Can a member of the management board of a limited liability company engage in competitive activities?
What is competitive activity?
We can define competitive activity as engaging in the business of offering to the same customers in the same territory goods or services with the same or similar qualities to those offered by another entrepreneur.
Competitive activities of a board member
As a general rule, a member of the management board of a limited liability company cannot conduct any activities competitive to the company. It is important that the competitive activities of a member of the management board are considered to be both the independent occupation of interests competitive to the company and participation in a competitive company. Engaging in competitive interests should be understood as carrying out business activities competitive to the company on one's own account, as well as any kind of consulting on any legal basis to entities engaged in competitive activities. Such consulting may be performed, for example, on the basis of an employment contract. It is understood that a board member does not have to receive a remuneration in order for his activities to be considered as engaging in competitive activities.
A board member may also not participate in a competing company, since such participation usually involves a presumption of such a board member's use and transfer of know-how and trade secrets that he is aware of due to his position. This means that a member of a company's management board cannot be:
· a partner in a competitive civil partnership;
· a partner in a competitive partnership (registered partnership, professional partnership, limited partnership and limited joint-stock partnership) – despite some doubts, it is assumed that this also applies to having the status of a partner not authorized to represent and conduct the affairs of the company, i.e., a limited partner of a limited partnership and a shareholder of a limited joint-stock partnership;
· a member of the company’s authorities (management board, supervisory board or auditors’ committee) of a competitive limited liability company, simple joint-stock company, joint-stock company and other legal entities;
· a shareholder in a competitive limited liability company, a simple joint-stock company or a joint-stock company, holding at least 10% of the shares of the company;
· a shareholder in a competitive limited liability company, simple joint-stock company or joint-stock company entitled to appoint at least one member of the management board of that company regardless of the number of shares held.
Obligation to obtain consent
However, there is an exception to the rule described above. The company may give prior consent to a member of the management board to engage in competitive activities. Unless the company's articles of association provide otherwise, consent to conduct competitive activities is granted by the company’s authorities to appoint the management, which in practice is most often the shareholders' meeting. Consent for a management board member to engage in competitive activities may also be expressed directly in the text of the articles of association.
Competitive activity of a shareholder of a limited liability company
The provisions of the Code of Commercial Companies. do not regulate the prohibition of shareholders in a limited liability company from conducting activities that are competitive with the company. Thus, partners in a company, as a rule, have the possibility to conduct activities competitive to the company.
However, the obligation to refrain from competitive activities applies, of course, to those shareholders who sit on the company’s management board.
In addition, it is possible to include provisions in the articles of association or in the shareholders' agreement extending the prohibition on competitive activities to the shareholders.