Non-competition clause in acquisition agreements: a necessity?

Companies may be transferred via asset deals or share deals. As one of their main concerns in such takeovers, buyers will want to have the opportunity – at least for a transitional period – to work towards actively retaining the company’s clients without being obstructed by the transferring party who (immediately) after the takeover, might resume their transferred activities and create a competitive business. The question arises whether under current legislation for sale of goods, buyers find sufficient protection against such actions and whether including a conventional non-competition clause in the acquisition agreement is required to achieve such protection.

In that context, the earlier mentioned distinction between a share deal (the sale of shares) and an asset deal (the sale of a business) is of crucial importance. Although both transaction structures have the same economic purpose (acquiring control of the business), they differ fundamentally from a legal point of view. In a share deal, the shares are the subject of the agreement (not the underlying company assets), whereas in an asset deal, the business itself is the subject. The common rules of protection in favor of the buyer apply only to the actual legal subject of the acquisition agreement (i.e. the shares or the assets). In accordance with the applicable provisions from the Belgian Civil Code, the seller has the following obligations: (i) compliant delivery of the sold good; (ii) providing the undisturbed possession of the good to the buyer; (iii) warranty against eviction by their own actions; and (iv) indemnification against hidden defects.

As a general assumption, based on the warranty against eviction the buyer of a business (of which its customers form an important part) is bound by an implicit non-competition obligation. Therefore by operation of law the transfer of the assets / business implies the relinquishment of any professional activity related to that business.

Things are different under a share deal. Since the shares constitute the legal subject of the agreement, according to current legal literature and case law the legal protection does not cover the underlying company assets. For this reason, certain authors have tried to impose on the seller of a controlling participation interest a non-competition obligation based on (i) the good faith that must be observed in the performance of any agreement; (ii) the real will of the parties; or (iii) the legitimate expectations of the buyer. However, the courts have not (yet) embraced this approach.

It follows from the above that in the absence of any satisfactory legal protection, the buyer of shares must include in the acquisition agreement an explicit and well-defined prohibition to compete. Although based on civil law the buyer of a business enjoys some degree of protection against competitive activities developed by the seller, under certain circumstances he would be wise to make specific conventional arrangements in this respect. For instance, parties could concretize the implicit prohibition to compete in the acquisition agreement, or stipulate that certain third parties related to the seller and/or the business are also bound by a non-competition obligation.

Matthias Jans, intui law firm