How to make a non-compete clause enforceable for an employee and shareholder in a shareholders' agreement?
For a non-compete clause to be truly enforceable against an employee who has become a partner, there must be real, identifiable, and independent financial consideration.
In practice, many executives believe they can secure a non-compete clause by including it in a shareholders' agreement or a deed of assignment, with a formula stating that "the consideration is included in the price." When this partner is also an employee of the company, this is not sufficient. We explain everything through a ruling by the Court of Cassation (Cass. Com., November 5, 2025, n° 23-16.431).
1. The Context: An "Employee-Partner" Non-Compete Clause in an Agreement
An employee of a consulting firm became a partner and adhered to an "associative charter," which served as a shareholders' agreement. The document included a non-compete clause targeting the company's clientele: the partner was prohibited, after her departure, from any direct or indirect involvement with the firm's clients.
Upon her departure, she sold her shares for €535,000 and signed a deed of assignment in which she acknowledged that the consideration for her non-compete undertaking was "included in the sale price." A few months later, the company accused her of soliciting some of its clients and initiated legal action based on this clause.
The Court of Cassation then reiterated an essential principle: when a non-compete clause is entered into by a partner who, at the time of the undertaking, is also an employee, its validity is subject to the existence of financial consideration. In other words, as soon as the clause limits the professional freedom of an employee-partner, the requirements of labor law apply.
2. The Contractual Arrangement in Question: Presenting a Non-Discount as Consideration
The associative charter was not limited to non-compete. It also provided for:
- a penalty clause calculated based on fees invoiced to the clients concerned;
- a bad leaverclause, which applied a 50% discount on the capital gain in the event of a "conflictual" departure, while a "non-conflictual" departure entitled the partner to the full price.
Initially, the partner's departure was treated as non-conflictual: no discount was applied, and the capital gain was paid in full. Subsequently, the company attempted to reclassify the situation as a bad leaver to reverse this treatment and retroactively reduce the price.
To justify the absence of specific financial consideration for the non-compete, the company argued that the advantage granted to the partner lay in the non-application of the 50% discount provided for in the event of a conflictual departure. The assignment clause reflected this idea by stating that the consideration for the non-compete would be integrated into the price.
The Court of Appeal validated this approach: since the partner had signed the deed of assignment, she could no longer contest the existence of the consideration.
3. The Court's Response: A Dual Requirement for Financial Consideration
The Court of Cassation overturns the ruling. It lays down two simple principles, directly useful for drafting.
Firstly, a purely declaratory clause is not sufficient. Stating in a document that "the consideration is included in the price" does not exempt the judge from verifying whether this consideration actually exists. The non-compete clause for an employee-shareholder requires genuine compensation; it is not a condition that the employee could waive in advance by means of a standard phrase.
Secondly, a mere absence of a bad leaver discount does not constitute valid consideration. Even if the economic benefit is real, it is, by nature, conditional: it depends on the classification of the departure (good or bad leaver), which itself is subject to discussion, or even subsequent decisions by the shareholders. However, the financial consideration for a non-compete must be due regardless of the circumstances of the termination and must not be confused with the mechanism for determining the sale price.
In practice, the ruling therefore rejects that the sale price serves both as remuneration for the shares and as an implicit "recipient" for the non-compete compensation, especially when it is adjusted by good/bad leaver clauses.
4. Practical Takeaways for Drafting Shareholder Agreements
To secure an enforceable non-compete clause against an employee who has become a shareholder, several drafting best practices are essential.
First, it is important to provide for independent consideration, separate from the sale price : an identified, quantified amount, presented as the non-compete compensation. A simple phrase stating that "the consideration is included in the price" is not sufficient to satisfy the jurisprudential requirement.
This compensation must then be payable regardless of the circumstances of departure : it cannot depend on the classification of the departure (good/bad leaver), nor be absorbed by a price discount or premium mechanism. The non-compete consideration must be independent of penalties related to conduct or circumstances of termination.
Finally, its amount must be substantial and not negligible, considering the scope of the restriction (duration, geographical scope, nature of the prohibited activity).
The key takeaway from the judgment is therefore twofold: for a non-compete clause contained in a shareholders' agreement to be truly enforceable against an employee-shareholder, it is not enough to insert a general formula into the deed of assignment; a genuine financial consideration is required, clearly identified as such, which is neither absorbed into the price nor confused with a mere absence of discount.
