In its judgement of 25 July last (‘Thermagas case’), the Arnhem-Leeuwarden Court of Appeal ruled that a term of five years for a competition clause in a purchase agreement was unacceptably long. The result: the competition clause was rendered null and void.
Facts of the case
Thermagas is a wholesaler in, amongst other things, heating and cooling systems. Via his own PLC (of which he was sole director), Thermagas’ managing director (‘the director’) was also a co-shareholder in Thermagas (‘the vendor’). At the end of 2013, the firm, Salor, purchased all of the shares in Thermagas. Under the purchase agreement, the vendor bound itself to a five-year competition clause, which applied both to the aforementioned PLC and its director (‘the director’). Following the takeover, ‘the director’ entered the employ of Thermagas. His employment agreement included both a competition clause and a business-relations clause.
On 1 August 2014, via a settlement agreement, ‘the director’ left the employ of Thermagas and shortly thereafter, the vendor purchased fifty per cent of the shares in a competitor of Thermagas which had just been established, Multitherm Nederland. Salor then brought an action with the aim of binding the vendor to the competition clause in the purchase agreement. The vendor argued that the competition clause did not apply, as it was in conflict with the Competitive Trading Act.
An arrangement between companies under which they agree not to compete with one another can, in certain cases, be in conflict with the prohibition on cartels pursuant to the Competitive Trading Act. Arrangements which are directly connected, and essential, to a concentration (a merger, takeover or joint venture) are however exempt from the prohibition and are regarded as ancillary restrictions.
This exemption, whose underlying principle is to protect the purchaser from competition from the vendor, enables the purchaser to win the trust of the market following the takeover, and to protect the value of its investment, as it is usually easy for vendors to compete with their former companies, due to the long-term connections they typically have entertained with customers and suppliers and due to their unique knowledge of the relevant markets, prices and margins.
In the context of these ancillary restrictions, the European Commission (‘EC’) in 2005 indicated that competition clauses are acceptable, provided their term does not exceed three years and the concentration (in this case, the takeover) includes a transfer of both goodwill and knowhow. These conditions were satisfied in the case of the sale of Thermagas to Salor.
The court of appeal was willing to assume that a competition clause in and of itself was essential to the conclusion of the purchase agreement, as the vendor’s director was the former director of Thermagas, possessed a great deal of competition-sensitive information and, further, was in a position substantially to frustrate the ambitions of Salor via his interest in Multitherm Nederland.
However, in the view of the court of appeal, the relevant term of five years went too far. Salor also argued that ‘the director’ had so much knowledge and expertise that a five-year term was justified, but according to the court of appeal, this aspect had already been taken into account in the three-year term employed by the EC. The court of appeal thus assumed that the court hearing the main action would declare the competition clause invalid and suspend it in its entirety, pending its decision.
Although this was a case between two entrepreneurs and its evaluation remains a casuistic one, the vendor’s director (‘the director’), by invoking the Competitive Trading Act, clearly succeeded in escaping from a long-term competition clause and was free to establish a new, competing business.
As mentioned above, the employment agreement entered into by ‘the director’ and Thermagas subsequent to the takeover contained, amongst other things, a competition clause. In invoking the competition clause in the employment agreement, Salor in any case benefitted from the advantage that the competition clause had only taken effect subsequent to the expiry of the employment agreement and not immediately following the takeover. Indeed, the actual term may not even have been exceeded at that point. In addition, there was a chance that ‘the director’ would not walk away unscathed: first cashing in and then (via one’s own PLC) competing is normally not viewed by the subdistrict courts in positive light.
Further, it does not, in the context of employment law, tend rapidly to be assumed that a competition clause or business-relations clause will have a ‘disturbing effect’ on the market (see, e.g., Arnhem-Leeuwarden Court of Appeal, 19 Februari 2013). This legal route does not however seem to have been taken, nor does it look like ‘the director’ himself was held to account on the basis of the competition clause. It is in fact unclear whether this constitutes a missed opportunity or if the parties agreed differently at the end of the employment agreement: the possibility cannot be discounted that the competition clause was cancelled by means of the settlement agreement between the parties. And it is not unthinkable that Salor felt sufficiently protected by the competition clause in the purchase agreement.
Put succinctly, the employment-law route can form an attractive option in such an instance. As a precautionary measure, though, the competition clause from the purchase agreement should also have been included (or confirmed) in the settlement agreement between ‘the director’ and Thermagas.
When it comes to sales processes, it is important to take account of the available competition-law options, in precisely which documents competition limiting arrangements are laid down and, finally, with which parties (!).