Non-Compete Covenants in Business Purchase Agreements
Non-compete covenants are widely used in business purchase agreements. They are found both in share deals and asset deals and vary in breadth depending on the subject matter of the transaction, the negotiating position and the interest to be secured.
The article by a lawyer specializing in corporate law and M&A, published in EuZW 2026, 927, addresses a particular aspect of this topic: extending a non-compete covenant to persons closely associated with the seller. The author of the specialist article, LL.M. Eur., is, according to publicly available information, active as Counsel in the field of corporate law/M&A at the law firm SKW Schwarz. The focus is on the question of what burdens and delimitation issues arise when not only the seller itself, but also persons from the seller’s personal or economic environment are included within the scope of a non-compete covenant.
Function of the Non-Compete Covenant in a Business Acquisition
A non-compete covenant in a business purchase agreement is intended to ensure that the purchaser can actually exploit the economic value of the acquired business. This value regularly includes not only tangible assets, but also intangible factors such as customer relationships, market position, practical know-how and other business advantages.
Without a non-compete covenant, there would be a risk that, after completion of the transaction, the seller would immediately compete again with the business sold. This could occur, for example, by approaching former customers again, using previous know-how or establishing a similar business operation. Such conduct may subsequently impair the value of the acquired business.
Even though case law recognizes that, under certain conditions, a time-limited non-compete covenant of the seller may already arise as an ancillary obligation under the business purchase agreement, an express provision is regularly included in practice as a separate ancillary agreement.
Limits of Non-Compete Covenants
Non-compete covenants affect both competition and the freedom to pursue an occupation. They are therefore subject to restrictions. Of particular relevance are Art. 101 AEUV (Treaty on the Functioning of the European Union, TFEU), § 1 GWB (German Act against Restraints of Competition) and Art. 12 Abs. 1 GG (German Basic Law). In the case of personal non-compete covenants, § 138 BGB (German Civil Code) may also become relevant.
If a contractual provision requires interpretation, any resulting uncertainties are borne by the party relying on the prohibition. In a business purchase agreement, this is regularly the buyer.
Territorial Scope
The non-compete covenant must be territorially limited to the markets in which the acquired business is actually active. The relevant factor is therefore the geographical area of activity of the business at the time of the transaction.
A provision that goes significantly beyond this may give rise to legal risks. The buyer’s interest in protection alone is not decisive; the question is also whether the restriction remains proportionate to the business value transferred.
Temporal Scope
In terms of duration, non-compete covenants exceeding two years are regularly regarded as problematic. A longer commitment may be considered only in special constellations, for example where the business operation depends to a particular degree on industrial property rights or know-how. In such cases, a duration of up to three years is considered permissible.
Substantive Scope
In substantive terms, the non-compete covenant must relate to the subject matter of the acquired business. It may therefore cover only those activities that the sold business actually carries out at the time of the sale.
An extension beyond this to other business areas may jeopardize the validity of the covenant. The substantive delineation is therefore an essential element of the proportionality assessment.
Typical Drafting of Non-Compete Covenants
Non-compete covenants may be regulated on a stand-alone basis in the business purchase agreement. Frequently, however, they are combined with other protective instruments.
Typical forms include in particular:
- combination with a non-solicitation covenant,
- agreement of a contractual penalty,
- inclusion of affiliated companies,
- extension to related persons.
Combination with a Non-Solicitation Covenant
In many business purchase agreements, the non-compete covenant is supplemented by a non-solicitation covenant. This is intended not only to prevent the seller itself from competing with the buyer. At the same time, it is intended to prevent the seller from specifically approaching and poaching employees of the sold business.
In this context, even the intended bringing about of an employee’s move may be relevant. Actual employment by a competing company is not necessarily required for an economic disadvantage to arise for the sold business.
Contractual Penalty in the Event of Breaches
Non-compete covenants are often secured by contractual penalties. Such a provision is intended to sanction breaches and have a deterrent effect.
