Non-compete clauses in company acquisitions

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AGM Abogados

It is becoming increasingly common for the vast majority of company sale and purchase transactions to include non-competition commitments with the acquired company on the part of the seller.

In company acquisitions, it is common practice for the buyer to impose a number of obligations on the seller, including a prohibition of competition.

The main objective of the inclusion of these clauses in the SPA (Share Purchase Agreement) is to protect the interests of the buying party, trying to prevent the selling party, once the transaction has been concluded, from starting an economic activity identical to the one that has been the object of the transaction, or from attempting to negatively influence essential aspects of the transaction, such as the company’s goodwill, know-how or employees.

From a practical point of view, these clauses usually stipulate certain prohibitions or limitations of conduct, which apply in an objective and territorial scope, as well as with a fixed duration in time. Such prohibitions could consist of the following stipulations:

  • To cease contacts with suppliers essential for the exercise of the economic activity.
  • To cease contacts with the company’s customers.
  • In some cases, it is even forbidden to recruit employees who provide services for the target.

In this regard, it is essential not to exceed the stipulated non-competition prohibitions, as well as to stipulate such clauses with an appropriate and proportional wording, avoiding possible conflicts and litigation after the closing of the transaction. Thus, the case law of the Spanish Supreme Court, in its judgment of May 18th, 2012, has ruled in this regard, stipulating that such non-competition clauses are valid “unless, due to their duration, geographical scope and content, they exceed what is reasonably useful or appropriate to ensure that the value of the shares is not damaged by the actions of the seller“.

With regard to the time limit of the duration of the prohibition of competition, the Preliminary Courts of Barcelona and Madrid, in their judgments of May 9th, 2008 and December 4th, 2015, respectively, declared partially null and void those clauses that established periods longer than 3 years and 2 years, the latter stating that the maximum legal limit stipulated for non-competition agreements applicable to labour matters would be applied by analogy.

More recently, the Spanish Supreme Court, in Ruling May 9th, 2016, stipulates that “the transferring employer basically has two obligations:

  1. An obligation to do, that is a duty to disclose to the buyer knowledge and information concerning the technical production processes and the structures, systems and relationships that make up the commercial organisation of the undertaking, such as sales systems, lists of customers and suppliers, commercial strategies in the market, distribution and marketing networks, etc.
  2. An obligation not to do, that is an obligation to refrain from carrying out an activity that competes with the activity of the business being sold. The purpose of this obligation not to do is none other than to prevent the seller from taking away, retaining the acquired clientele, or hindering the generation of new clientele that the transferred company is entitled to generate at the time of the transmission”.

In short, our case law admits the inclusion of non-competition clauses in SPAs, provided that such limitations are justified by a reasoned protection of the legitimate interests of the buyer, without this entailing a disproportionate and abusive obligation for the seller. It is therefore essential that the content of such clauses be proportionate and reasonable, as well as to introduce effective protection mechanisms in the event of non-compliance by the seller.

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Mergers and Acquisitions description Article