The importance of properly drafting non-compete clauses in M&A transactions
In corporate acquisition transactions, non-compete clauses are of particular importance. Their purpose is to protect the purchaser against the risk that the seller, once the price has been received, may use their knowledge of the business to compete and regain the transferred clientele.
However, the recent Supreme Court judgment of 14 January 2026 (STS 17/2026) highlights a recurring reality in legal practice: poor drafting can completely deprive an essential clause of its substance.
Supreme Court judgment 17/2026 and non-compete clauses in M&A transactions
The case analysed by the Supreme Court arises from a share purchase transaction in which a non-compete clause was included. Specifically, the sellers undertook not to compete in respect of: “the clients who have been and are” clients of the investee companies, in particular those from the last three (3) years (2004, 2005 and 2006).
Years after the transaction, the purchaser ceased paying part of the deferred consideration, alleging a purported breach of that covenant by one of the sellers. The latter, in turn, brought proceedings to claim the outstanding amounts. In those proceedings, the purchaser filed a counterclaim seeking termination of the contract and the repayment of the consideration already paid.
Strikingly, the decisive element in the dispute was the interpretation of a single word: the conjunction “and”.
The Supreme Court was clear on this point: the clause required that the clients must have had a relationship with the companies in all of the specified years and, moreover, that such relationship remained in force at the time of execution of the contract. In other words, it was not sufficient to have been a client in any one of those years; a continuous and current relationship was required.
The consequence was decisive: the client in respect of whom the breach was alleged did not meet those requirements. Therefore, there was no infringement of the non-compete covenant, and the purchaser could not justify the suspension of the payment of the price.
Consequences of poor drafting of non-compete clauses
The courts have repeatedly held that non-compete clauses, as they restrict the freedom to conduct a business, must be interpreted restrictively and in accordance with their literal wording.
In this case, the deficient drafting of the clause prevented it from fulfilling its economic and protective function.
The purchaser understood that it had acquired a business with the necessary protection against competition from the seller. However, the specific wording of the covenant limited its scope so strictly that, in practice, it excluded situations that were presumably intended to be covered.
All of this stems from an apparently minor issue, yet one that is legally decisive: the use of a copulative conjunction (“and”) instead of a disjunctive one (“or”), or of a broader and more flexible formulation.
In this context, it is reasonable to assume that the purchaser intended to protect itself against any significant client from recent years. However, what it actually agreed to was a much more limited clause, the practical application of which proved clearly insufficient.
Key considerations in drafting non-compete clauses
The judgment allows for a number of particularly relevant conclusions to be drawn, offering significant practical guidance for the proper drafting of non-compete clauses:
- Linguistic precision is essential: at times, the difference between being protected or not depends on a single word.
- Restrictive clauses are interpreted strictly: the more a clause limits rights (such as the freedom to compete), the greater the degree of precision required in its drafting.
- No extensive interpretation is permissible: the scope of a clause cannot be broadened by analogy, economic logic or group affiliation if this is not expressly provided for.
- The timing of the breach is crucial: not every breach entitles a party to suspend its contractual obligations; it must be prior, material and duly evidenced. Subsequent breaches cannot be relied upon to avoid performance of an obligation that has already fallen due.
Conclusions on non-compete clauses in M&A transactions
Supreme Court judgment 17/2026 constitutes a clear example of how imprecise drafting can undermine the effectiveness of a key clause in an M&A transaction.
In share purchase transactions, where the value of the business largely lies in its clientele, know-how and market position, non-compete clauses are not a peripheral matter, but a central element of the negotiation.
However, their effectiveness does not depend solely on their inclusion in the contract, but on how they are drafted. A clause that appears sound may prove ineffective if it does not properly define its personal, temporal or material scope.
This type of situation highlights that, in M&A transactions, it is essential to have a properly structured and carefully drafted contract.
The drafting of clauses such as non-compete provisions requires:
- specialised legal knowledge
- an understanding of the business and the sector
- anticipation of future scenarios
- technical precision in drafting
A minor error can result in significant economic consequences or, as in this case, in the inability to hold the other party liable.
For this reason, investing time and resources in proper legal advice is not a cost, but a guarantee that what is negotiated is effectively protected and that the contract fulfils the function for which it was intended.
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