Corporate law disputes often arise in connection with a non-competition clause and violations thereof. As a lawyer, you employ me comparatively often. Competing with one's own company is a breach of the duty of loyalty under company law. However, it depends on many details whether a legal non-competition clause or a non-competition clause according to the articles of association actually exists or whether a violation actually exists. As a lawyer and Specialist lawyer for commercial and corporate law and specialist lawyer for international business law I support my clients, usually shareholders or managing directors, in examining a non-competition clause, a violation of it and in enforcing claims for information and damages. A distinction must always be made between statutory and contractual non-competition clauses and between non-competition clauses imposed by shareholders and managing directors. In the case of managing directors, a post-contractual non-competition clause may also have to be taken into account.
Property of the Company
The regulations of the articles of association to the object of the company. Because the object of the company determines the extent to which the company operates as a company in the case of a corporation and a partnership. Competition and infringement are therefore only possible within the framework of this entrepreneurial activity of the company. Consequently, competition is any business activity that is identical to that of society. If the company trades in fashion items or microchips, for example, or if it offers software or IT services, the personally liable partner, i.e. an oHG partner, or the managing director of the general partner GmbH, neither directly nor indirectly exercise the same activity. Otherwise he would be in breach of his duty to society.
The content of the purpose of the company and the interpretation of the provisions of the articles of association is therefore always the starting point when examining claims for damages due to a violation of a non-competition clause. As a lawyer, I therefore pay attention to the precise formulation of the company's object when drafting the articles of association of a GmbH or a articles of association of a GmbH & Co KG or KG. Because in competition with one's own company, in addition to infidelity and "picking at the cash register", the most serious violation of the duties of loyalty of a managing director or shareholder. Violations of the Business Secrets Act (GeschGehG) are similarly serious, i.e. in particular the taking and disclosure of secret information or know-how.
In addition, every automatic change or expansion of the object of the company beyond the wording of the articles of association is included in the examination of the non-competition clause. This applies accordingly to every planned business activity of the company. In this respect, both the company and the shareholders and managing directors should resort to the advice of a lawyer in order to have legal certainty. A factual expansion does not require a change in the articles of association. In practice, this often happens automatically over time.
Statutory non-competition clause
The personally liable partners of a partnership, i.e. a general partnership (oHG) and the general partners of a GmbH & Co KG, are subject to a non-competition clause by law. For limited partners however, there is no statutory non-competition clause. The HGB expressly provides for this. The background is that limited partners are not included in the management. In principle, no statutory non-competition clause applies to GmbH shareholders either. They are therefore allowed to compete with their GmbH. Here, too, the reason is that the shareholders of a GmbH have no management authority. The regulations of GmbH law therefore do not offer sufficient protection for legal entities and companies against competitive activities by their shareholders.
However, the protection of business opportunities is derived from the duty of loyalty under company law. Even without entering into competition, a shareholder may not use the company's opportunities for a "good deal" of which the shareholder is aware for himself or for a third party close to him.
GmbH managing directors, on the other hand, are always subject to a non-competition clause by operation of law as long as they are appointed as GmbH managing directors. They are therefore not allowed to compete with their GmbH, i.e. they are not allowed to work directly or indirectly for another company, nor are they allowed to use business opportunities of their company for themselves. Consequently, this also applies to the managing director of the general partner GmbH of a GmbH & Co KG. However, there is no post-contractual non-competition clause against the managing director by operation of law, i.e. no non-competition clause after the termination of the managing director’s employment relationship with his company. If the managing director violates the statutory non-competition clause, he can be dismissed for good cause and owes information and damages because he has violated his duty to conduct business diligently. He is then subject to personal liability according to Section 43 (2) GmbHG.
In the case of the managing partner – i.e. a person who is both a shareholder and a managing director – the managing director’s statutory non-competition clause applies. A managing director of a shareholder cannot therefore refer to the fact that, as a shareholder, he is fundamentally allowed to compete. Because as a managing director, he is not allowed to, regardless of whether he is also a shareholder or not.
Contractual non-competition clause
Because statutory non-competition clauses, especially for shareholders of a GmbH, are only weakly structured, it should already be Founding of the GmbH a non-competition clause can be anchored in the articles of incorporation by means of a contractual agreement. This applies in particular to medium-sized companies in which the shareholders are closely involved in the operational business and therefore also have access to know-how and trade secrets. Consultation with a lawyer is strongly recommended in this respect.
