I. Initial situation

Shareholders have the greatest potential to compete with their company because they know its core business. For GmbHs – unlike for partnerships – there is, however, no statutory non-competition obligation for shareholders. Nevertheless, it is generally accepted that shareholders of a GmbH may also be subject to a non-competition obligation due to their statutory fiduciary duty. In order to precisely define the legal situation, the articles of association of a GmbH frequently contain provisions which accommodate the company’s need to protect itself against competition from its own ranks. Whether a shareholder is subject to a non-competition obligation even without contractual provisions can only be clarified in the individual case.

II. Non-compete obligations for partnerships

In contrast to GmbH law, there is a statutory non-competition obligation for the partners of a general partnership [Offene Handelsgesellschaft] and the general partner of a limited partnership [Kommanditgesellschaft] (section 112 German Commercial Code [HGB]). On the other hand, there is no statutory non-competition obligation for the limited partner of a limited partnership (section 165 HGB). However, according to the judicature, a limited partner may also be subject to a non-competition obligation in exceptional cases if he is able to control the company by holding a large majority both in the limited liability capital and/or in the share capital of the GmbH being the general partner.

III. Majority shareholders of a GmbH

For shareholders of a GmbH, the requirement for a non-competition obligation derived by law is based on similar criteria as for limited partners due to their fiduciary duty. Thus, the extent to which a shareholder has influence on the management of the company is also a decisive factor for a GmbH. If a shareholder is able to strategically block important decisions due to his majority shareholding, the judicature generally assumes a non-competition obligation arising from his fiduciary duty under corporate law.
In the case of a sole shareholder, however, a conflict of interest cannot arise in relation to the company that leads to a fiduciary duty, so that the sole shareholder is in general not subject to a non-competition obligation as a result of the fiduciary duty under corporate law. Furthermore, a sole shareholder does not have any other shareholders whose interests he must take into consideration, which is why there is no non-competition obligation based on the consideration. However, both under consideration of capital protection and for tax reasons (withdrawal of business opportunities), and especially in case of a sole shareholder, the exemption from a “possible” non-competition obligation should be provided for as standard in the articles of association of the GmbH at the time of incorporation.

IV. Minority shareholders of a GmbH

As a rule, a minority shareholder can influence less the GmbH due to his position as shareholder, so that he also faces less comprehensive fiduciary duties. In general, however, a minority shareholder may also be subject to a non-competition obligation deriving from the fiduciary duty.
In this context, the question arises as to which shareholding constitutes a “minority shareholder” in this sense. Shareholdings between 25 and 50 percent are particularly critical because such shareholders already have a certain legal “ability to block decisions”. The same applies to minority shareholders who have been granted special rights in the articles of association. A cooperation of several minority shareholders can also lead to a relevant “shareholder group” which must then be treated as majority shareholders because of their similar interests. Additionally, minority shareholders who have significant know-how or are even actively involved in the business of the company are generally subject to a non-competition obligation. In addition to the non-competition obligation of such persons under corporate law, the statutory non-competition obligation of the managing directors must also be observed.

V. Non-competition obligation in the Articles of Association

In order to prevent a case-by-case examination based on fiduciary duties in the event of a competing shareholder, it is advisable to include a provision in the company’s articles of association. Particularly, a non-competition obligation for a minority shareholder (e.g. explicit participation of 10 percent or more) or a non-competition obligation that goes beyond the durance of the shareholder position can be governed. If the shareholders wish to decide on the exemption of shareholders from the non-competition obligation in individual cases, an opening clause can also be included in the articles of association, according to which the type and scope of the exemption from the non-competition obligation, the differentiation of tasks and the compensation are regulated by resolution.
In the case of minority shareholders, the question arises as to whether a non-compete obligation can be effectively agreed effectively without special justification. Compliance with antitrust law limits (section 1 German Act against Restraints of Competition [GWB]) as well as the reasonableness of the provisions must be taken into account to ensure its effectiveness.

1. Antitrust law limits

In principle, a non-competition obligation is also permissible with respect to minority shareholders if several shareholders together have a strong influence on the strategic orientation of the company or on its management. If this is not the case, a non-competition obligation is only permissible under antitrust law if it serves the existence and preservation of a company that is otherwise neutral under antitrust law and does not go beyond the necessary measure to protect the company’s business. Additionally, it must not lead to any noticeable influence on market conditions. If the market share is small, it will typically not have an impact on the market, since an external impact on the affected market is usually only assumed when the market share reaches a threshold of 5 percent.

2. Reasonableness

To the detriment of a minority shareholder, a non-competition obligation is only reasonable if the company can assert a sufficient interest in restricting the shareholder’s competitive activity. This is typically the case if there is a danger of damaging and undermining the company from within.
In order to avoid an excessive restriction, a non-competition clause should be limited to what is strictly necessary in terms of territory, subject matter and time. For the purpose of limiting the subject matter and geographical scope, the non-competition clause should be based on the object of the company and the territory in which it operates. The non-competition clause may include both prohibitions on activities and prohibitions on (direct or indirect) participations in competing companies or other competitors. In addition, a post-contractual non-competition obligation following the withdrawal of the shareholder may be agreed if the shareholder either had a controlling influence on the company or acquired special know-how and gained access to the company’s trade secrets. A post-contractual non-competition obligation should not exceed two years. However, for a minority shareholder participating purely capitalistically (without further influence or special know-how) a post-contractual non-competition obligation is impermissible.
In the event of a breach of the non-competition obligation under the articles of association, it is possible to include a contractual penalty (in addition to claims for damages) in the articles of association.

VI. Conclusion

Non-competition clauses in the articles of association are particularly recommended in the case of inconsistent shareholder structures in order to ensure the protection of the company against competition “from its own ranks”. However, it should be considered that minority shareholders may only be restricted by the non-competition obligation in a necessary and reasonable extent.