Entering into non-competition agreements is extremely popular nowadays. However, not everyone knows that a board member of an LLC in Poland does not have to sign such an agreement at all in order to be bound by a non-compete with the company. This is because the prohibition of competition for members of the management board of an LLC in Poland derives directly from Article 211 of the Commercial Companies Code (CCC) and is a so-called statutory prohibition.
Non-competition – what can’t a board member of an LLC do?
It follows from the CCC that a board member of a limited liability company may not:
- engage in business that competes with the interests of “his” company, and
- participate in a competing company as:
- a partner in a partnership or civil partnership
- a member of a body of a capital company or other legal entity (e.g., a foundation or association)
- a person holding at least 10% of the shares or the right to appoint at least one board member in another company.
What does this mean in practice? A member of the board of a company that is a manufacturer of fruit sorting machines will not be able to act on the board of directors, hold 10% or more shares, or advise another company that also offers sorting machines for the fruit industry. He will also not be able to carry out such activities as part of a sole proprietorship (in Polish: jednoosobowa działalność gospodarcza), nor will he be able to train or support (including financially, such as through a loan) entities that offer such machines.
What, on the other hand, will he be able to do? He will be able to become a minority shareholder in such a competitive company (less than 10% of shares), or take a position on the board of directors of a company that deals with sorting machinery for the waste industry, for example. Without major problems, he will also be able to sit on the board of directors of a company that operates in a completely different market – for example, one that offers food products or cosmetics.
Competitive companies – companies within which a board member cannot act
There is no formal definition of a competitive company. However, it is considered to be companies that operate in the same market, offer the same products/services (or products/services that are substitutes for each other), reach the same groups of customers. In other words – competitive for our company will be such an entity that competes with our company for the market and its activities are not economically, organizationally or legally indifferent to our entity.
Competitive interest – what does it mean for a board member?
Engaging in competitive interest (and this is something a board member cannot do either) has a broad meaning. However, it is not explicitly defined in the law. Thus, a board member will not be able, for example, to conduct training for competitors on product sales, marketing methods, etc. – which information is connected with the business of the company on whose board he sits.
Dealing with competitive interests also undoubtedly means providing information to competitors about planned sales actions, marketing campaigns, price discounts, etc. in “our” company. In such cases, one could even consider the charge of committing an act of unfair competition (disclosure of business secrets) by such a board member.
Can a board member be released from a statutory non-compete?
Yes, he/she can – the statutory non-compete is not an obligation for the company. Exempting a board member from the ban is done by the body that is authorized to appoint him. Thus, most often it will be the shareholders’ meeting.
The CCC does not specify the form of consent to conduct competitive activities. Theoretically, therefore, it can also be a form of oral or tacit consent – while for evidentiary purposes it is worthwhile for the consent to be in writing or at least – documentary form. Especially since, as a rule, such consent is given by a collegial body – that is, the shareholders’ meeting.
What are the penalties for a board member for violating the statutory non-compete?
It should be remembered that actions of the board member that violate the non-compete remain valid. On the other hand, a board member may face two types of consequences for his anti-competitive action:
- he/she may be held liable for damages – if his/her action caused damage to the company (e.g., the company lost a client or did not win an order as a result of the board member’s actions);
- he/she may be dismissed from the board of the company to the detriment of which he/she acted. The contract (employment, managing contract, etc.) underlying his work for the company may also be terminated as a result.
Thus, any activity within a company other than the one on whose board of directors one sits – requires prior verification that one does not expose oneself to the charge of violating the statutory non-compete.