The amount of the contractual penalty for individual breaches, any overall cap in the case of continuing breaches, and further details are matters of contract drafting. The relationship with other liability provisions in the business purchase agreement must be observed, in particular liability limitations in the event of breaches of warranties. Although contractual penalties and consequences of warranties must in principle be distinguished from one another, the provisions should be coordinated and should not create an unreasonable imbalance.
Related Persons in the Business Purchase Agreement
If a non-compete covenant is intended to cover not only the seller, the term related person is often used. There is no uniform definition of this term in German law.
Possible Statutory Reference Points
One possible reference point is § 138 InsO (German Insolvency Code). The provision identifies various groups of persons who are considered related in an insolvency-law context. In abbreviated form, these include, for example, spouses, life partners, relatives, persons living in the same household, persons connected by service contract, and certain persons connected or associated under corporate law. However, this definition generally does not apply outside insolvency law.
In addition, § 15 AO (German Fiscal Code) is sometimes used, which defines the term relatives. According to this provision, the term includes, among others, fiancés, spouses, life partners, relatives and relatives by marriage in a direct line, siblings, children of siblings, spouses or life partners of siblings, and further family groups. This definition, too, has its own regulatory scope and generally has no direct application beyond it.
Further statutory references can be found, for example, in § 111a AktG (German Stock Corporation Act), § 11 Abs. 1 Nr. 1 StGB (German Criminal Code) and § 1 Abs. 2 AStG (German Foreign Tax Act). For business purchase agreements, however, these provisions are usually not used.
Importance of a Clear Definition
What is decisive is that the agreement specifies which group of persons is intended to be covered. If reference is made to a statutory definition, it must be borne in mind that the provisions mentioned cover similar, but not identical, groups of persons.
The term related person is used in business purchase agreements not only in connection with non-compete covenants. It also appears in warranties and obligations, for example in order to disclose economic interdependencies or prevent circumvention.
Common areas of regulation include, for example:
- warranties regarding contracts with related persons,
- disclosures regarding benefits in favor of related persons,
- arm’s length provisions for transactions with related persons,
- warranties regarding loans or sureties in favor of related persons,
- consent requirements for transactions between signing and closing.
Extension of the Non-Compete Covenant to Related Persons
From the buyer’s perspective, the inclusion of related persons follows a legitimate interest. The buyer wishes to avoid the value of the acquired business being diminished by activities from the seller’s environment.
This may become relevant, for example, where related persons approach customers, use know-how or commence a comparable business operation. According to case law, the seller does not even have to inform the buyer that a family member intends to open a competing business. Against this background, an express provision appears purpose-oriented from the buyer’s perspective.
The Seller Generally Remains the Obligated Party
Under usual formulations, the related person itself does not become a party to the business purchase agreement. Rather, the obligated party remains the seller.
As a rule, the related person is not directly bound by the business purchase agreement. In principle, that person is free to commence an activity that competes with the sold business. However, the seller assumes an obligation towards the buyer to be responsible for, or to work towards, the cessation of such activities.
This is the central conflict: the seller is expected to be responsible for the conduct of third parties over which the seller often has no legally enforceable means of influence.
Permissibility in Principle
Within the framework of freedom of contract, business purchase agreements may in principle also contain non-compete covenants that include related persons. Limits, however, arise from statutory prohibitions, public policy, antitrust law and occupational freedom.
Both antitrust-law standards and civil-law limits are relevant to the assessment. The territorial, temporal and substantive limits already mentioned must therefore also be taken into account when including related persons.
Effects on the Seller
Extending the non-compete covenant to related persons may have significant consequences for the seller. While, in the case of a non-compete covenant that concerns only the seller, the seller can control its own conduct, this is not possible in the same way with third parties.
Liability for Third-Party Conduct
If the non-compete covenant also covers related persons, the seller is liable, depending on the contractual drafting, for their breaches as for the seller’s own breaches. If a contractual penalty has also been agreed, a breach of the non-compete covenant by a related person may trigger a payment obligation on the part of the seller.
This may be economically significant because contractual penalties are regularly set at a high level, do not always contain an independent maximum liability cap, and can often be incurred repeatedly in the case of continuing breaches. In the worst case, a continuing breach by a related person may consume substantial parts of the purchase price, provided that agreed liability caps also apply to this constellation.
