Those who leave sometimes take more with them than expected

Good agreements make good friends, as every entrepreneur knows by now. Anyone who holds shares in a company, acts as a director, or works together with a business partner, relies on good agreements during that cooperation. But what if someone decides to leave, with their share of the profits and – sometimes more importantly – their valuable knowledge and skills? The nightmare that your business partner becomes a new competitor after just one week, is a scenario that everyone wants to avoid.

Here, good agreements can save a lot of headaches. We then speak of a non-compete obligation, a prohibition for a shareholder or director to go knocking on a competitor's door or to set up a competitive business during – and especially after – his or her time in the company. This is interesting, for example, for those who are jointly involved in the shareholding of a company, because it prevents one of the partners from suddenly leaving to set up an identical business themselves. Such a commitment also allows a company to appoint a director without having to worry about the possibility that this person will immediately start working for a competitor with all the newly acquired knowledge and skills after his or her departure.

However, such an obligation to refrain is not a carte blanche to completely deprive a person of his or her freedom of enterprise. A non-compete obligation must be reasonable and proportionate in three different respects. A first component entails the prohibited activities. For example, what activities is a departing shareholder not allowed to perform? In practice, it is required that this does not go beyond the actual activities of the company they are leaving, as it is unreasonable and absurd to prohibit a software developer from opening his own bakery.

A second component is the limitation in time. For example, how long after his or her departure can a director be prohibited from taking up the same position at a competitor? Have you perhaps already thought of a lifelong ban? If this director only has sector-specific knowledge, this would be disastrous for the person concerned. That is why in practice a duration of 2 to 3 years is often considered reasonable.

A final component is the limitation in space. In which cities, regions, countries or even continents does this ban apply? Once again, it is tempting to be on the safe side and promptly write down a non-compete obligation for the entire national territory. However, for a garage that only focuses on customers in Flanders, for example, it would not be very logical that a selling garage owner should not be allowed to look for a new customer base in Wallonia. Here too, the common standard is often the regions where the company effectively offers its services and products. These can be described very specifically, or you simply choose, for example, a radius of 50 kilometers around your business location.

What if you go too far in one of these areas? The person subject to the non-compete obligation always has the possibility to challenge its validity in court. The obligation will then be assessed in its entirety by the court, which may decide that the clause is null and void. However, such an 'all or nothing' story is not desirable, which is why the parties involved often add that they prefer to moderate the commitment if it would be too far-reaching, in order to avoid it being completely lost, for example if the court were to rule that the duration of the ban alone is a problem.

In summary, a non-compete commitment is therefore a very useful and necessary agreement that offers welcome security, and is currently provided as standard in almost all cases. The pitfall is that it can be tempting to take some extra margin, and extend the ban beyond what is necessary. That is why it is important to always be assisted by the right experts when drawing up a contract with such a commitment. At Deloitte, we are happy to advise you, and we can always tailor your contracts perfectly to your business needs. Feel free to contact us for an introductory meeting!