Partnership agreement: beware of the non-competition clause

A non-competition clause can be found in a variety of contracts, such as the transfer of shares, the sale of a business or a management lease, and is designed to prevent the beneficiary company from engaging in a competing activity. When included in a shareholders' agreement, the clause must serve a real interest, and be limited in time and space. Here's a closer look at the 3 conditions to be met.

Protect the company's interests vis-à-vis its partners

The partners of a company are not obliged to refrain from engaging in any activity in competition with the company, unless they are at the origin of an unfair act. However, if a non-competition clause is included in the partners' agreement, they are prohibited from undertaking any competing activity. The non-competition clause may be supplemented by an exclusivity clause requiring partners with operational functions in the company to devote themselves exclusively to them.

The main purpose of including a non-competition clause in a shareholders' agreement is to protect the company from its partners by preventing them from gaining access to strategic information in their dealings with the company (commercial strategy, list of customers or suppliers, etc.).

Strict validity conditions apply to non-competition clauses

To be valid under a shareholders' or partners' agreement, a non-competition clause must comply with strict validity conditions. This was reiterated by the French Supreme Court in a ruling handed down on March 30, 2022.

In this case, the partners had entered into an agreement under which the company's chairman and partner undertook, for as long as he held an interest in the company's capital, not to hold a salaried or executive position, or an interest in another company with a competing business. Taking the view that the non-competition clause in the shareholders' agreement was invalid in the absence of any geographical limitation, the company's Chairman and CEO decided to take the matter to court. Initially, the Court of Appeal disagreed, ruling that the non-competition clause did not require any temporal or geographical limitation. On March 30, the French Supreme Court ruled that a non-competition clause is only valid if it is limited in time and space, and if it is proportionate to the purpose of the contract.

To be valid, a non-competition clause must meet three cumulative conditions:

  • Restricted activity;
  • A limitation in time and space;
  • A legitimate limitation proportionate to the beneficiary's interests.

The partners' agreement may provide for a number of sanctions in the event of breach of this clause, such as the payment of indemnities consisting of the reimbursement of sums received from the time when the competing activity began. In this respect, the partners may request enforcement of the clause.