Supreme Court: Non-Competition Clause Between Two Shareholders Is Not Covered By Section 11(3), Cf. (1), Of The Danish Act On Restrictive Covenants

The facts of the case

Two 50% owners, A and B, of a company X ApS had concluded a shareholders’ agreement containing a non-competition clause. In the settlement agreement, which was concluded later, in which A assigned all his shares in X ApS to A and B, the non-competition clause remained and would apply for 2 years from the conclusion of the settlement agreement.

Before and after the conclusion of the settlement agreement, A was employed in Y ApS, which was a subsidiary to X ApS. The operation of the company took place from Y ApS. A was subsequently suspended from his position in Y ApS since A had allegedly been involved in competitive business activities.

Based on A’s competitive activities, B and X ApS requested the city court to grant an injunction against A’s violation of the con-competition clause. A claimed, however, that the non-competition clause had become void pursuant to section 11(3) of the Danish act on restrictive covenants, since A had not caused the suspension.

The court’s comments

Based on the above, the city court of Helsingør granted an injunction against A’s violation of the non-competition clause. This was upheld by the high court and is now also upheld by the Supreme Court.

The Supreme Court emphasised that the non-competition clause had been agreed between A and B in their capacity as shareholders in X ApS and not as a part of A’s employment as salaries employee in Y ApS.

Further, the Supreme Court found that the repeal of section 38(2) of the Danish Contracts act and the introduction of section 11 of the Danish act on Restrictive Covenants were not intended to change the legal position applicable at the time in question where the provision only applied to employment, including for directors. Based on this, the Supreme Court found that the current provision in section 11(3), cf. (1) of the Danish act on Restrictive Covenants did not apply to this case, as the non-competition clause had been agreed as a part of a settlement agreement between the two shareholders and not in an employee or director context.

The non-competition clause was thus not void and the Supreme Court upheld the decision to grant an injunction against A’s competitive activities.

Bird & Bird’s comments:

Bird & Bird notes that the judgment of the Supreme Court appear to decide the scope of section 11(3) of the Danish act on Restrictive Covenants, as the provision in such case does not reach to include non-competition clauses agreed as a part of a shareholders’ agreement.

In this connection, it should be noted that the judgment of the Supreme Court will presumably entail that the reach of the decision of the Danish Maritime and Commercial High Court, which Bird & Bird has previously commented on here, may be doubted. There are, however, significant differences between these two cases, as the non-competition clause in the case before the Danish Maritime and Commercial High Court had a time-related scope that relates to the shareholder’s termination of his employment (and not his shareholding), as well as it being a matter of a minority shareholder.

This entails that a non-competition clause in a shareholders’ agreement not necessarily will have to fulfil the requirements of validity of the Danish act on Restrictive Covenants, if the clause obligates the company’s shareholders, although these shareholders may also be regarded as employees. In a specific case, it will depend on an assessment of whether the clause has been agreed as a part of a shareholder or of a employee context.

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[1] Casen no. BS-35272/2020-HJR.