Restrictive Covenants in Dutch M&A: Non-Compete and Non-Solicitation

Protecting goodwill, customer relationships and key employees after closing

Restrictive covenants in Dutch M&A are contractual restrictions that limit what a seller, founder, manager or shareholder may do after closing. They usually include non-compete, non-solicitation, non-hire and sometimes non-disparagement or confidentiality obligations.

In a Dutch acquisition, the buyer often pays for goodwill, customer relationships, know-how, employees and market position. If the seller can immediately compete with the acquired business, approach key customers or hire away essential employees, the value of the transaction may be undermined.

For foreign buyers and international counsel, restrictive covenants are therefore an important part of the SPA and related transaction documents. But they must be drafted carefully. A covenant that is too broad may be difficult to enforce. A covenant that is too narrow may not properly protect the acquired business.

This article is part of the M&A Insights series on Dutch deal practice and is relevant for foreign buyers, sellers, founders, PE and VC investors and international counsel involved in Dutch acquisitions.

Why restrictive covenants matter in Dutch acquisitions

Restrictive covenants are intended to protect the economic value transferred to the buyer.

This is particularly important in founder-led companies, professional services businesses, software companies, distribution businesses, niche manufacturers, healthcare businesses and companies where customer relationships or employee know-how are concentrated in a small group of people.

A buyer does not only acquire shares or assets. It often acquires a commercial position that depends on trust, reputation, know-how and personal relationships. If the seller or key manager can immediately attack that value after closing, the buyer’s bargain is weakened.

Restrictive covenants therefore sit at the intersection of legal drafting and commercial deal protection.

Non-compete clauses

A non-compete clause restricts the seller or relevant individual from engaging in competing activities after closing.

In Dutch M&A, the scope of the non-compete should be linked to the business sold. A broad restriction on “any competing activity” may be too vague or too wide if the target operates in a specific product category, customer segment or territory.

Foreign buyers often want broad protection. Sellers usually want the restriction to be limited to the actual business sold, the relevant market and the period needed to protect goodwill.

A well-drafted non-compete should therefore define the restricted business, the restricted person, the territory, the duration and any exceptions.

Non-solicitation clauses

A non-solicitation clause restricts the seller or relevant individual from approaching customers, suppliers, business partners or employees of the target.

This may be more targeted than a full non-compete. For example, a seller may be allowed to remain active in a broader sector, but may not approach the customers of the sold business for a specific period.

In many Dutch transactions, non-solicitation protection is commercially more important than a general non-compete. The buyer wants to protect relationships, not necessarily prevent every possible activity by the seller.

The clause should identify which relationships are protected. Are only existing customers covered? Also prospects? Suppliers? Referral partners? Group companies? Customers contacted during a look-back period? The drafting should avoid uncertainty after closing.

Non-hire clauses

A non-hire clause restricts the seller from hiring or poaching employees of the target after closing.

This is particularly important where the target depends on key employees, technical specialists, sales teams, consultants, developers or management. The buyer may lose significant value if the seller cannot compete directly but can hire away the team.

Non-hire clauses should be drafted carefully. A restriction on active solicitation of employees is usually easier to justify than a broad prohibition that effectively limits employees’ own freedom to move.

Foreign buyers should also be aware of Dutch employment-law sensitivities. The covenant should bind the seller or relevant covenantor, not operate as an unreasonable restriction on employees who are not party to the SPA.

Enforceability and proportionality

The enforceability of restrictive covenants depends heavily on proportionality.

Dutch M&A transactions generally allow more room for restrictive covenants than ordinary employment relationships, because the seller receives consideration for the goodwill and business transferred. However, that does not mean that every restriction will be acceptable.

The clause should be reasonable in light of the business sold, the role of the seller, the value transferred, the relevant market and the legitimate interest of the buyer.

A restriction imposed on an operational founder who personally owns key customer relationships may be easier to justify than the same restriction imposed on a passive minority shareholder who was not involved in the business.

Duration and territory

Duration and geographic scope are key negotiation points.

A non-compete for a limited period after closing may be justified where the seller’s involvement could damage the buyer’s ability to integrate and protect the business. But the duration should not be longer than necessary.

The geographic scope should also reflect the market of the target business. A Dutch nationwide restriction may be reasonable where the target operates throughout the Netherlands. A European or global restriction requires stronger justification and more precise drafting.

For foreign buyers, it can be tempting to use broad international templates. In Dutch transactions, it is usually better to tailor the scope to the target’s actual business.

Seller involvement after closing

Restrictive covenants become more complex where the seller remains involved after closing.

This is common in founder exits, earn-out structures, consultancy arrangements, management rollover, private equity transactions and transitional service arrangements. The seller may continue to work for the company, advise the buyer or participate economically while also being restricted outside the business.

The SPA and related documents should align the restrictive covenants with the seller’s post-closing role. If the seller remains active in the business, the documents should clarify what is permitted, what is prohibited and what happens after that involvement ends.

This is particularly important where an earn-out depends on post-closing performance. The seller may need enough freedom and operational involvement to influence results, while the buyer wants protection against external competition.

