Non-Competition Clauses in Shareholder Agreements: The Importance of a Clear Start Date

Non-competition clauses in shareholder agreements may be unenforceable if their duration cannot be determined with certainty. Two recent Superior Court decisions highlight an important drafting risk: where the starting point of a non-competition obligation is not clearly defined, the clause may be deemed unenforceable in its entirety, leaving the company exposed and unprotected against a departing shareholder.

The Fleury Decision: An Unclear Start Date Defeated the Non-Competition Clause

In 9395-3271 Québec Inc. v. Fleury [Fleury], the Court examined the validity of a non‑competition clause in a shareholder agreement in the context of an interlocutory injunction sought against a former shareholder and employee.

The company alleged, among other things, that the former colleague had breached his contractual obligations by taking up employment with a competing business operating in a similar field.

The non-competition clause read as follows:

[Unofficial translation] Each of the Shareholders agrees and expressly undertakes, for the duration of this agreement and, in the event that he ceases to be a shareholder of the Corporation, for a period of three (3) years from the date of the disposition of his Shares, not to, directly or indirectly, whether personally or through an intermediary, alone or jointly, or in any capacity whatsoever as an investor, employee, or otherwise, engage in business or lend his support to any other enterprise operating, directly or indirectly, in the same field as that carried on by the Corporation or its subsidiaries, namely the casting and finishing of concrete and the installation of prestressed concrete, within a radius of five (5) kilometres from the Corporation’s head office. [Our emphasis]

The Superior Court dismissed the application for an injunction, primarily on the ground that the clause lacked clarity as to when the non-competition obligation would become enforceable, thereby rendering its duration indeterminable and the clause unenforceable.

More specifically, the Court found that the issue did not lie in the duration itself, three (3) years in this case, but in the uncertainty surrounding its starting point.

At the time of the interlocutory proceedings, a six (6) month dispute between the parties regarding the valuation of his shares remained unresolved, with no resolution in sight. The Court concluded that a clause providing for a fixed duration but an indeterminate commencement date is contrary to public order and, therefore, unenforceable.

What Makes a Non-Competition Clause Enforceable in Québec?

Pursuant to article 2089 of the Civil Code of Québec (“CCQ”), parties may, by written agreement and in express terms, stipulate that one shall not compete with the other or participate in any enterprise that competes with it.

However, such stipulations must be limited, with respect to duration, territorial scope, and the nature of the prohibited activities, to what is necessary to protect the legitimate interests at stake.

Since the Supreme Court’s ruling in Payette v. Guay Inc., it is well established that in commercial matters, such as shareholder agreements, courts apply a more flexible and permissive standard when assessing the reasonableness of non-competition clauses, in contrast to the more stringent standard applicable in employment matters.

However, despite Fleury falling within a commercial context, the Superior Court adopted a stricter approach, consistent with a more conservative line of jurisprudence.

Why Does a Precise Start Date Matter in Non-Competition Clauses?

In another decision involving a non-competition clause in a shareholder agreement, Gestion Brault & Associés v. CAL Consultant [Gestion Brault], the Superior Court again held that the clause in question was ambiguous, unreasonable, and unenforceable.

The clause provided that the non-competition obligation would remain in effect for a period of three (3) years following the termination or expiration of the shareholder agreement, or the sale of the party’s shares in accordance with the terms of the agreement. More specifically, the non‑competition clause read as follows:

[Unofficial translation] 19.2. Non-competition. For as long as he holds Shares, directly or through a Holding company, and for a period of three (3) years following the termination, expiration of this Agreement or the sale of his Shares in accordance with the terms hereof, each of the Parties hereto (and its directing mind, where applicable) undertakes not to engage in any conduct that could directly or indirectly compete with the activities of the Corporation or its subsidiaries, namely the operation of a business engaged in building roof installation and roof maintenance, within a radius of one hundred (100) kilometres of any current or future place of business of the Corporation or any subsidiary. [Our emphasis]

The duration of the agreement was defined the following way:

[Unofficial translation] Regarding each Party, the terms hereof remain in force as long as he did not cede all of his Shares or his participation, direct or indirect, in the capital of the Corporation, the whole, according to the terms hereof; they then end automatically in it regard, save for his applicable obligations described at section 19. [Our emphasis]

As in Fleury, the dispute over the sale of shares in this case remained unresolved and was expected to persist for an extended period. As a result, the expression “the sale of his Shares in accordance with the terms hereof,” which failed to establish a definitive deadline for the repurchase of the shares in question, led the Court to conclude that the starting point of the non‑competition obligation was vague and imprecise.

The Superior Court therefore found that the non-competition clause in the shareholder agreement was indeterminate, indeterminable, and lacked clearly defined temporal limits, rendering it contrary to public order and therefore unenforceable.

Why These Decisions Matter for Businesses and Shareholders

These decisions serve as a reminder that, even in commercial contexts where courts tend to apply a more flexible approach to non-competition clauses, the absence of a clear and determinable starting point may render the clause unenforceable in its entirety.

In both Fleury and Gestion Brault, the Superior Court emphasized that ambiguity or vagueness regarding the commencement of a non-competition obligation will be held against the party seeking to enforce it. This case law reflects the Court’s reluctance to permit a party to artificially extend the duration of a restrictive covenant by delaying the sale of shares or by failing to establish a clear triggering mechanism.

Practical Takeaways

To reduce the risk of invalidity, the following best practices should be observed when drafting non-competition clauses in shareholder agreements:

• Clearly define the duration, territory, and restricted activities. A valid clause must comply with the requirements of article 2089 of the CCQ. Any ambiguity, particularly regarding duration, may jeopardize its enforceability.
• Establish a clear starting point or a reliable mechanism for determining it. The commencement of the non-competition obligation must be readily ascertainable by a judge. It should thus stay away from relying on events likely to give rise to unresolved disputes or be subject to the uncertainties of litigation.
• Ensure the clause remains proportionate to the company’s legitimate interests. The restriction must strike a balance between the need to protect the business and the individual’s right to pursue other professional opportunities, especially in cases involving shareholder-employees.
  
  Clauses that are overly restrictive or disproportionate may be struck down as contrary to public order. Careful, precise, and tailored drafting is essential.

We invite you to contact a member of our national Labor & Employment law group, as well as Corporate Commercial Litigation to advise you on any questions or concerns.