commonly applied is that the provision should be so framed and so guarded as to afford adequate protection to the party in whose favour it is imposed, while at the same time it is in no way injurious to the public (Nordenfelt v Maxim Nordenfelt Guns & Ammunition Co [1894] AC 535 at p. 565).
• NSW law: Under section 4(1) of the Restraints of Trade Act 1976 (NSW) a restraint of trade is valid to the extent to which it is not against public policy, whether it is in severable terms or not. This does not affect the invalidity of a restraint of trade by reason of any matter other than public policy (section 4(2)).
• Other States: Other jurisdictions do not have corresponding legislation to that of NSW. Outside of NSW, the doctrine of restraint of trade operates under the common law. However, courts have acknowledged it is not against public policy for other States to apply the NSW Restraints of Trade Act 1976 as long as it does not offend the public policy of that particular State (Hawker de Haviland v Fernandes and Anor (1996) ATPR 41-479).