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published on 22 June 2022 | reading time approx. 3 minutes
Non-compete clauses are of great importance for the economic success of a transaction. When joining a company as a shareholder or when acquiring all of the company's shares, the purchaser must ensure that the seller does not operate on the same market both when (still) having the position of a shareholder and also after his exit. A similar need exists regarding (former) managing directors.
Otherwise, there is an inevitable risk of a reduction in the value of the shares held. The seller could disclose the company's trade secrets and know-how to the outside world and enter into direct competition with the company. Non-compete clauses are intended to counteract this risk.
Therefore, non-compete clauses are an indispensable part of the articles of associations and the managing director’s agreements as well as share purchase and transfer agreements.
Insofar as the seller of the shares in the company initially remains with the company either as a shareholder and/or as a managing director, he or she will usually be subject to a non-compete clause. Even if the prohibition of competition already results from the law, its details are often agreed individually between the parties.
It should be noted, however, that a minority shareholder who does not have any special rights (e.g. in the form of veto rights or rights of approval) is generally not subject to any legal prohibition to compete and such a non-compete clause cannot be effectively agreed by contract. This should be considered in particular, if a gradual exit of the seller from the company is planned and therefore will become a minority shareholder in the course of the transaction. Decisive for agreeing a valid non-compete clause is whether a shareholder has the possibility of influencing the management which can also be assumed, for example, if there are pooling agreements among the shareholders.
The validity of a non-compete clause always depends on the individual case. In order to draft a valid non-compete clause and to avoid the quite considerable risk of the non-compete clause being invalid, it should be adapted to the specific individual case with due care. It is advisable to coordinate the articles of association, the managing director’s agreements and the share purchase agreement to avoid possible contradictions and / or loopholes. If, for example, the articles of associations stipulate that the shareholder's voting rights are suspended as of the date he or she hands in his or her resignation, this may result in the shareholder no longer being subject to the prohibition of competition resp. the non-compete clause becomes invalid as of that date.
Even more important for a transaction are usually the post-contractual non-compete clauses. It must be agreed contractually, as it can only be derived from the law in exceptional cases.
For both shareholders and managing directors, a post-contractual non-compete clause can only be effectively agreed if there is a legitimate interest of the company that is worth protecting. In the case of a minority shareholder, the post-contractual non-compete clause is also usually invalid, unless he or she has acquired special know-how and gained access to business secrets during his or her employment.
If the company has an interest that is worth protecting, the second step is to assess whether the non-compete clause is appropriate in regard to its duration, territorial range and subject matter. In this respect, the balancing of interests of the company and the fundamental right to freedom of occupation of the shareholder and / or managing director is performed.
Post-contractual non-compete clauses which have a duration of two years are generally con-sidered by courts as permissible. In the past, however, significantly shorter periods than two years have been considered inadmissible in some cases. Post-contractual non-compete claus-es over a period of three years may only be permissible in absolute exceptional cases. However, if the permissible duration limit is exceeded, the period may be reduced by the court, with the rest of the clause preserving its validity.
Caution is also required when specifying the territorial scope of the clause. If this scope is not stipulated in the contract, in case of doubt it is assumed that the non-compete clause applies nationwide, which in turn can render the clause invalid if the company concerned does not actually operate nationwide. If the non-compete clause refers to the entire "German-speaking area", the non-compete clause is invalid if the company does not also operate in Austria and Switzerland or seriously plans to do so.
It is necessary to describe the scope of the post-contractual non-compete clause in detail. A post-contractual non-compete clause is only valid if it relates specifically to the area in which the company currently operates. Making a mere reference to the industry is not sufficient in this case. A reference to the object of the company stipulated in the articles of association also carries the risk of the non-compete clause being invalid, as this object of the company is usually too broad. If, exceptionally, the object of the company is described sufficiently concrete, a non-compete clause may still become invalid if the company's activities change in the meantime.
Furthermore, it is necessary to specifically describe the activity prohibited under the non-compete clause. If it prohibits all activity and involvement in a competitor company, this may also render the non-compete clause ineffective. For example, a former managing director cannot be prohibited from working as a janitor for a competitor company.
As legal consequences of a breach, it is usually advisable to agree on a contractual penalty, as the specific damage is often difficult to quantify and prove. When agreeing on a specific amount of the contractual penalty, however, it must be noted that it may not be unreasonably high, but should take into account the circumstances of the individual case to a certain extent. Assuming that a valid contractual penalty has been agreed on its merits, it is still possible that in the event of a judicial review, the contractual penalty will be reduced to an amount reasonable from the court's point of view.
In summary, special attention should always be paid to the wording when phrasing non-compete clauses, as exceeding the permissible limits may result in the non-compete clause becoming invalid in whole. The non-compete clause may be reduced while preserving its validity only when it comes to reducing its duration.
Dr. Alexandra Giering
Partner
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Alina Waldenburger
Associate
Transaction advisory | Mergers & Acquisitions