If such a limitation is absent, unlimited liability may be at issue. In such cases, § 343 BGB, § 242 BGB or § 138 BGB (German Civil Code) may become relevant in order to correct or limit an unreasonable burden.
Lack of Legal Means of Influence
As a rule, the seller cannot legally force related persons to refrain from a competing activity. They are usually not parties to the business purchase agreement and therefore do not directly owe the buyer compliance with the non-compete covenant.
This creates dependence on the conduct of third parties. This can be particularly conflict-prone where family or personal relationships are strained. The original article cites as an example a constellation in which spouses practice the same profession, one spouse sells a solely owned business, and a separation subsequently occurs. In such a situation, contractual liability for the conduct of the other spouse can cause considerable practical problems.
Information Issues in the Seller’s Environment
It also remains open how the seller should deal with the provision in practice. One question is, for example, whether and when the seller would have to inform all covered related persons about the conclusion of the agreement and the non-compete covenant.
Particularly where definitions are broadly drafted, this may concern a substantial number of persons. In addition, family or kinship tensions may result in the provision not only having a protective effect, but also opening up potential for conflict or pressure.
Cases Without Practical Relevance
Not in every transaction will the extension to related persons be of practical significance. If there are no indications that a related person could commence a competing activity, the provision may in fact carry little weight for the seller.
This may be the case, for example, where family members work in entirely different professions or are active outside the territorial scope of the non-compete covenant. Nevertheless, professional and personal circumstances may change during the term.
Effects on Related Persons
Even though related persons are generally not themselves contractual parties, a non-compete covenant may have indirect effects on them.
No Separate Consideration
The seller receives the purchase price. This regularly also serves as economic compensation for submitting to a non-compete covenant. Separate compensation for the restricted period is usually not agreed.
Related persons, by contrast, generally receive neither a purchase price nor any other remuneration for complying with the non-compete covenant. Formally, they are not themselves bound. In substance, however, the provision may result in them refraining from a competing activity out of family solidarity or consideration for the seller.
Indirect Restriction of Professional Activity
The occupational freedom of related persons is not affected by the usual clauses in the same way as that of the seller, because they are not directly bound. Nevertheless, the provision is aimed at having the seller prevent them from engaging in competing conduct.
It is therefore possible to speak of an indirect impairment. As long as the restriction vis-à-vis the seller is permissible and no further requirements apply to related persons, this indirect effect will generally not be assessed differently either.
No Typical Contract to the Detriment of Third Parties
A non-compete covenant for related persons should not be classified as an impermissible contract to the detriment of third parties, because the related person is not directly obligated without their participation. The obligated party remains the seller.
Rather, classification as a contract with a burdening effect on third parties may be considered. In such a case, no own obligations are imposed on the third party, but that party’s factual freedom and freedom to enter into legal transactions may be indirectly impaired. Such a burdening effect on third parties is permissible in principle.
Effects on the Buyer
For the buyer, a non-compete covenant extending to related persons may be an important protective instrument. It is intended to prevent the acquired business value from being impaired by activities from the seller’s environment.
Risk of Invalidity if Drafted Too Broadly
The buyer regularly has an interest in the most comprehensive protection possible. However, drafting that goes too far may jeopardize the validity of the entire non-compete covenant.
If the permissible framework is exceeded, a validity-preserving reduction to the permissible level is generally not available. Rather, the non-compete covenant agreed in the business purchase agreement may be invalid in its entirety.
The original article points out, however, that a validity-preserving reduction is not completely excluded in this context. In the case of an unreasonably high contractual penalty, a reduction to a permissible level may be possible. According to the prevailing view, the same may, under certain circumstances, apply if the agreed duration of the non-compete covenant exceeds the appropriate level.
Injunctive Relief
In the event of a breach of the non-compete covenant, claims for injunctive relief in favor of the buyer may exist. However, these are in principle directed only against the obligated party, namely the seller, and not against related persons who are not contractual parties.
