Shareholders’ agreement: non-competition clauses
- What can be stipulated here?
- Similar activities
- Duration of restrictions
- Liability for breach of non-competition provisions
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.
What can be stipulated here?
A shareholders’ agreement may contain the following prohibitions on competition:
- a prohibition on direct or indirect participation in companies engaged in similar activities (this excludes the possibility of owning shares in competing firms or participating in their management, which minimizes the risks of strategic information leakage);
- prohibition on independently establishing or running a business that competes with the main project (partners are obliged to focus their efforts on developing a joint business);
- prohibition to provide consulting and any other services to companies engaged in similar activities, etc.
| 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. |
Similar 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.
Duration of restrictions
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.
Liability for breach of non-competition provisions
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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