01 What is a board member’s non-compete obligation?
Under Article 211 of the Commercial Companies Code, a management board member of a limited liability company may not, without the company’s consent:
- engage in competing business,
- be a partner in a competing civil-law or partnership company,
- hold a position on the governing bodies of competing capital companies,
- be a shareholder in a competing limited liability company if they hold at least 10% of the shares or the right to appoint a board member.
§ The purpose of this restriction is to protect the company against conflicts of interest and actions that could harm its market position. //
02 How to obtain consent for competing activity
A board member who wishes to engage in competing activity or hold a position in the bodies of a competing company must obtain consent: in a single-shareholder company, from the sole shareholder; in a multi-shareholder company, from the shareholders’ meeting.
The consent should be given in the form of a resolution. It is worth remembering that it may relate to specific activity rather than being a general release from the non-compete obligation.
03 Consequences of breaching the non-compete obligation
A board member who breaches the non-compete obligation may face serious consequences, including:
- Liability in damages – the company may claim compensation if the competing activity caused it a loss.
- Removal from the management board – a breach of the prohibition may be grounds for removal.
- Criminal or civil liability – in extreme cases, for example the disclosure of trade secrets, a board member may be liable under other provisions of law.
04 How to avoid legal problems
- Check the company’s articles of association – some companies modify the non-compete rules in their articles.
- If in doubt, obtain consent – it is better to secure your actions formally than to risk the consequences.
- Consider signing a non-compete agreement – a well-drafted agreement can protect both the company and the board member.