Including non-competition clauses in a shareholders’ agreement helps to prevent partners from using the company’s knowledge and resources for the benefit of competing projects and to keep the business competitive.
A shareholders’ agreement may contain the following prohibitions on competition:
| In the case of an investor, such restrictions either do not apply at all and are limited to confidentiality obligations, or an exception is made for the investor, allowing the investor to enter a similar business with a small stake and make a profit, but without the investor’s direct involvement in the operational activities. |
In the context of shareholders’ agreements, it is important to clearly define what is meant by “similar activities”. The agreement should describe the specific products and services that are considered similar to your business and define the area where the non-competition restriction applies.
Non-competition restrictions can be in place for the duration of the shareholders’ agreement or for a certain period after its termination. Such a period allows the company to strengthen its market position and avoid sudden competition from former partners.
In practice, the duration of the restrictions usually covers the period during which the party remains a shareholder of the company and continues for a further 2-3 years thereafter.
Typically, a shareholders’ agreement provides for liability in the form of damages and a penalty option in the event of, a breach. Termination of the partnership is less common.
Remember that predetermined rules of the game in business are the key to its sustainability and the basis for development.
Author: Kuheika Irina
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