Ruling from Borgarting Court of Appeal: Non-Compete Clauses in Share Sales

Borgarting Court of Appeal has recently ruled on whether a non-compete clause entered into in connection with an employee's sale of shares should be assessed under the Working Environment Act's rules on non-compete clauses, or regarded as a purely contractual restriction on competition. The distinction carries significant practical weight, since the Working Environment Act imposes strict requirements on non-compete clauses, including a requirement for compensation and a maximum duration of 12 months.

The case concerned DNB Bank ASA's acquisition of Carnegie. The employee held a minor ownership stake in Carnegie and, in connection with the acquisition, signed both a non-compete clause tied to the share sale and a corresponding clause in his employment agreement. When he later resigned to join a competitor, the question arose as to how long the non-compete obligation linked to the share sale was intended to apply.

Consistent with earlier decisions in this area, the Court of Appeal held that the question depends on an overall assessment of whether the competition restriction in the transaction declaration is more closely connected to the employment relationship or to the share sale.

One factor in the court's assessment was that the employee had signed the transaction declaration as a seller of shares, not as an employee, and that the declaration was made to the company in its capacity as purchaser. The court also placed weight on the fact that the non-compete obligation in the transaction declaration began to run from completion of the share transaction ("Closing"), rather than from termination of the employment relationship, as was the case for the clause in the employment agreement. This tied the declaration more closely to the share sale itself than to the employment relationship.

The fact that the employee's ownership stake was modest, just under 0.5 percent, did not alter this conclusion. The court noted that the stake nonetheless represented significant value to him personally, and that by making the declaration he contributed to enabling the transaction to be completed and the value realized.

Taken together, the Court of Appeal found that the non-compete clause was more closely connected to the share sale than to the employment relationship. The non-compete obligation was therefore not subject to the strict, mandatory rules of the Working Environment Act. The ruling is not yet legally binding, as the appeal deadline has not yet expired.

The ruling has been appealed to the Supreme Court.