Non-Compete Carve-Outs for Passive Investors in an Ontario Business Sale

A well-drafted non-compete is supposed to stop a seller from competing with the business they just sold. Read too literally, though, a broadly worded clause could technically be breached by something far less threatening — owning a handful of shares in a publicly traded competitor through a personal investment account, with no involvement in running it. Most sellers don't intend to sign away their entire investment freedom, and most buyers don't actually need them to. That's where a passive investment carve-out comes in.

This article explains what the carve-out does, the conditions typically attached to it, and where sellers and buyers tend to disagree.

Why a Blanket Non-Compete Can Be Too Broad

A non-compete clause is often drafted to prohibit a seller from having any "interest" in a competing business — a phrase broad enough, on its face, to catch not just starting or working for a competitor, but simply owning shares in one. Taken literally, that could mean a seller technically breaches the clause by holding shares of a large, publicly traded competitor purely as an investment, through a mutual fund, or even indirectly through a diversified portfolio they don't actively manage.

Few buyers actually intend to restrict that kind of passive, arm's-length investment activity — the real concern is the seller actively competing, working for a competitor, or using inside knowledge to help one. A carve-out exists to draw that line clearly, so the clause captures what it's meant to and nothing more.

What a Passive Investment Carve-Out Does

The carve-out permits the seller to hold a small, non-controlling ownership interest in a competing business — typically framed around publicly traded companies — purely as a passive financial investment, without that holding counting as a breach of the non-compete. It's a targeted exception, not a general loosening of the restriction: active involvement, board positions, or any operational role in the competitor generally remain squarely prohibited.

Typical Conditions Attached to the Carve-Out

A passive investment carve-out is rarely unconditional. Common conditions include:

• [ ] The investment is limited to a small, clearly bounded ownership percentage, keeping the seller well short of any meaningful control or influence.
• [ ] The investment is in a publicly traded company, where shares are freely bought and sold on the open market rather than privately negotiated.
• [ ] The seller has no active role — no board seat, no management position, no consulting arrangement, and no involvement in the competitor's operations or strategy.
• [ ] The seller isn't using confidential information from the sold business to inform the investment or the competitor's activities.
• [ ] The investment is disclosed to the buyer, in some drafting approaches, particularly where the stake is larger or the competitor is a direct rival.

Because these conditions are drafted into the specific clause rather than implied automatically, the exact wording of your agreement — not general practice — determines what's actually permitted.

Where Sellers and Buyers Tend to Disagree

• How large the passive stake can be. Sellers often want flexibility for their broader investment portfolio; buyers want the threshold low enough that it can't function as a backdoor way to have real involvement in a competitor.
• Whether private (not just publicly traded) investments qualify. Buyers are typically more cautious about extending the carve-out to privately held competitors, where an "investment" can much more easily come with real influence or information flow.
• Disclosure obligations. Some buyers want to be notified of any investment in a named competitor, even a passive one, while sellers may resist an ongoing disclosure obligation as intrusive.
• What happens with indirect holdings. Mutual funds, index funds, and pooled investment vehicles can create technical exposure to a competitor without the seller ever choosing that specific company — well-drafted carve-outs usually address this explicitly rather than leaving it to interpretation.

Drafting It Carefully

A passive investment carve-out is a narrow exception to an otherwise broad restriction, which means loose drafting on either side creates real risk. A carve-out written too broadly can swallow the non-compete's protection entirely; one written too narrowly can leave a seller in technical breach over an investment nobody involved in the deal actually cares about. Getting the specific thresholds, conditions, and disclosure requirements right — rather than borrowing generic template language — is worth the attention it takes.

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