It is often vital for companies to protect their confidential information and know-how to maintain a competitive advantage. Accordingly, companies have a legitimate interest to ensure that their management and other key employees are loyal to the company and do not engage in activities that compete with the company during their term of service or employment relationship with the company and for a certain time after they have left the company. Non-compete obligations are thus a common feature in service contracts and employment contracts and their acceptable scope and duration governed by the relevant general contract law (e.g. as regards managing directors in Finland) or employment law principles (as regards management employees).
However, non-compete obligations are often also included in shareholders' agreements in cases where a manager or key employee (referred to below as 'managers') is (or was) also a shareholder e.g. as part of an incentive scheme. Such non-compete obligations tend to relate to the shareholding of the manager rather than his/her service with the company. The scope and duration of such non-compete obligations sometimes exceed what is acceptable under e.g. the relevant employment law principles. This again may raise certain competition law questions that are important to bear in mind.
From a competition law perspective, a mere shareholding in a company is not as such a sufficient justification to bind a shareholder to a non-compete obligation in a shareholders' agreement. This is generally only possible with regard to shareholders that jointly control the company, i.e. those whose consent is required to approve strategic decisions in the company's decision-making bodies (e.g. relating to the budget and business plan). Shareholder-managers are often not controlling shareholders and non-compete obligations imposed on them usually require other justifications under competition law than the mere ownership of shares and being party to the shareholders' agreement. Typically, a manager's non-compete obligation is justified based on his/her term of service with the company.
It is thus often recommendable to include the non-compete obligation in the manager's service contract instead of the shareholders' agreement. In the service contract, the non-compete obligation has a natural link to the manager's term of service with the company. The non-compete obligation should normally not continue after the term of service beyond the period acceptable under the applicable contract law or employment law principles even if (for one reason or another) the manager continued to be a shareholder of the company. Indeed, if a manager continues to hold a small, non-controlling interest in the company (and thus also remains a party to the shareholders' agreement) after having left the firm, there are normally no valid grounds under competition law to bind that person to a non-compete obligation beyond a reasonable period of time after the term of service. For the same reason, if the non-compete obligation is nevertheless included in the shareholders' agreement, it should be linked to the manager's term of service rather than the shareholding as such, and be limited in time after the term of service based on relevant employment law principles.