3 September 2020
Limited liability company – non-competition obligation of the Management Board MembersAll
Many foreign investors enter into joint-venture agreements with partners from other countries or with Polish entrepreneurs already active on the local market. Sometimes, instead, they establish their own 100% subsidiary and it is common that they choose a limited liability company, because it is a flexible and less expensive to manage in comparison to a joint-stock company. Here you may read my comments on the most important advantages which an LLC offers.
One of the very important matters in a limited liability company (LLC) is the non-competition of the Management Board Members and of the shareholders.
What does law say about the violation of the non-competition obligation ?
Under Polish law, the Management Board Member of a company has a statutory obligation to refrain from any activity which might be competitive towards the activity of the company. As a consequence, such a Member cannot manage, be a member of a supervisory board of, own shares in, work for or provide any consulting services to a competitor company or partnership or any other legal entity or an individual. All the more such a Member cannot run an individual enterprise or be a proxy in an enterprise which belongs to another person. Exceptionally, he/she can own no more than 10% shares in a capital company (LLC or joint-stock) but on the condition that he/she cannot appoint the management board members of such a company.
The non-competition prohibition is binding over the whole period when he/she holds the function in the Management Board and it expires immediately afterwards. The Company can release the Management Board Member from this obligation at any given time.
The statutory rule is that the Management Board Members are nominated by a resolution of the General Assembly of Shareholders. Consequently, it is the General Assembly who adopts a resolution on the release from the non-competition obligation.
The Articles of Association may, however, modify this rule and provide another procedure. For example each of the Management Board Members may be appointed directly by each shareholder. Rarely an external third party has a personal competence to nominate and revoke the Management Board Members.
What are the consequences for the disloyal Management Board Member ?
If a Management Board Member violates the non-competition obligation he does not lose automatically his/her position. However, he/she may normally be revoked by the General Assembly of Shareholders – regardless of the procedure of his/her appointment. Therefore, even if a shareholder is entitled to appoint and revoke a Member in case if this Member violates the non-competition clause the General Assembly is entitled to revoke him/her. Obviously it is important to underline that the resolution on revocation needs to get a required majority of votes.
A Management Board Member is responsible for damages caused to the Company through such a violation of the non-competition, but, in practice, the Company may encounter difficulties proving before the court that in fact it has indeed suffered damage (either actual damage of loss of profit). Only in relatively evident cases it will be simple. In many instances it will be time consuming and complicated.
How to protect the Company ?
Therefore, even if the Polish law provides for a general rule related to the non-competition by the Management Board Members, it is still crucial for the investors and the Company to conclude a good non-competition agreement with these persons or introduce a respective clause to the Articles of Association.
It should contain a precise description of the activity which will be deemed competitive and its geographical scope. The timeframe of such an obligation is also crucial. The clause may state that a Member will be bound by this prohibition not only over the period when he holds his function but also over e.g. 2 years afterwards. Preferably, it should also contain a contractual penalty clause, so, in case of breach it is easy and costly-efficient to enforce against the Management Board Members.
If such an agreement is accurately drafted and adjusted to the Companys situation, it will protect the Company very efficiently from any competive operations (whether fair or unfair). In my next article I elaborate more on the subject of the non-competition obligation of the shareholders in an LLC.
This article was originally published by me on Legalmondo.com – the international platform which unites reliable lawyers from different jurisdictions specialised in cross-border matters.
3 September 2020 | Agata Adamczyk LL.M
Agata Adamczyk LL.M
Legal CounselLimited liability company – non-competition obligation of the Management Board Members