27.01.2015Post-Contractual Non-Competition Clause for the Managing Director of a Limited Liability Company – Effect of Termination for Good Cause
Is a managing director of a German GmbH still bound by his post-contractual non-compete obligation if he terminates his service agreement for good cause? This article provides answers by touching on a recent court ruling by the Higher Regional Court of Celle (Ruling Dated September 24, 2013 – Case No.: 9 U 121 / 12).
The service agreement between a limited liability company (Gesellschaft mit beschränkter Haftung – GmbH) and its managing director often includes clauses which oblige the managing director not to compete with the company. In fact a non-compete obligation of the managing director already arises from the duty of loyalty he/she has towards the company during the term of the executive position – regardless of what is provided for in the service agreement. However, a so-called "post-contractual non-competition clause" extending in time beyond the end of the executive and employment relationship must always be explicitly agreed in the service agreement. Court decisions have subjected post-contractual non-competition clauses to a strict examination of their content due to the fact that they significantly intrude in the managing director's freedom to choose an occupation which is guaranteed as a fundamental right. In addition even an agreement which is valid per se cannot be enforced in every conceivable constellation. In its ruling dated September 24, 2013 (Case No.: 9 U 121 / 12), the Higher Regional Court (Oberlandesgericht – OLG) in Celle had to answer the question whether it is possible for a company to assert a post contractual non-competition clause if the managing director terminated his service agreement for good cause. The following article outlines the purpose and content of a post contractual non-competition clause and then explains the main statements of the OLG in Celle. Practical advice is given at the end.
1. Purpose and Content of Post-Contractual Non-Competition Clauses
Post-contractual non-competition clauses primarily serve to protect existing corporate business relationships of the company. Due to the fact that the managing director, often over many years, forms and influences the business relationships of the GmbH as the person who is mainly responsible for them, he/she is in a particularly attractive position for the corporate business relationships even after leaving his/her position.
In practice the wording of the post-contractual non-competition clause is often broad and generally foresees the managing director being obliged not to compete with the company for a period of up to 24 months after the end of the service agreement – either as an employee, consultant or managing director of a competitor or as a self-employed businessman. The non-competition clause can generally cover the company's active territory. The former managing director has to be granted an appropriate allowance for the period of the non-competition clause in return for this restrictive limit of his/her occupational activities. The individual admissible boundaries of the non-competition clause are often not easy to determine, cf. Gresbrand, GmbHR 2013, 119, for example.
2. Enforceability of the Non-Competition Clause if the Managing Director's Employment Relationship is Ended by Extraordinary Termination
If the service agreement is ended through extraordinary termination by the managing director, it raises the question whether and how far the company can still enforce the post-contractual non competition clause. It is quite rare that there are explicit regulations on this in service agreements.
A statutory link is in § 75 Subsection 1 German Commercial Code (Handelsgesetzbuch – HGB) which refers to the “commercial clerk” (Handlungsgehilfe). While the commercial clerk in itself is a legal concept of little current practical significance, § 75 HGB Subsection 1 HGB can serve as a basis for assessing the legal issue at hand: Pursuant to § 75 Subsection 1 HGB a non-competition clause becomes invalid if the commercial clerk dissolves the service relationship due to his/her principal's conduct being contrary to agreement and declares in writing before the end of one month after the notice of termination that he/she does not consider himself/herself bound to the non-competition clause. Although the regulations on commercial clerks are not directly applicable to GmbH managing directors, the regulation can still supply the general legal thinking that a contractual party which causes the contractual relationship to be terminated without notice due to its conduct being contrary to agreement is prevented in good faith to hold the opposing party to such a strong obligation as the non competition clause constitutes. It has therefore already been argued that a GmbH managing director who has terminated his/her employment agreement with good cause is not bound to a post contractual non-competition clause.
3. Higher Regional Court in Celle, Ruling Dated September 24, 2013 – Case No.: 9 U 121 / 12
The OLG in Celle confirmed this argument in its ruling dated September 24, 2013. The court had to decide in an appeal proceeding on the validity of a post-contractual non-competition clause which was stipulated both in the managing director's employment agreement and in the company’s articles of association. The company, a GmbH, had filed legal action to adhere to the post-contractual non-competition clause against a former managing director who was also a minority shareholder and who had terminated his service agreement and the membership in the GmbH with good cause. The circumstances justifying the extraordinary termination resulted from a shareholder meeting in which serious but ultimately unsubstantiated allegations against the managing director had been raised and resolutions passed which the court argued constituted a gross infringement of the managing director's rights.
The court stated with respect to the post-contractual non-competition clause that an extraordinary termination of the employment agreement substantiated by the misconduct of a contractual partner is appropriate to release the other contractual party from a post-contractual non-competition clause. The court left it open whether this results from a similar application of § 75 Subsection 1 HGB or for another legal reason, such as a general consequence of the termination with good cause. Furthermore, the OLG in Celle stated that conduct which abuses rights excludes the assertion of a post-contractual non competition clause (§ 242 BGB) if the principal's conduct is so contrary to agreement that he/she gives the managing director a motive for the extraordinary termination of the employment agreement.
4. Conclusion
Ultimately you have to agree with the ruling by the OLG in Celle. It is convincing that a managing director who sees himself/herself forced to end his/her employment relationship with an extraordinary termination due to the conduct of his/her business partners which is contrary to agreement cannot be bound to a non-competition clause against his/her will.
However, the ruling does not bring clarity in the controversial question of legal doctrine as to how far § 75 HGB applies, at least by analogy, to GmbH managing directors. The court believed in the instant case that the managing director had already expressed in his declaration of termination that he considered he was no longer bound to the non-competition clause. It therefore continues to remain unclear whether the managing director can only be released from the non-competition clause under the preconditions of § 75 Subsection 1 HGB, namely by a written declaration within one month after the notice of termination. Hence the subsequent question also remains unclear whether the managing director can still decide in the event of termination with good cause to adhere to the non-competition clause and receive the envisaged allowance. The managing director is recommended at any rate as a precaution to declare in writing in the event of termination with good cause whether he/she considers himself/herself still bound to the non-competition clause.
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