Gwenaëlle de Kerviler Alain Levy Nathalie Lastennet November 2 2022 Never-ending dialectic of non-compete undertakings in M&A transactions AYACHE | Corporate Finance/M&A - France Gwenaëlle de Kerviler, Alain Levy, Nathalie Lastennet Corporate Finance/M&A BackgroundFactsDecisionCommentBackgroundIn M&A transactions, non-compete undertakings are usually triggered by the termination of an individual's functions within the group, often while these individuals are acting shareholders, corporate officers and/or employees.Conditions for the validity of such undertakings vary depending on the status of the non-compete undertaking obligor. Attention must also be paid to the event that triggered the non-compete undertaking – namely, the end of the corporate office or the employment contract or the sale of the individual's shares.Under French law, the conditions for the validity of a non-compete undertaking have not been defined by legislative or regulatory texts. Instead, they have been set by case law. Under settled case law, and pursuant to the fundamental principle of freedom of enterprise, a non-compete undertaking may be imposed to protect the company's interests, provided that it will not be too detrimental to the freedom of enterprise of the obligor. Thus, it must be proportionate to the objectives of the agreement in which it is provided as well as limited in time and space. These criteria are cumulative conditions.In cases where the obligor is an employee, the conditions for the validity of the non-compete provisions are more severe. Although the undertaking must be limited in time and space, it must also be indispensable (not only proportionate) to the protection of the legitimate interests of the company, and it must be accompanied by a financial consideration for the obligor.The above conditions for the validity of a non-compete undertaking are assessed when the undertaking is negotiated and signed.FactsIn a recent case submitted to the French Court of Cassation, a corporate officer who did not have an employment contract with a company, but who was a shareholder of said company, had accepted a non-compete undertaking in a shareholders' agreement. Pursuant to this undertaking, he was prohibited from carrying out any activities or occupying any position of any nature, in France or abroad, with a competing company for as long as he was a shareholder of the company.The Court of Appeal ruled that the non-compete undertaking did not have to comply with time and space limitations conditions to the extent that it was provided for in a shareholders' agreement and not in an employment contract.Decision In its decision dated 30 March 2022, the French Court of Cassation logically overruled the Court of Appeal's decision. To comply with the principle of freedom of enterprise, a non-compete undertaking must be limited in time and space regardless of the nature of the agreement (whether it be an employment contract, a shareholders' agreement or other) in which it is provided.CommentIn M&A transactions:any non-compete undertaking – whether it is imposed on a shareholder, a corporate officer or an employee – must comply with the case law conditions (ie, time and space limitations and proportionality) in order to be valid, notwithstanding the nature of the agreement in which it is included;in addition to the time and space limitations and proportionality conditions, as soon as the non-compete undertaking obligor is an employee (irrespective of whether they are also a shareholder and/or a corporate officer), the undertaking must be essential for the company and the obligor must receive a financial consideration; andparticular attention must be paid to the triggering event of the non-compete undertaking since the end of an employment contract or of a corporate office does not always correspond to the sale of all the shares held in the company by the obligor.For further information please contact Gwenaëlle de Kerviler, Alain Levy or Nathalie Lastennetat AYACHE by telephone (+33 1 58 05 38 05) or email ([email protected], [email protected] or [email protected]). The AYACHE website can be accessed at www.ayachelaw.com.