Non-Competition Clause of the Management Board in the AG in Germany
Omission, Damages in Case of Violation of Non-Compete and Non-Solicitation Clauses in Germany
In german practice, contractual and post-contractual non-competition clauses for the management board of a stock corporation are very common. This is not surprising since the management board is the central knowledge carrier of the stock corporation due to its activities. It knows all the details about customers, prices, supply chains, internal processes and product-related trade secrets. It also knows the key employees, who are often the most important "assets" in knowledge-intensive companies.
Since the interests of the company and the management board in Germany are very different (conflicting) when agreeing on a non-competition clause, it is not only the balancing of interests in the drafting of the relevant contractual provisions that is very complex. The enforcement and application of the regulations in the event of a dispute is also a major challenge.
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Legal Expertise in Non-Competition Clauses under german Stock Corporation Law
Our highly qualified and specialized team of corporate lawyers will advise you quickly and competently on all questions concerning contractual and post-contractual non-competition clauses. The range of advice provided by our corporate lawyers can be described as follows:
- Examination of the scope of contractual and post-contractual non-competition clauses, customer non-solicitation clauses, employee non-solicitation clauses and know-how protection clauses, including concrete risk assessment
- Strategic advice on the individual drafting of contractual clauses restricting competition with a sustainable system of sanctions in the management board contract
- Enforcement of non-competition clauses by way of preliminary injunctions, injunctive relief and claims for damages against board members
- Out-of-court and in-court defense of management board members against claims of the AG
- Prohibitions under stock corporation law, contractual and post-contractual prohibitions
The AktG, unlike the German Limited Liability Companies Act (GmbHG), provides for an express prohibition of competition for members of the management board. Art. 88 AktG, for example, stipulates that members of the management board in Germany may not act in the company's line of business either for their own account or for the account of third parties. In addition, members of the management board may not engage in any other activity, in particular they may not otherwise be a member of the management board or managing director or personally liable partner of another company. They should simply devote their entire working capacity to the AG. It is important to note that such claims become time-barred after just 3 months.
It is undisputed that the statutory standardized prohibition in Art. 88 AktG can be tightened and facilitated by contractual agreements in Germany. With regard to these agreements, a distinction is made - in terms of the temporal effect of the prohibition - between so-called contractual non-competition clauses, which apply during the activity as a member of the executive board, and so-called post-contractual non-competition clauses, which apply after the activity as a member of the management board has ended.
What is permitted - Competition, enticing away customers and employees, know-how
Non-competition clauses in Germany can be found in management board service agreements in a wide variety of forms. In many cases, all competition is excluded in a very general form, whereby self-employed activities are covered in the same way as employed activities for a competitor company. Other agreements only cover the customers and/or employees of the german stock corporation. With regard to these, a distinction is usually made between active and passive contact. In some cases, a distinction is also made between major customers/employees and other customers and employees. Finally, it is not uncommon for management board contracts in Germany to contain clauses relating to the protection of special know-how.
Limits, effectiveness of post-contractual non-competition clauses in Germany
Post-contractual non-competition clauses are not expressly regulated by german law, so that in practice companies prefer to draft such non-competition clauses broadly. After termination of their activities - through resignation, dismissal/termination - management board members should not compete with the company in any way, no matter how remote. What is often missed in this context is that post-contractual non-competition clauses are also subject to limits.
The german courts consider post-contractual non-competition clauses to be effective only within narrow limits: Only if a non-competition clause
- serves the protection of a justified interest of the stock corporation, and
- it does not unreasonably impede the professional practice and economic activity of the management board in terms of place, time and subject matter,
it is effective (and thus enforceable). It is necessary to consider the specific circumstances of each individual case: how long, where and in what way the prohibition restricting competition applies.
Group-wide Non-Competition Clauses for AG Board Members in Germany
The effectiveness of so-called group-wide non-competition clauses in Germany is particularly critical. These are prohibitions which do not only relate to the company at which the board member is appointed/employed. Rather, they apply to all companies that are part of a group. A distinction must be made between these prohibitions in two directions. On the one hand, there are situations in which the management board is appointed by a controlling group company ("parent company"). On the other hand, there are situations in which the management board member is employed by a subsidiary.
Compensation for non-competition in the case of a post-contractual non-competition clause on the part of the management board?
In german business practice, the idea prevails that post-contractual non-competition clauses are only effective if the management board member receives compensation for the duration of the non-competition clause. This so-called compensation for non-competition is regulated by Art. 74 et seq. of the German Commercial Code (HGB), which serves to protect employees under labor law. However, the courts deny the application of Art. 74 et seq. HGB to the management board of a stock corporation. In other words, unless otherwise agreed, post-contractual non-competition clauses are generally effective even without compensation.
Consequences of a Breach of a Non-Competition Clause in the AG in Germany
If a member of the management board in Germany violates the statutory or a contractually agreed non-competition clause, the range of possible consequences is wider than is generally assumed.
First and foremost, the stock corporation has a claim against the management board to cease and desist from the act of competition. The management board is simply obliged to refrain from the act in question for the future. In german practice, such claims are asserted and enforced by means of applications for interim injunctions.
As a matter of principle, the AG also has a claim against the member of the management board in question for information and accountability for the actions that violated his duties - regardless of whether they involved competition, enticement of customers, patients or employees. This is intended to enable the stock corporation to assess and quantify any damage. It is questionable whether the company only has a right to information on an ad hoc basis or can assert this right at any time.
The management board in Germany is also threatened with claims by the company for damages suffered by the company as a result of the competitive behavior. In german practice, it is not always easy to prove damages, which is why (lump-sum) contractual penalties are often used when drafting non-competition clauses. The so-called right of subrogation also offers the company a simplification in this context. It allows the company to "skim off" the remuneration earned by the management board through anti-competitive actions.
Violation of a non-competition clause can provide extraordinary grounds for dismissal of the management board member. The same applies to the service agreement with the management board, which may be terminated by the stock corporation for cause.
Assertion by Supervisory Board, Annual General Meeting or Shareholders
Claims against members of the management board for violations of the non-competition clause in Germany must be asserted by the supervisory board; if the supervisory board fails to do so, it is in breach of its duties itself. In view of the short limitation period of the statutory non-competition clause in Section 88 AktG, care must be taken to act promptly.
Irrespective of any failure on the part of the supervisory board to act, the shareholders' meeting in Germany can pursue any breaches of duty on the part of the management board with regard to the non-competition clause within the framework of the special audit under german stock corporation law with a special auditor (Section 142 AktG), with the help of a special representative (Section 147 AktG) and possibly also within the framework of the action admissibility procedure (Section 148 AktG). Minority shareholders can also make use of the above-mentioned options, subject to the conditions specified by the German Stock Corporation Act.
Exemption in the AG by the Supervisory Board in Germany
According to the german law, the supervisory board can allow the management board to compete with the company. Practice shows that two things must be observed here. Firstly, the supervisory board is strongly advised to carefully examine any reasons for exemption from the non-competition clause and to carefully document the examination and decision-making process. In many cases, an exemption will create its own liability potential for the supervisory board. Secondly, great care should be taken when formulating the exemption in order to have legal certainty.