Competition from former directors
Competition from former directors
The principle of loyalty prohibits directors from competing with the company of which they are directors. Since the shareholders entrust them with the management of their company, it can therefore be considered that the directors do everything necessary to optimize this management. But what happens when the director leaves the company?
No law
Nowhere is the principle of loyalty written in black and white. This principle derives from the principle of good faith execution enshrined in the Civil Code. It is not necessary (but perhaps appropriate) to record it separately in an agreement.
As this principle is very general, it is also very widely interpreted. It does not only concern direct competition (offering the same services as the company), but it also prohibits, for example, a director from acting as a director in a competing company. Even being a shareholder or employee of a competitor is a breach of this principle of loyalty.
At the end of the term of office
It is questionable whether this prohibition of competition continues to apply beyond the end of the mandate. The director knows the company inside out and can therefore be of great value to competitors.
A few years ago (13 October 2014), the Ghent Court of Appeal ruled that the prohibition of competition continues to apply. The case in question concerned the manager of a wine merchant who, after his (voluntary) departure, started as an independent wine merchant.
The judges considered this to be an infringement of the principle of loyalty. This may seem strange, since one would expect the principle of loyalty to cease to apply as soon as one leaves the business. However, the Court is of the opinion that it is generally accepted that the principle of good faith continues so that the non-competition obligation also extends beyond the termination of the mandate, but for a limited period of time (in this case six months after the judgment is served).
In another case submitted to the Antwerp Court of Appeal in 2017, the Court also concluded that the non-competition obligation continues to apply after the director's departure. The case in question was somewhat more complicated, but certainly no less humane.
A company/insurance broker J&J is established by Mr. A (50%) and couple B and C (each 25%). After a few years, B and C put their shares in a company (B&C) and B becomes B&C's permanent representative in J&J. A few more years later, J&J takes over all the shares of B&C, but B and C are interested in taking over the entire J&J business. After a few months of discussions, talks about this takeover are abruptly terminated, and A receives termination upon termination shortly afterwards. Several contracts are taken over by B&C.
The Antwerp Court of Appeal imposes a competition ban on the former director/manager for one year after the end of the mandate.
Court of Cassation
This ruling was recently overturned by the Court of Cassation. In its ruling of 25 June 2020, the Court of Cassation considers that the principle of freedom of enterprise takes precedence over the continued application of the principle of good faith. Freedom of enterprise is a basic principle that can only be restricted by law or by a special agreement. The continued application of the principle of good faith (and the resulting prohibition of competition) is not explicitly laid down in a law, so that a prohibition of competition can only be imposed by agreement.
An agreement
Good agreements make good friends: it therefore seems appropriate to agree, from the beginning of the mandate, on the modalities to be respected after a possible break-up. A non-competition clause must be balanced. For example, it should be limited in time and space and preferably specify from the outset the areas in which it applies.
Clauses that do not meet these conditions will be considered void and you will not be further ahead!