All of French Company Law: ordinary law of companies and specific regime for different types of companies

Company Law (en cours)

The effectiveness of the transfer of shares can be guaranteed by a non-compete clause  which allows, by virtue of a mechanism very similar to the warranty against dispossession offered by ordinary law of sale, to protect the transferee against any competitive activity by the transferor that could harm them.
1) Conditions of validity
The scope of non-compete clauses cannot, unless it infringes on t …

Principle and validity.

TREBULLE, The control of proportionality of the non-compete clause contained in an act of transfer of shares (droits sociaux), French Company Law 2003, chron. 6.

The effectiveness of the transfer of shares can be guaranteed by a non-compete clause  which allows, by virtue of a mechanism very similar to the warranty against dispossession offered by ordinary law of sale, to protect the transferee against any competitive activity by the transferor that could harm them.

The scope of non-compete clauses cannot, unless it infringes on the freedom of commerce and industry, be unlimited.

They must first be limited in time and space. These criteria are cumulative and not alternative . Case law considers that a non-compete clause stipulated for five years in a share transfer agreement is limited in time, even if its entry into force was postponed due to the deferred transfer of ownership of the transferred shares by mutual agreement of the parties and also due to the seller's wrongful conduct . Furthermore, the non-compete commitment, which applies throughout France and to any client, contact, or prospect located abroad, under which the seller is prohibited for five years from directly, indirectly, or through an intermediary, engaging in a similar or competing activity with that of the transferred company in any capacity or from having an interest in a competing undertaking as an employee or otherwise, is not disproportionate in its duration and geographical scope given the very restricted nature of the sector, even if it may seem particularly restrictive for the individual, aged 54, and specialized in the sector for many years . Conversely, the non-compete obligation contractually imposed on a corporate officer, restricted to countries likely to constitute the market for integrated magnetic memory products on silicon, and concerning only those, restrictively and precisely listed, appears sufficiently limited in space . The validity of non-compete clauses also implies that they are limited in their object . Care must be taken in drafting the clause because a clause that prohibits creating, operating, or having an interest directly or indirectly, in any capacity, even as a limited partner, in a competing activity, does not extend to the exercise of salaried employment, even within a company in the prohibited sector, as long as the terms used refer to personal operation or at least an interest in the operation of the competing company .

A clause, even if limited in space and time, cannot be declared lawful if it does not present a character proportionate to the legitimate interests of its beneficiary : the restriction of freedom inherent in the clause must be strictly necessary for the objectives to be achieved. The invalidity of a non-compete clause is not assessed with regard to the diversity of activities provided for in the corporate purpose of the transferred company but, concretely, in terms of its disproportion in relation to the purpose of the contract, as it prevents its debtor, for a period of five years, from engaging in management activities in an establishment similar to that of its beneficiary . Similarly, a non-compete clause infringes on the commercial freedom of the transferor when it only allows sales to individuals, while the majority of the turnover is achieved in the sector with professionals, prohibits recruiting the staff of the transferred company for five years, and subjects the transferor to periodic inquisitorial controls by the transferee . Furthermore, the non-compete clause in a transfer of shares, by which the transferor agrees not to compete with the company for eight years, on the territory of continental Europe and in a sector described in broad and imprecise terms, is void as it cannot, by its scope, be considered as protecting a legitimate interest . Conversely, the non-compete clause, limited to five years and a radius of twenty kilometers from the registered office of the transferred company, appears lawful as it is essential to the protection of legitimate interests and aims to prevent the intervention of the former manager, transferor, in the same field, with the same clientele . Similarly, the non-compete clause, by which the transferor agrees not to engage in events or exhibitions in the medical or hospital fields competing with the transferred company, is proportionate to the protection of the transferee's interests, as it aims to guarantee the value of their investment . Finally, the non-compete clause stipulated in a share transfer agreement, which sets its scope to the territory of French Polynesia, an area where the transferred company has exclusive distribution rights, while allowing the transferor to continue operating two other companies, of which he is the sole manager and partner, in the same sector, does not appear disproportionate in view of the legitimate interest of the transferees .

In which cases does the judge find a breach of the clause? It all depends on the drafting of the clause and its interpretation by the judge. In fact, case law considers that a clause prohibiting the transferee and the company from engaging with clients listed in the annex prohibits solicitation but does not forbid responding to a call for tenders . Similarly, a non-compete clause limited to active participation in the operation of a competing company's business after the transfer of shares does not extend to holding a stake prior to the transfer or to contributions in current accounts, which cannot be equated with a stake, in the company managed by the transferor's son .

Constitutes a violation of the non-compete clause prohibiting direct or indirect involvement, in any capacity and in any form, with a commercial establishment of the nature of that operated by the transferred company or likely to compete with it, when the transferor contacts the clients of the latter to announce the resumption of his activity through a newly created undertaking and establishes commercial relations for its benefit . Similarly, the transferor of shares violates the non-compete clause prohibiting acquiring an interest in a competitor, unless he expressly commits not to have the same clients, by contracting with some of them without obtaining the prior agreement of the transferee . A transferor also violates the non-compete clause stipulated in the deed of transfer of his shares when he is hired by a company created to develop a goods delivery activity primarily by bicycle in urban centers, notably in Paris, as this service already constitutes the core activity of the company whose shares he transferred . Finally, the debtor of a non-compete clause prohibiting involvement, even as a partner or limited partner, in a fund of the same nature, breaches this clause if he becomes a majority partner in a competing company .

