If a (founder-) shareholder leaves a company, her
co-shareholders will want to make sure that the departing
shareholder will not use her know-how and contacts to engage in
competing activities or lure key employees away from the Company.
Against this background, the parties often agree on a non-compete
and non-solicitation undertaking for the departing shareholder.
Given that in case of a breach of such undertakings it is often
extremely difficult to prove actual damages, such undertakings are
often coupled with contractual penalty clauses. Such contractual
penalty clauses allow the beneficiary to claim a certain amount as
compensation payment without having to prove actual damages.
It is obvious that such provisions are contrary to the interests
of the departing shareholder who will try to avoid any restrictions
on her economic freedom to engage in whatever activities she deems
In order to balance the conflicting interests, the German
Federal Court of Justice has set out certain standards for
post-exit non-compete and non-solicitation clauses. In a most
recent decision (dated January 20, 2015, file number II ZR 369/13)
the Federal Court of Justice has clarified further detailed
questions. All in all, post-exit non-compete undertakings must be
limited in scope, space and time. The limitation in scope forbids
non-compete undertakings that go beyond the actual business of the
company, while the usually much broader business purpose of the
company as stated in its articles is irrelevant. With regard to the
necessary limitation in space, non-compete undertakings must not go
beyond the company's current markets or markets for which the
company has concrete plans to enter such markets. With regard to
limitations in time, the Federal Court of Justice has ruled that
under normal circumstances the non-compete undertaking must expire
no later than two years after the shareholder has left the company.
Similar limitations in time apply for non-solicitation
The parties are well advised to use particular care for the
drafting of any non-compete and non-solicitation clauses to ensure
compliance with the standards developed by German courts.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
Where standard printed terms and conditions of a contract are inconsistent with its special terms and conditions, the special conditions will prevail so as not to defeat the main object and intention of the contract.
The Common Reporting Standard is, like FATCA before it (a regime established by US legislation, the Foreign Account Tax Compliance Act), an information exchange regime aimed at international tax transparency.
An assignment of rights under a contract is normally restricted to the benefit of the contract. Where a party wishes to transfer both the benefit and burden of the contract this generally needs to be done by way of a novation.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).