Germany: When A Founder Leaves The Company – German Federal Court Of Justice Decides On Post-Exit Non-Solicitation Undertakings

If a (founder-) shareholder leaves a company, her co-shareholders will want to make sure that the departing shareholder will not use her know-how and contacts to engage in competing activities or lure key employees away from the Company. Against this background, the parties often agree on a non-compete and non-solicitation undertaking for the departing shareholder. Given that in case of a breach of such undertakings it is often extremely difficult to prove actual damages, such undertakings are often coupled with contractual penalty clauses. Such contractual penalty clauses allow the beneficiary to claim a certain amount as compensation payment without having to prove actual damages.

It is obvious that such provisions are contrary to the interests of the departing shareholder who will try to avoid any restrictions on her economic freedom to engage in whatever activities she deems appropriate.

In order to balance the conflicting interests, the German Federal Court of Justice has set out certain standards for post-exit non-compete and non-solicitation clauses. In a most recent decision (dated January 20, 2015, file number II ZR 369/13) the Federal Court of Justice has clarified further detailed questions. All in all, post-exit non-compete undertakings must be limited in scope, space and time. The limitation in scope forbids non-compete undertakings that go beyond the actual business of the company, while the usually much broader business purpose of the company as stated in its articles is irrelevant. With regard to the necessary limitation in space, non-compete undertakings must not go beyond the company's current markets or markets for which the company has concrete plans to enter such markets. With regard to limitations in time, the Federal Court of Justice has ruled that under normal circumstances the non-compete undertaking must expire no later than two years after the shareholder has left the company. Similar limitations in time apply for non-solicitation undertakings.

The parties are well advised to use particular care for the drafting of any non-compete and non-solicitation clauses to ensure compliance with the standards developed by German courts.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.