Non-compete covenants in M&A transactions

In a share purchase transaction, a substantial part of the price pays for items that are not on the balance sheet. Client base, reputation, team, supplier relationships and accumulated know-how form part of the value paid and can be quickly emptied if the seller reopens the same business the day after closing. The non-compete covenant exists to protect precisely that economic content, and its effectiveness depends on requirements that Brazilian practice has already outlined with reasonable clarity.

The legal basis

In the sale of a going concern, art. 1,147 of the Civil Code settles the matter directly, barring the seller from competing with the buyer for five years after the transfer, unless expressly authorized. In the sale of quotas or shares the situation differs, because the business remains with the company and what is transferred is the equity interest. The covenant not to compete becomes contractual, supported by private autonomy and the good faith duties of arts. 421 and 422 of the Civil Code, with the five-year period of art. 1,147 serving as a reasonableness benchmark by analogy.

That freedom is limited by free enterprise and free competition under art. 170 of the Constitution and by the right to pursue any work or profession under art. 5, XIII. Hence the invalidity of generic, perpetual or purposeless restrictions, which courts tend to set aside as amounting, in practice, to a prohibition on working.

Requirements for validity

The covenant holds when it cumulatively presents a defined term proportionate to the time needed for the buyer to consolidate its position over the acquired client base, a territorial scope consistent with the area where the business actually operates, a material definition of the restricted activity, a demonstrable legitimate interest and adequate consideration.

In M&A, consideration is usually embedded in the price, which dispenses with specific compensation to the seller. The position changes when the obligation is imposed on someone who receives no part of the price, such as an executive who stays with the company. There, the absence of separate consideration is one of the most frequent reasons why the covenant becomes unenforceable, and the usual solution is separate compensation in the employment agreement, in a consultancy agreement or in a standalone instrument.

The antitrust filter

The covenant is also reviewed by the Brazilian antitrust authority as an ancillary restraint to the transaction. CADE Summary Opinion 5/2009 recognizes non-compete covenants of up to five years linked to the protection of goodwill, treating longer periods as exceptional. Covenants exceeding that benchmark, reaching markets where the target did not operate or providing for automatic renewal have been restricted in merger clearance decisions, an approach upheld by the Federal Regional Court of the 1st Region in February 2026.

In structuring terms, this means the term, the territory and the material scope must be justifiable against the target’s actual operations rather than the buyer’s appetite. In notifiable transactions, excessive drafting may lead to a restriction in the clearance decision and, in extreme cases, to discussion of an antitrust violation under art. 36 of Law 12,529/2011.

Drafting in practice

The definition of competing activity should be descriptive and anchored in the business actually carried on, avoiding broad formulas such as any related activity. The territory must follow the operating area and the logic of the business, which may be municipal, regional, national or digital. Related parties should be named, covering affiliates, investment vehicles and, where justified, spouse and descendants, otherwise the obligation may be circumvented through a third party.

It is advisable to carve out passive financial investments in listed companies up to a small percentage, to start the term at closing rather than at signing, to align the period with any transition during which the seller remains in management, and to coordinate the covenant with the related non-solicitation and confidentiality obligations, which protect distinct interests and should not be confused with the prohibition on competing.

As to consequences, a non-compensatory penalty combined with damages preserves the buyer’s interest without limiting relief to indemnification. Specific performance is supported by art. 497 of the Code of Civil Procedure and allows preliminary injunctive relief, usually more effective than a later damages claim, particularly where the breach occurs shortly after closing. Where part of the price is variable, it is worth addressing the interaction between breach and earn-out, including withholding or set-off.

A closing note

The non-compete covenant is often treated as a boilerplate provision negotiated in the final hours of a deal. That is a methodological mistake. It forms part of how the price is built, because it defines what the buyer actually acquires, and it deserves the same care devoted to representations and warranties and to the indemnity regime.

This article is for general information only and does not constitute legal advice. For guidance on specific situations, please contact our team at contato@gotlibrocha.com.br.

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