Non-compete clause

Non-compete clause / Wettbewerbsverbot

December 14, 2022

The purpose of non-competition clauses under labour law is to prevent persons holding shares in a company from competing with their own company. They can apply both between shareholders as well as in relation to the managing director or employees and are often required by investors in the context of a participation agreement. A distinction must be made between statutory and contractually agreed non-competition clauses. Under certain conditions, these may also apply for the time after leaving the company.

Non-competition clauses between shareholders

The first question for the partners is whether there is already a statutory non-competition clause in the relationship between the partners or whether this still has to be contractually agreed. In principle, it depends on the type of the company. Generally, there is no statutory non-competition clause for the shareholders of a GmbH/UG, but such a non-competition clause may follow from the "duty of loyalty as a shareholder" if the shareholder in question exercises a determining influence on the company or exploits special internal information for his or her own purposes. If a more extensive non-competition clause is to apply, it must be contractually agreed (usually in the articles of association). However, the admissibility of such a prohibition is subject to narrow limits: On the one hand, it is problematic from an antitrust point of view that agreements restricting competition are actually prohibited under Section 1 Act against Restraints of Competition (GWB) or Article 101 Treaty of the Functioning of the European Union (AEUV). Therefore, a non-competition clause must be necessary in order to maintain the existence and functioning of the company, so that a shareholder cannot ensure that the company does not develop as expected for the benefit of his/her competitive activities. The freedom of occupation under Article 12 of the German Constitution (GG) can also be impaired by a non-competition clause. Therefore, non-competition clauses may only be directed at shareholders who are able to exert significant influence on the company, in particular who are in a position to block important decisions. Furthermore, it must be determined according to the circumstances of the individual case whether they go beyond the protection worthy interests of the beneficiary and do not unduly restrict the obliged.

Section 112 German Commercial Code (HGB) provides for a statutory non-competition clause for the partners of a general partnership (OHG). It applies to all partners and states that a partner may neither do business in the company's branch of trade nor participate in another similar trading company as a personally liable partner without the consent of the other partners. If a partner violates his or her obligation under this provision, the company is entitled to claim damages or restitution from him or her (section 113 HGB). However, the other partners must expressly object to such activity when they become aware of it, otherwise it is deemed to be approved. A contractual extension of the non-competition clause is possible if it is functionally necessary for the business. Sections 112, 113 HGB do not apply to partners who have left the company. A post-contractual non-competition clause must be limited to what is necessary in terms of time, space and subject matter (e.g. a maximum of two years) and comes up against the limits of the GWB and professional freedom described above.

In a limited partnership (KG), the personally liable general partners and in principle not the limited partners, are subject to a statutory prohibition of competition (section 165 HGB). The situation may be different in individual cases where limited partners exercise a significant influence and occupy a position similar to that of the general partner. Deviating contractual regulations are also permissible here within the limits applicable to the general partnership (OHG).

Contractual regulations can also be made for the GbR within this framework, in some cases a non-competition clause is also derived from the duty of loyalty of the partners, the content of which should correspond to section 112 cont. HGB.

Non-competition clauses for GmbH managing directors

A comprehensive non-competition clause already follows from the duty of loyalty of the GmbH managing director. The managing director may not do business in the same branch of industry or hold leading positions in competing trading companies and may not use business opportunities of which he/she has become aware through the company for his/her own benefit, in any case not against the good of the company. The articles of the association of the company may, however, contain deviating provisions. The non-competition clause ends with the term of office, which is why post-contractual non-competition clauses must be contractually agreed. In the case of shareholder-directors, this can be done in the articles of association, otherwise the employment contract usually contains a provision (but this can also be done subsequently). However, there are strict requirements. The company must have an interest in the non-competition clause that is worth protecting in terms of time, space and subject matter, and must not unreasonably impede the managing director's exercise of his or her profession. In principle, an interest worth protecting can only exist in the protection of the existing customer base or the protection of business secrets. A non-competition clause may exist for a maximum of two years. When formulating the contract, it is essential to ensure that these limits are observed - otherwise there is a risk of total nullity.

Compensation for waiting

In the event of a comprehensive prohibition of activities, the shareholder or managing director must be paid compensation in any case. In practice, the amount of this compensation is based on approx. 50% of the last contractually agreed benefits. Such compensation should be specified in the formulation of the non-competition clause.

Non-competition clauses for employees

In labour law, employees are not allowed to compete with their employers during their employment. In other words, they are not allowed to participate in an enterprise that affects their employer's field of activity. In the event of a breach of the non-competition clause, the employee may not only be dismissed but also be liable for damages.

Non-competition clauses play a special role after termination of the employment relationship. A so-called post-contractual non-competition clause can be agreed in the employment contract or in a separate agreement for a maximum period of 2 years after leaving the company. However, the employer must have a justified business interest in the non-competition clause (e.g. the protection of trade secrets) and pay the employee compensation for the non-competition clause (see section 74 HGB and see above under compensation for the non-competition clause).

Non-competition clauses in the investment agreement

When an investor takes a stake in a start-up, it is usually of great importance to him/her that the founders (or other leading persons) will continue to be part of the company in the future. For this reason, investors usually require a non-competition agreement. This is intended to prevent the founders from setting up a similar company in parallel or leaving the company in order to compete with it. Since such non-competition clauses are regularly agreed upon in managing directors' service contracts concluded with the founders, what has been said about non-competition clauses for GmbH managing directors applies here accordingly.