Non-Compete Clauses in Executive Mandates: Protecting the Company’s Interests and Legal Limits

For a director with access to the company’s commercial strategy, pricing, customers, suppliers and internal information, leaving the company may raise a legitimate concern.

What happens if, in the near future, that person starts working for a competitor? This is where discussions around the non-compete clause begin.

When negotiating executive mandates, however, we sometimes see an attempt to address the issue through the broadest possible wording: a long restriction period, a very wide geographical scope, vaguely defined activities and substantial penalties. That... does not necessarily mean better protection.

The restriction should be connected to the company’s legitimate interests

If a director manages the operations of a company in Romania, it is easy to understand why the company may want to prevent that person from immediately joining a direct competitor.

It becomes harder to justify a restriction covering any professional activity, any market and any company within an international group.

This is why we look at the position held, the information to which the individual had access and the markets in which the company actually competes. This is where the reasonable scope of the restriction is determined.

The geographical scope matters more than it may seem

A company may have a presence in 20 countries. That does not automatically mean that a former director should be prevented from working in all 20.

If the business relevant to the mandate was concentrated in a particular market, the restriction should be assessed against that reality. Put simply, we look at the actual business, not the group-level organisational chart.

Duration and compensation

A post-contractual restriction means that the individual agrees to limit their professional freedom for a certain period.

For this reason, the duration of the restriction and the corresponding compensation should be considered together.

For the company, the objective is to obtain sufficient protection for the period during which the information and business relationships acquired by the executive are most valuable. For the director, the concern is to avoid being subject to an excessive restriction without appropriate compensation.

A penalty can be a useful tool, if proportionately structured

A contractual penalty can be an important enforcement mechanism.

A EUR 500,000 penalty may appear highly compelling at the time of signing. However, if the restriction is drafted too broadly or there is no reasonable relationship between the obligation and the penalty, the company may ultimately find itself litigating the validity and scope of the very mechanism on which it relied.

Ultimately, the purpose of a non-compete clause is to protect the company against competition from a former executive. A clause that is difficult or impossible to enforce may look impressive when signed, but it does not provide the protection the company needs. For this reason, in a recent mandate we reviewed, we preferred an approach calibrated against the executive’s remuneration and the specific obligation that had been breached.

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When negotiating these clauses, we start with the executive’s position and the company’s business. Together with our clients, we determine what needs to be protected, how long the protection is required and what geographical scope can be justified. We then assess the compensation, penalties and the relationship between the restriction imposed and the company’s legitimate interests.

After years of practice, we can say without hesitation that there is no standard clause that works for every director. Each mandate starts with the individual’s specific role and the way in which the company actually operates.

(Photo by Ryoji Iwata on Unsplash)