Can a shareholder agreement include a non-compete clause for Ontario shareholders?
Yes, shareholder agreements in Ontario can include non-competition obligations, but their enforceability depends on whether they are reasonable in scope, duration, and geographic reach. Ontario courts treat restrictive covenants skeptically — they will not enforce an overly broad non-compete, even if both parties signed it willingly.
In the shareholder context, courts tend to be more willing to enforce non-competes than in a pure employment setting, particularly where the clause is part of a genuine business sale or where the shareholder is being bought out. The reasoning is that such a clause protects the legitimate interest of the buyer in actually getting what they paid for. Even so, the clause must be tailored to the specific business, not a blanket prohibition on all future activity.
Practically, a non-compete in a shareholder agreement might prohibit a departing shareholder from starting or working for a competing business in a defined territory for a specified period after their exit. The specific parameters need to reflect the actual scope of the business. A lawyer can help you draft a clause that has the best chance of being enforced if tested in court.
Key takeaways
- Non-competes in shareholder agreements are enforceable only if reasonable in scope, duration, and geography.
- Courts are more willing to enforce them in a business-sale context than in employment.
- Overly broad clauses may be struck down or read down by an Ontario court.
- The clause should be tailored precisely to the business's actual competitive space.