Have you breached the non-compete clause as an executive director or a member of a limited liability company?

Fundamental Changes to Non-Compete Clauses After the Amendment to the Business Corporations Act

(i) completely exclude it, meaning an executive director can concurrently engage in business in the exact same field or with the same commodities without needing any consent from the members,

(ii) extend it, and

(iii) narrow it.

However, if the non-compete clause were to be extended to apply to members, those members would have to consent to such an extension. The Business Corporations Act (BCA) does not specify the form of consent for the non-compete clause, but it is always advisable to make such a legal act in writing for the purpose of potential future evidence.

It must be added, however, that even a complete exclusion of the non-compete clause does not affect the duty to act with the due care of a prudent manager or to comply with the general rules on conflict of interest. Another fundamental change is that in the amended version of Section 199 of the BCA, the legislator has removed the one-month period in which members could express their disapproval of a notified competing activity.

The exclusion, extension, or narrowing of the non-compete clause can be established at the time of the company's formation, where this arrangement is reflected in the articles of association (or, in the case of an LLC with a single member, in the founder's deed), or it can be done for existing LLCs. All such changes to the articles of association are carried out in the form of a notarial deed.

If the articles of association of existing LLCs are not amended, the new legal regulation of the BCA will apply, and the executive director will be obliged to adhere to the competing activities listed in the law. However, it is no longer possible to cancel the non-compete clause with the mere consent of all members of the LLC, or by their failure to express disapproval, as was the case under the previous legislation until 31 December 2020.

Prohibited Activities

In relation to the non-compete clause, the articles of association may also stipulate that decisions on the scope and content of the non-compete clause will be entrusted to the General Meeting, or that the performance of a prohibited activity by an executive director will be conditional on the consent of the members or another body of the company.

As for the specific prohibitions listed in Section 199 of the BCA, the general rule is that an executive director:

a) may not engage in business within the company's scope of activity or business, either for their own benefit or for the benefit of other persons, nor may they broker the company's business for another;

In relation to the above, it is always necessary to assess the actual business activity. Therefore, if two competing companies, or rather their executive directors, conduct business activities that, for example, consist of the wholesale of agricultural products, but one company deals in the sale of grain and the other in the sale of sugar beet, this is not a breach of the non-compete clause.     

b) may not be a member of a governing body of another legal entity with a similar scope of activity or business, or a person in a similar position, unless it is part of a concern;

An executive director or member may thus be a member of a governing body or a person in a similar position in another enterprise of the same concern, even if it has the same or a similar scope of business (activity).

c) may not participate in the business of another business corporation as a partner with unlimited liability or as a controlling person of another person with the same or a similar scope of activity or business.

Finally, the provision in question precludes an executive director from being a partner in a general partnership or a general partner in a limited partnership.

Extension of the Non-Compete Clause

Although the Business Corporations Act, following its amendment, no longer explicitly regulates the possibility of extending the non-compete clause to members, we are of the opinion that with the consent of the members, this prohibition remains valid. By analogy, it can be inferred that when amending the articles of association in a way that affects the rights of members, the consent of the members concerned is always required.

Furthermore, when extending the prohibition, it is true that a decision of the General Meeting cannot apply this prohibition to persons other than members. However, it is not precluded to conclude a non-compete agreement with other persons. By agreement with an executive director, the non-compete clause can also be extended for a fixed period after the termination of the executive director's office.

Consequences of Breaching the Non-Compete Clause

At the moment a non-compete clause is breached, a significant risk arises, which consists of the possibility of claiming the surrender of the benefit from a transaction made in breach of the non-compete clause, or the transfer of the corresponding right to the company. Furthermore, in accordance with the provisions of the Civil Code, the company concerned may demand compensation for damages from the executive directors for the breach of a contractual duty, and last but not least, this breach does not affect potential consequences arising from criminal law.

The question remains whether it is possible to demand that a member who is breaching a non-compete clause cease their actions. A member cannot, without more, be said to be a representative of the company in the same way as an executive director, and therefore Section 432(1) of the Civil Code does not apply to them. However, we are of the opinion that the ability to demand the cessation of unlawful conduct is a general option for any injured party, and the law therefore does not need to explicitly establish this right.

As for the time limits for exercising these rights, the right to the surrender of the benefit or right obtained in breach of the non-compete clause must be asserted within three months from the date the company became aware of the breach, and no later than one year from the breach itself. After these periods have elapsed, the right to the surrender of the benefit or rights obtained by breaching the non-compete clause expires.

Conclusion

Therefore, if after 1 January 2021 a position as a member of a governing body or supervisory board is created which involves a breach of the non-compete clause as established by the Business Corporations Act, it is necessary to explicitly address this matter in the articles of association.

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