Founders, management and PE-backed companies

Restrictive covenants are often negotiated differently depending on who gives them.

A founder or DGA who is central to the business may be expected to accept stronger restrictions. Management sellers may be subject to covenants in the SPA, shareholders’ agreement, management participation plan, employment agreement or consultancy agreement. Passive sellers should generally not be restricted more than necessary.

In private equity transactions, restrictive covenants often interact with management participation, leaver provisions, rollover equity, non-compete obligations, non-solicitation obligations and exit mechanics.

Foreign PE buyers should make sure that the covenants in the SPA, management documents and shareholders’ agreement are consistent. Inconsistent restrictions can create enforcement problems and post-closing disputes.

Interaction with employment law

Restrictive covenants in an M&A context should not be confused with employee non-competes.

If a seller is also an employee or statutory director, there may be separate employment or management agreement restrictions. These restrictions may be subject to different legal requirements and policy considerations.

The SPA should therefore not be reviewed in isolation. The buyer should check whether the relevant individuals are bound under the SPA, employment agreement, management agreement, shareholders’ agreement or participation plan, and whether the restrictions are consistent.

For foreign buyers, this is a common implementation issue. A non-compete in the SPA may protect the buyer as purchaser of the business, but employment-law documents may still need separate review.

Confidentiality and use of know-how

Restrictive covenants should be coordinated with confidentiality provisions.

In many Dutch acquisitions, the seller has detailed knowledge of customers, pricing, product development, pipeline, technology, employees and strategy. Even if the seller is restricted from competing or soliciting, the buyer should also ensure that confidential information and know-how are protected.

Confidentiality provisions can be broader and longer-lasting than non-compete obligations, but they must still be clear. They should define confidential information, permitted use, exceptions and remedies.

Remedies and enforcement

The SPA should state what happens if a restrictive covenant is breached.

Common remedies include injunctive relief, contractual penalties, damages and specific performance. Contractual penalties can be useful because actual loss may be difficult to prove. However, the penalty should be drafted carefully and should not be treated as a substitute for proper scope.

The documents should also clarify whether breach of restrictive covenants affects earn-out payments, vendor loan repayments, management participation rights, leaver treatment or other post-closing arrangements.

SPA drafting points

In Dutch M&A practice, restrictive covenants should be aligned with the wider transaction documentation.

The SPA should define the restricted business, restricted period, restricted territory, restricted persons, protected customers, protected employees, exceptions, permitted activities, remedies and interaction with other post-closing obligations.

If there is an earn-out, vendor loan, management rollover, consultancy agreement or transition services agreement, those documents should be reviewed together.

Restrictive covenants should not be copied from a foreign template without checking whether they fit the Dutch target, the seller’s role and the actual transaction structure.

Practical conclusion

Restrictive covenants are important tools in Dutch M&A transactions. They protect the buyer against post-closing erosion of goodwill, customer relationships, employees and know-how.

For buyers, the key is to draft covenants that are strong enough to protect the business acquired. For sellers, the key is to avoid restrictions that are broader than necessary or that prevent legitimate future activity.

A well-drafted restrictive covenant is specific, proportionate and aligned with the SPA, employment arrangements, management participation, earn-out, vendor loan and post-closing role of the seller.

FAQ

Are non-compete clauses allowed in Dutch M&A transactions?
Yes. Non-compete clauses can be used in Dutch M&A transactions, but they should be proportionate and linked to the business sold, the role of the seller, the duration and the relevant market.

What is the difference between a non-compete and a non-solicitation clause?
A non-compete restricts competing activities. A non-solicitation clause restricts approaching customers, suppliers, business partners or employees.

Can a seller be restricted from hiring employees after closing?
Yes, but non-hire clauses should be carefully drafted. A restriction on actively soliciting employees is usually more defensible than a broad restriction on employee mobility.

Do restrictive covenants apply to passive shareholders?
They can, but the scope should reflect the person’s actual role. A passive minority shareholder should usually not be restricted in the same way as an operational founder or key manager.

Should restrictive covenants also be included in management documents?
Often yes. Where management remains involved after closing or participates in equity, the SPA, shareholders’ agreement, management agreement and leaver provisions should be aligned.

About Dirk de Waard

Dirk de Waard is a Dutch corporate and M&A lawyer, partner at Venture Lawyers in Amsterdam, and advises foreign buyers, sellers, founders, management teams, PE and VC investors and international counsel on Dutch SPAs, restrictive covenants, non-compete clauses, non-solicitation, non-hire obligations, management participation and post-closing arrangements.

Drafting restrictive covenants in a Dutch acquisition?

Restrictive covenants protect the value of a Dutch acquisition, but they must be tailored to the business sold, the role of the seller and the post-closing structure. Overly broad clauses can create enforceability issues; narrow clauses may leave the buyer insufficiently protected.

Dirk de Waard advises foreign buyers, sellers, founders, management teams and investors on restrictive covenants in Dutch M&A transactions. Contact Dirk de Waard at dirk.dewaard@viottalaw.com to review or draft non-compete, non-solicitation and non-hire provisions in a Dutch SPA or shareholders’ agreement.