Post-contractual non-compete clauses for managing directors are standard practice. But should these clauses go beyond the scope of what is necessary, they may be deemed to be null and void in their entirety.
It is common practice for a company to agree to a post-contractual non-compete clause with its managing director. The terms of this typically prohibit the managing director from competing with his or her former employer for a specified period of time following their departure from the company, whether this be through working for a rival firm or self-employed work. Post-contractual non-compete clauses of this kind are meant to protect the legitimate interests of the company.
Post-contractual non-compete clauses must nonetheless be balanced. We at the commercia law firm GRP Rainer Rechtsanwälte note that, on the one hand, they are supposed to protect the legitimate interests of the company; and, on the other hand, they ought not to unduly restrict the managing director’s freedom to choose his or her occupation. For this reason, a post-contractual non-compete clause should not be too broad in scope. In an indicative ruling by the Oberlandesgericht (OLG) München, the Higher Regional Court of Munich, from August 2, 2018, the Court noted that this may render the non-compete clause null and void in its entirety (Az.: 7 U 2107/18).
In the case in question, a GmbH had agreed to a post-contractual non-compete clause with its managing director. This prohibited the managing director from engaging in any form of activity for a rival business for a period of one year. After the managing director’s employment agreement was terminated, the managing director wanted to move to a rival firm and was able to enforce this by means of a preliminary injunction. The GmbH’s lawsuit was unsuccessful.
The OLG München held that while post-contractual non-compete clauses for GmbH managing directors are possible as a matter of principle, a non-compete clause is deemed to be null and void if it does not serve the legitimate interests of the company and unfairly restricts the time, location and subject of the managing director’s professional practice and economic activity. In other words, a non-compete clause that is too broad in scope is invalid according to the OLG. The value of the compensation for non-competition was said to be irrelevant to this consideration.
In the instant case, the non-compete clause was found to be too broad in scope because it prohibited the managing director from engaging in any form of activity for a competitor, including, e.g., working as a caretaker.
As such, post-contractual non-compete clauses for managing directors can be said to hinge on striking the right balance. Lawyers experienced in company law can offer advice.