Non-competition clauses in articles of association therefore play a major role in practice, on which I have advised clients in many cases as a lawyer and specialist lawyer for commercial and corporate law as well as specialist lawyer for international commercial law. Non-competition clauses in the articles of association are included in the articles of association of the GmbH and bind current and new shareholders and, in particular, minority shareholders.
However, company law sets limits on competition clauses in the articles of association. Because every ban on competitive activity restricts a shareholder in his freedom to practice his profession. A competition clause in the articles of association may therefore only go so far as the company has a legitimate interest in protection against competition. A contractual non-competition clause must therefore be appropriate in terms of its content, its geographical or spatial impact and its timing. Mind you, this only applies to shareholders, because the GmbH managing director is already subject to a comprehensive non-competition clause under GmbH law.
The more a shareholder is involved in the operational activities of the company, for example as the majority shareholder, as a source of know-how or as an authorized representative under the German Commercial Code, the more likely it is that the company has a legitimate interest in this shareholder not working for other companies or for them otherwise supported as a consultant. This applies in particular if this shareholder has knowledge of information that falls under the Business Secrets Act (GeschGehG). Shareholders with only capitalist minority holdings usually have no insight into the details of the company's operational activities. In contrast to managing directors or company directors, for example, they have no opportunity to "hollow out" the company and their company through their competitive activities or the violation of trade secrets that are protected under the Trade Secrets Act (GeschGehG). Therefore, no obligation to observe a non-competition clause in the articles of association can be imposed on them.
The articles of association must therefore precisely define the non-competition clause in its objective scope. Customer protection is one way to effectively protect against competition. Case law regularly allows customer protection regulations in the articles of association of a company without restrictions. Likewise, the geographical scope of the non-competition clause must be limited to the geographical area in which the company is actually active or intends to be active in the future. If a non-competition clause goes beyond a legitimate interest of the company in terms of content or location, the non-competition clause is ineffective, even if the articles of association have been notarized. It has no effect. Only a non-competition clause that is intended to last too long can be reduced to what is still permissible according to case law. Therefore, as a lawyer, I pay great attention to a precise definition of the non-competition clause when advising my clients accordingly.
Post-contractual non-competition clauses for managing directors are permissible for a period of up to one year. However, it is necessary for the managing director to be paid a waiting allowance. Post-contractual non-competition clauses towards shareholders are only permissible in exceptional cases, such as when selling a company. This must be taken into account during the due diligence of a company.
Exemption from the non-competition clause
A shareholder or managing director can always be exempted from a legal or contractual non-competition clause. The other shareholders are authorized at a shareholders' meeting to grant such an exemption by resolution of the shareholders. A articles of association drawn up by a lawyer should therefore also contain provisions on the majority with which a shareholder resolution for the exemption can be passed and whether a consideration is to be provided, in particular for tax reasons. Because neither the HGB nor the GmbH law contain more detailed regulations for the exemption.
Trade Secret Breach
Non-competition clauses under company law overlap with other areas of law, in particular with the law on the protection of trade secrets, also known as the Trade Secrets Act or GeschGehG. The legal regulations of the GeschGehG protect trade secrets against their unlawful use, in particular by shareholders and managing directors. If no or possibly ineffective non-competition clauses are agreed in GmbH articles of association or in the articles of association of a partnership and therefore only statutory regulations apply, it should always be checked at the same time whether the competitive action of the shareholder or the managing director constitutes a violation of the Trade Secrets Act because trade secrets themselves or used for other companies or disclosed to companies or passed on to them and the protection of secrets was violated. In certain constellations, the violation of the Trade Secrets Act even constitutes a criminal offense and also triggers liability for damages.
For confidential information to be classified as trade secrets, it must be protected by appropriate confidentiality measures and that there is a legitimate interest in confidentiality. A preliminary injunction can be applied for against the use of illegally obtained trade secrets if the violation of the Trade Secrets Act (GeschGehG) can be credibly demonstrated.
Legal Consequences of Violations
A shareholder who violates a non-competition clause or the Trade Secrets Act (GeschGehG) can be excluded from the company by the other shareholders for good cause. However, it is necessary that in advance by the Advice from a lawyer it is certain that the breach of competition exists and is effective and that a breach of this can be proven. In any case, legal advice from a lawyer is required here, who will explain the prerequisites and connections for your case in detail and, in particular, examine the provisions of the articles of association and, if applicable, the service contract of the managing director for agreed non-competition clauses.