It is questionable whether and to what extent an injunctive claim may exist against the seller because of conduct by related persons. As a rule, the seller cannot legally require these persons to refrain from the competing activity. The seller can refrain only from its own anti-competitive conduct. If such own conduct is absent, at least an injunctive claim based on the anti-competitive conduct of related persons is likely to be excluded.
Possible Contractual Approaches to Limiting the Problem
The fundamental conflict cannot be fully resolved: the seller is expected to be responsible for conduct that it often cannot legally control vis-à-vis related persons. However, the original article outlines various approaches by which the burden on the seller can be mitigated.
Limitation of the Covered Group of Persons
One possibility is to limit the group of persons for whose conduct the seller is to be responsible. This can be done by selecting specific persons within a statutorily described group or by means of an independent contractual enumeration.
In this way, at least the number of persons whose conduct can be attributed to the seller is reduced.
Inclusion of Individual Related Persons as Contracting Parties
For certain persons, consideration may be given to including them in the business purchase agreement themselves, at least with regard to the non-compete covenant. This does not appear practicable if a wide family circle is to be covered. In the case of one or a few specifically named persons, however, it may be feasible.
In that case, the related person is liable for their own conduct. To that extent, the seller would not have to be solely responsible for third-party conduct. An incentive for such a commitment may lie in separate compensation for the restricted period.
Different Level of Liability
Since, under usual clauses, sellers are often liable for third-party conduct in the same way as for their own conduct, a separate limitation of liability for breaches by related persons may be considered.
In this respect, the original article mentions in particular lower contractual penalties for one-off breaches and a generally lower maximum liability cap in the case of multiple or continuing breaches. This is intended to prevent the entire purchase price, or amounts beyond it, from being economically consumed by competition breaches committed by third parties.
Shorter Liability Period
In addition, the liability period for breaches of the non-compete covenant by related persons may be set shorter than the duration of the general non-compete covenant. While non-compete covenants are regularly considered for two to three years, the original article mentions, for these cases, for example a shorter duration of one to two years.
A combination of various liability-limiting elements is also conceivable.
No Implied Non-Compete Covenant for Related Persons
For the seller, a non-compete covenant may, under certain conditions, arise even without an express provision from § 242 BGB (German Civil Code) as an unwritten ancillary obligation and post-contractual duty of loyalty. This applies insofar as refraining from competition is necessary for transferring the business to the buyer.
According to the view taken in the original article, this cannot be transferred to related persons. Without an express provision, it remains unclear which persons are intended to be covered and whether the parties wanted such an extension at all. Deriving it solely from good faith would, according to that view, go too far.
Separate Agreement Between Seller and Related Person
Finally, a separate agreement between the seller and a related person is conceivable. In it, that person could undertake towards the seller not to commence any activity that breaches the non-compete covenant from the business purchase agreement, which also covers that person.
Such an agreement is permissible provided that it does not violate statutory prohibitions, § 134 BGB (German Civil Code), public policy, § 138 BGB (German Civil Code), or antitrust requirements, in particular § 1 GWB (German Act against Restraints of Competition) and Art. 101 AEUV (Treaty on the Functioning of the European Union, TFEU). Here, too, the willingness of the related person will regularly depend on whether compensation for the restricted period is provided.
Conclusion and Corporate-Law Classification
The inclusion of related persons in a non-compete covenant may have significant practical and legal consequences in a business purchase agreement. The seller is thereby placed in a difficult position: the seller is expected to be responsible for conduct that it often cannot legally control vis-à-vis related persons. If a contractual penalty is added, the economic consequences may be substantial.
For buyers, the provision serves to protect the acquired business value. For sellers and related persons, however, considerable burdens may arise, in particular where the covered group of persons is drawn broadly, no separate limitation of liability exists, or personal relationships are conflict-laden.
In the event of legal questions regarding non-compete covenants in business purchase agreements and their classification under corporate law, case-specific advice may be required. MTR Legal Rechtsanwälte supports companies, investors and high-net-worth individuals in corporate-law matters; further information can be found under Legal advice in corporate law.
