Non-compete agreements in share purchase transactions in Costa Rica

Nikole Sánchez

Nikole Sánchez

During share purchase transactions between companies in Costa Rica, it is common for buyers and sellers to enter a non-compete agreement. This agreement aims to impose a “negative obligation” on the seller to refrain from participating in the acquired company’s market. Non-compete clauses or agreements represent ancillary restrictions agreed upon by the parties involved in the share purchase transaction. However, it is crucial to highlight that these agreements, by restricting or limiting an agent’s participation in a specific market, may be deemed illegal from the perspective of Competition Law.

In situations where share purchase transactions result in a concentration and certain economic thresholds are met, prior authorization from the Commission for the Promotion of Competition (Coprocom) is required. According to art. 88 of the Strengthening of Competition Authorities Law of Costa Rica, concentrations are defined as:

“The merger, acquisition, sale of the business establishment, strategic alliance or any other act or contract through which companies, associations, shares, social capital, trusts, management powers or assets, in general, are concentrated.”

According to art. 89 of the Strengthening of Competition Authorities Law of Costa Rica, concentrations must be notified in advance if they meet the following concurrent criteria:

    1. The participation of at least two economic agents who have carried out activities with an impact in Costa Rica at any time during the two previous fiscal periods before the transaction.
    2. The sum of the gross sales or productive assets in Costa Rica of the economic agents involved reaches amounts equal to or greater than the threshold established by Coprocom, that is, thirty thousand base salaries.
    3. Individually, at least two economic agents involved have generated gross sales or own productive assets in Costa Rica during the previous fiscal year, in amounts equal to or greater than the threshold established by Coprocom, that is, one thousand five hundred base salaries.

Additionally, in the applications to Coprocom, the existence of a non-compete agreement signed by the parties must be disclosed. Coprocom pays special attention to aspects of this ancillary limitation, such as the relevant market, nature, term, purpose, and potential effects on the market. Similarly, it may also request additional information to assess the scope of the contract. For example, a duration period of three years is generally accepted. If the parties establish a longer period, they must justify the reasonableness of its extension.

Coprocom has indicated that non-compete clauses of up to five years may be acceptable exceptionally in cases involving certain circumstances simultaneously, such as the high technical complexity of the transferred business, the lack of experience of the acquirer in said business, the continuity of similar businesses by the seller, and a marked loyalty of customers to the brand, trade name, or distinctive and the transfer of know-how.

In conclusion, non-compete agreements are common tools in share purchase transactions between companies in Costa Rica, but it is crucial to consider their possible illegality from the perspective of Competition Law. In the case of concentrations resulting from such transactions, prior notification to the Commission for the Promotion of Competition (Coprocom) in Costa Rica, complying with the established criteria, is necessary.

This entity carefully examines non-compete agreements, considering various aspects to assess their impact on competition in the market. It is essential for the involved companies to understand and comply with antitrust regulations to avoid possible legal consequences and ensure a fair and equitable competitive environment.