Non-compete clauses in Swiss M&A transactions should be carefully drafted

In M&A transactions, sellers typically possess the essential know-how and relationships necessary for the successful management of the sold business. As a result, buyers often rely on non-compete clauses to prevent sellers from engaging – following a closing – in activities that compete with the target company, thereby giving the buyer the opportunity to build customer trust.

Necessity of contractual regulation

Certain legal scholars consider that, under Swiss law, the seller of a business has an implied non-compete obligation, arising as an ancillary duty from its obligation to transfer ownership. Since there is no unanimity on this question and this opinion is based on old rulings of the Swiss Supreme Court (Tribunal fédéral), parties to an M&A deal governed by Swiss law should contractually regulate the post-closing non-compete obligations of sellers.

Scope of non-compete and non-solicitation undertakings

A key issue for parties when negotiating the terms of a non-compete undertaking is determining precisely the scope of activities that sellers will be prohibited from conducting and the territory in which the restrictions apply. Typically, the non-compete obligations cover the activities carried out by the target at the time of closing of the transaction and the markets in which those activities were conducted. In practice, however, the non-compete may sometimes be limited to only certain core activities of the target.

It is in buyer's interest to ensure non-compete provisions cover both the active operation of a competing business and the acquisition of shares or other interests in such businesses. The non-compete clause, however, generally expressly carves out the passive holding of shares for investment purposes, provided this does not involve any managerial role or significant influence over the competing company.

Non-compete clauses often extend beyond a strict prohibition on competition to include non-solicitation obligations, which prevent sellers from approaching or influencing certain individuals (e.g. employees or customers) and inducing them to terminate existing contracts and enter into new ones with the sellers or a third party. Since it is often difficult to prove that employees or customers did not leave on their own initiative, non-solicitation clauses are sometimes drafted to impose an absolute prohibition on entering into contracts with certain key employees or clients of the target.

It is also crucial for parties to clearly define the individuals subject to these restrictions. In Switzerland, non-compete obligations generally apply to sellers and persons closely related to the sellers, as well as their affiliated entities.

Contractual penalty

Breaches of non-compete clauses are usually sanctioned by a contractual penalty. The key advantage of such a penalty is that it allows buyers to obtain compensation without having to prove actual damage – a task that is often difficult in practice. To ensure the penalty serves as an effective deterrent, its amount must be sufficiently high, which is often frustrating for sellers since even a minor breach (e.g. hiring a junior employee despite the non-solicitation undertaking) may automatically trigger a substantial penalty. It is also advisable for buyers to specify that the payment of the penalty does not release the sellers from their obligation to comply with the non-compete obligations.

Frequently, transaction documents provide for a one-time lump-sum payment for each breach of the non-compete clause. Since the definition of "each breach" tends to be unclear, it may be more appropriate to specify a monetary amount for each day the non-compete clause is violated. In addition, buyers should consider expressly reserving the right to claim damages exceeding the contractual penalty, should their actual loss be higher.  

Limitations resulting from civil law

Under Swiss law, the scope of a non-compete obligation is limited by Article 27, para. 2 of the Swiss Civil Code (CC), which prevents excessive commitments. Swiss courts, however, are generally cautious when applying this provision to business matters, limiting non-compete clauses only when they excessively restrict economic freedom or seriously threaten the professional viability of sellers.

Limitations resulting from competition law

The Swiss Competition Commission views non-compete clauses, which are entered into over the sale of a business, as permissible ancillary restraints, provided they include the following:

• They are directly related to a concentration of undertakings (i.e. a merger or a transaction by which one or more undertakings acquire control of an undertaking);
• They are necessary to implement the transaction; and
• They do not exceed what is necessary in terms of duration, geographic scope and subject matter.

These principles apply regardless of whether the concentration meets the thresholds requiring notification to the Swiss Competition Commission.

The current view of the Swiss competition authorities is that, in the case of the acquisition of sole control over a target (i.e. the acquisition of a decisive influence over the target's business, assumed when a majority of voting rights is acquired), the non-compete clause should be limited to two years if only goodwill is transferred to the buyer and three years if both goodwill and know-how are transferred.

Also, according to Swiss authorities, the non-compete clause must be limited in terms of subject matter and geographic scope to the activities of the target prior to the transaction and the market where the target was offering its services or goods prior to closing. The geographic scope, however, can be extended to areas where the sellers had intended to conduct business at the time of the company's transfer, provided that the sellers had already made corresponding investments. Goods and services that were at an advanced stage of development at the time of the transfer or fully developed products that have not yet been brought to market can be covered by the clause. Swiss competition authorities apply the same principles to non-solicitation clauses.

Conclusion

Non-compete and non-solicitation undertakings are a central feature of M&A transactions since they protect the ability of buyers to integrate and develop the acquired business. While such clauses are widely accepted in practice, their enforceability depends on careful drafting. The parties must strike a balance between the buyers' legitimate interest in safeguarding the value of the transaction and the legal limits imposed by civil law and competition law. In particular, non-compete and non-solicitation undertakings must remain proportionate and contractual penalties should be calibrated to deter breaches without being excessive. Clear definitions and a precise articulation of remedies are key to ensuring that these clauses serve their protective function while remaining legally sustainable.

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