On the other hand, the transferor of a company bound by a non-compete agreement cannot be considered as engaging, alone or through an intermediary, in a competing activity solely because they have granted, without consideration, a loan to the company of their former employee, which operates in the same sector as their former company, and have provided assistance and advice .

It should be noted that the violation of a non-compete clause included in a share transfer agreement does not necessarily result in compensation in the absence of proof of the extent of the alleged damage and the causal link between this damage and the fault alleged .

Cass. com., 17 July 2001, LawLex202300001091JBJ, considering that the agreement for the transfer of ownership interests that does not expressly provide for a non-compete clause cannot give rise to any contractual non-compete commitment, even tacit or implicit.

Cass. com., 12 February 2013, LawLex202300001092JBJ; 24 November 2009, LawLex200900003553JBJ.

CA Paris, Pôle 5 ch. 4, 20 October 2010, LawLex201000001290JBJ.

Cass. com., 6 October 2015, LawLex202300001096JBJ; 11 March 2014, LawLex202300001087JBJ, considering that the non-compete obligation contractually imposed on a corporate officer appointed from among the shareholders, applicable in the event of dismissal, is validly limited in scope when its reach is restricted to countries likely to constitute the market for products of magnetic memories integrated on silicon and to these products alone, exhaustively and precisely listed.

Cass. com., 4 December 2007, LawLex200700001969JBJ; CA Versailles, 10 June 2004, LawLex200700002013JBJ, holding that the non-compete clause entered into by the transferor of shares is proportionate even if its duration is five years, as long as its purpose is to guarantee the value of the transferred undertaking, which operates in the field of organizing scientific events, where preparation times are long.

Cass. com., 16 November 2022, LawLex202200010345JBJ.

Cass. com., 24 September 2013, LawLex201300001407JBJ, RDC 2014, 30, obs. DESHAYES; Rev. sociétés 2014, 162, obs. FAGES.

Cass. com., 12 December 2018, LawLex202300001093JBJ.

Cass. com., 16 November 2022, LawLex202200010345JBJ; 17 December 2002, LawLex200300000619JBJ, holding that the transferor of shares violates the non-compete obligation undertaken towards the transferee by remaining the manager of a company engaged in a competing activity, even if its existence predates the subscribed clause, as long as at the time of subscription, it was not engaged in a competing activity.

Paris, 25 June 2015, LawLex202300001090JBJ; Cass. com., 21 January 2004, LawLex200400000320JBJ, considering that the debtor of a non-compete clause prohibiting him from having an interest, even as a partner or limited partner, in a business of the same nature, violates this clause if he becomes the majority shareholder of a company competing with the company whose shares he has sold; Versailles, 1 July 1999, LawLex200200000926JBJ, D., 2000, Somm., 318, note PICOT, considering that a clause by which the transferor prohibits himself “from directly or indirectly soliciting the clientele of the company” whose shares are transferred, “in order not to compete with said company in any way with said clientele,” prohibits both active solicitation and passive response to its solicitations.

Paris, 22 January 2015, LawLex201500000091JBJ.

Cass. com., 21 January 2004, LawLex200400000320JBJ.

CA Rennes, 20 November 2018, LawLex201800001812JBJ.

Cass. com., 26 September 2018, LawLex201900002080JBJ.

Cass. com., 10 March 2014, LawLex202300001087JBJ.

Cass. com., 4 January 1994, LawLex200200001606JBJ, considering that for a non-compete clause to be lawful, it is not enough for it to be limited in time and space; it must also not be disproportionate in relation to the purpose of the contract.

CA Paris, 8 January 2009, LawLex202300001089JBJ.

Cass. com., 8 October 2013, LawLex201300001723JBJ, D. 2013, 2816, obs. PICOD; Contrats Conc. Consom. 2013, No 260, obs. MALAURIE-VIGNAL; JCP E 2014, No 1000, obs. COURET and DONDERO.

Cass. com., 24 June 1997, LawLex202300001088JBJ; 15 March 2011, LawLex201100000728JBJ, considering that the non-compete clause prohibiting the transferor from participating or having any interest, in any capacity, in activities similar to those of the transferred company and from soliciting its clients for the post-contractual period is disproportionate; Paris, 22 January 2015, LawLex201500000091JBJ, holding that a non-compete clause, stipulated in a share transfer agreement, prohibiting the transferor for a period of five years from re-establishing directly or indirectly in the territory of the European Union, without defining the activities concerned in the ecological transport sector, while he provides teaching in the field of logistics and transport at the University of Caen where he has developed his expertise for more than ten years, constitutes an excessive infringement on his freedom to work and must be declared void.

Cass. com., 13 December 2011, LawLex202300001094JBJ.

Company Law (en cours)

299. Principle and validity.(1)

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299. Principle and validity.(1)

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