Non-competition clauses in the german company purchase agreement, M&A
Non-competition clauses, competition clauses and customer protection clauses in the acquisition of a company in Germany
In the case of german company purchase agreements and share purchase agreements (M&A), there is often an urgent interest on the part of the buyer and investor that the seller does not become active in the target company's field of activity after leaving it as a shareholder or as a shareholder-manager and does not (further) exploit its know-how and its relationships with business partners, customers, but also with employees.
In german practice, therefore, agreements are regularly included in the sale of companies or shareholdings according to which the seller of the target company may not engage in competition in the future and concrete sanctions are provided for in the event of a breach of this obligation. This applies regardless of the legal form of the company (AG, GmbH, GbR, etc.) and the object of purchase (shares, GmbH shares, limited partnership interest, GbR share).
Our legal expertise in the area of non-competition covenant company purchases in Germany
Our highly qualified and specialized team of lawyers and certified specialists for german corporate law will advise you quickly and competently on all issues relating to non-competition clauses in company purchase agreements. The consulting spectrum of our team can be described as follows:
- Advice on the drafting of non-competition clauses in company purchase agreements
- Examination of the effectiveness of already agreed non-competition or non-solicitation clauses
- Interim injunctions for the direct enforcement of non-competition clauses; defense against corresponding injunctions
- Extrajudicial and judicial assertion of claims for injunctive relief and damages and claims for payment of contractual penalties due to violation of non-competition clauses
- Out-of-court and in-court defense of claims for injunctive relief and damages and claims for payment of contractual penalties due to violation of non-competition clauses
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Non-compete clauses to the detriment of the seller in german practice
Non-competition clauses among competing companies partially or completely impair competition among them. This also applies to non-competition clauses imposed on the vendor (seller) by the acquirer (buyer) in connection with the sale of a company or part of a company in Germany.
The german general view is that such non-competition clauses are generally permissible. On the one hand, the buyer can usually obtain the full value of the transferred assets only with the agreement of corresponding prohibitions. The value of a company to be sold or a part of a company to be sold in Germany is usually not determined solely by its mere tangible assets, but in particular also by its intangible assets such as the goodwill of the company or the know-how of the seller.
Only if the purchaser in Germany is protected to a certain extent from the seller's competitive actions, for example, he can gain the trust of customers, retain employees and acquire and also use the company's own know-how in question.
On the other hand, cases are conceivable in which a non-competition clause burdening the seller is absolutely necessary for the sale or purchase of a company or part of a company in Germany because no (other) buyer would otherwise purchase the company/part of the company.
In german practice, non-competition clauses appear in the following forms, for example:
- general non-competition clause
- customer protection clause, non-solicitation of customers
- employee protection clause, non-solicitation of employees
Scope and limits of non-competition clauses in german law
However, under german law, non-competition clauses are only permitted within certain limits in order to protect competition. According to general german opinion, such clauses - and this also applies to non-competition clauses in german M&A agreements - are only permitted and therefore only effective if they do not go beyond what is actually necessary to protect the interests of the purchaser in terms of their temporal, spatial and factual scope.
Central to the assessment of the effectiveness of an agreed non-competition clause in german practice are therefore the
scope of the non-competition clause. In german M&A practice, it is often overlooked that a definition or delimitation of the relevant market is indirectly required on this basis. Such a definition is known from german antitrust law, where a precise market delimitation is the linchpin.
Material scope of a non-competition clause in german practice
From a factual point of view, the goods or services of the target company sold that characterize the company are initially decisive in Germany. In principle, the relevant point in time will be the time of the sale.
In individual cases, it may be questionable to what extent goods or services which are in an advanced stage of development at the time of the sale of the company or which have been fully developed but not yet launched on the german market are taken into account. In this respect, any reference to the object of the company is also associated with questions.
It is not uncommon for non-competition clauses to extend factually to goods and services, customers and employees of companies that are affiliated with the target company within the meaning of Section 15 AktG. This is more than questionable.
In german practice, it is often overlooked that clauses which impose blanket restrictions on the seller's right to acquire or hold interests in a company which is in competition with the target company are mostly invalid. This applies in any case if the seller has acquired the shareholding solely for investment purposes and has no direct or indirect management functions or material influence in the competing company.
It should be noted that the german courts consider a non-competition clause that is not objectively necessary to be ineffective per se and do not themselves restrict it to a tolerable level (no reduction to preserve validity).
Spatial scope of a non-competition clause in Germany
The territorial scope of non-competition clauses in the case of company sales in Germany must be limited to the territory in which the seller already offered the goods or services in question prior to the company sale. In individual cases, something else can only apply if the seller was already planning to do business in other areas at the time of the conclusion of the company purchase agreement and had already made corresponding investments in this respect.
If a limitation of the territorial scope of the non-competition clause in german company and share purchase agreements is considered at all, it is not uncommon to find perimeter restrictions in the form "[...] within a radius of ... km from the registered office of the target company ... [...]". With these, it must be noted that the relevant market is decisive. Thus, a limitation to a 15 km radius in a german metropolitan area may be necessary to protect legitimate interests of the purchaser. In a large city, on the other hand, a 6-km radius may already be too large.
It should be noted that the german courts consider a non-competition clause that is not spatially required to be ineffective per se and do not themselves limit it to a tolerable extent (no reduction that preserves the validity of the clause).
Temporal scope of a non-competition clause under german law (time limit)
In terms of time, an extension of a non-competition clause in a german company purchase agreement to up to 3 years is considered permissible.
In contrast to questions of the factual and spatial scope of a non-compete, courts occasionally impose a time limit of 3 years if this - already wide - limit has been exceeded.
Overall view german practice
In german judicial practice, it can be observed that judges often take an overall view of the factual, spatial and temporal scope in order to be able to assess the necessity of competition to protect the interests of the buyer. This must be taken into account.
Infringement: injunction, damages and contractual penalty under german law
Initially, non-competition clauses "only" contain the obligation not to carry out corresponding competitive acts. In the event of a breach of a non-competition clause in Germany, the question of the consequences arises for all parties involved. Here, a distinction usually has to be made between omission, damages and contractual penalties:
Omission. If, in german practice, there is an effective non-competition clause for the seller, the buyer can demand that the seller cease and desist from the competitive act in question by way of an injunction and/or by way of an ordinary lawsuit. In individual cases, this may also mean an obligation to sell an interest in a competing company and/or to cease working for a competing company.
Damages. In addition to the cease-and-desist order, the buyer may demand damages from the seller. In german practice, however, this is usually difficult, as the buyer must prove his damages in "pennies and nickels".
Contractual penalty. Particularly due to these problems of proof, contractual penalties are often agreed in german practice. These relieve the buyer of the burden of proving his damage - he can directly claim the contractual penalty and thus increases the economic pressure on the seller.
General terms and conditions and collision of non-competition clauses in Germany
An underestimated problem is the german law on general terms and conditions for the effectiveness and understanding of non-competition clauses in M&A contracts. Especially when larger companies grow through acquisitions, they appear in the german M&A markets with standardized contracts. Here, the exciting question then arises to what extent these contracts in general and the non-competition clauses in particular must/can withstand the narrow conditions of the german law on general terms and conditions.
Another exciting question is the collision of non-competition clauses. For example, in particular in the case of the takeover of owner-managed companies, two non-competition clauses stand side by side: the non-competition clause agreed in the german company purchase agreement and the post-contractual non-competition clause agreed in the managing director's or executive board service agreement.