German Law on Limited Liability Companies: Post-Contractual Non-Competition Clauses for Managing Directors

During their term of office, managing directors of German limited liability companies (GmbH) are subject to a comprehensive non-competition obligation - just like the management board (German: Vorstand) of a stock corporation (AG) or employees. After the end of the management activity, (only) a confidentiality obligation applies by law (section 85 of the Limited Liability Company Act “GmbHG”). If the company also wishes to ensure that the managing director does not enter into competition after he or she leaves the company, this must be expressly agreed. However, case law sets narrow limits to the freedom of contract in this regard.

The first requirement is a legitimate interest of the company in the post-contractual prohibition of competition, such as the protection of existing business relationships with customers and suppliers. In addition, the temporal, territorial and subject-related scope is always examined by the courts. Non-competition clauses unlimited in time or geographical scope are generally not permitted. In terms of time, a limit of two years is the general rule, which can only be exceeded in exceptional cases. The territorial limit may be drawn further the more specialized the company is. And with respect to the object, a non-competition clause can only be justified if it covers sectors in which the company is actually in a competitive situation.

If a post-contractual non-competition clause is too far-reaching, the consequences vary depending on the following: If "only" the time limit is exceeded, the duration of the prohibition is automatically reduced to the maximum permissible duration of (usually) two years. If, on the other hand, the prohibition is too broadly defined in terms of territory or object, this leads to the invalidity of the entire clause. The scope of a post-contractual non-competition clause must therefore always be adapted to the circumstances of the individual case. If a post-contractual non-competition clause goes too far, either in terms of territory or object, it is invalid and thus worthless. If the non-competition clause is not a pure customer protection clause and makes the exercise of the profession considerably more difficult for managing director after he or she has left the company, compensation must also be paid. To be on the safe side, one should adhere to the calculation regulations (applicable to employees) of sections 74 et seq. German Commercial Code for the calculation of the compensation. The same provide for a payment of50% of the most recent average total salary.