How far does loyalty go? Can a director compete with the company, during his mandate or after the termination thereof?

A director is expected to be “loyal” to the company in which he exercises his mandate. The duty of loyalty of directors[1] emanates from the general ‘good faith’ principle in contract law, which states that agreements must be executed in good faith.

It is accepted that this loyalty implies a non-competition obligation, which means that the director is not allowed to exercise activities during the term of his mandate that compete with the company’s (actual) business activities. He may not, for instance, set up a competing company, exercise a mandate or hold an operational position in a competing company, … This non-competition obligation applies even without an express agreement. However, it is possible to derogate from this non-competition principle by mutual agreement.

In line with the above, most of the legal doctrine and jurisprudence accept that this non-competition obligation ceases to exist with the termination of the mandate (whatever the reason or the time of this termination may be),

• unless otherwise agreed upon (for instance, by including a non-competition clause in the management agreement or the appointment decision, on the basis of which the non-competition obligation continues to exist up to a certain period after the termination of the mandate); and
• without prejudice to the always applicable prohibition of unfair/unlawful competition. This could, for instance, consist of the organized solicitation of customers or staff, by using confidential company information (such as customer or price lists) or deceit. Such practices are always prohibited.

By its judgement of 9 November 2017, the Antwerp Court of Appeal deviated, most surprisingly, from the general, well-established majority opinion regarding the termination of the non-competition obligation at the end of the mandate. Indeed, the Court ruled that in the concrete circumstances of this case, the former director was also bound to a post-contractual non-competition obligation, and this up to 12 months after the termination of his mandate, even without this being expressly agreed upon. So, the Court of Appeal accepted a certain ‘continuing of good faith/duty of loyalty’.

On 25 June 2020, the Supreme Court overturned this judgment of the Antwerp Court of Appeal. It motivated its decision by recalling and confirming the by majority accepted and above-mentioned principles, namely that:

• The freedom of competition (based on the general freedom of entrepreneurship) prevails, and can only be restricted by law or agreement.
• There is no legal non-competition obligation on the part of (former) company directors. But the law foresees a general obligation to execute agreements in good faith (also referring to the principle that agreements, in addition to their explicit content, also commit, depending on their nature, to all the consequences conferred upon them by the law, the fairness or the use of the contract).
• So, directors are expected to perform their agreement with the company, i.e. their mandate, in good faith. This implies an obligation of loyalty, which in turn implies, inter alia, a non-competition obligation. The company and the director may however deviate from this fundamental non-competition obligation by mutual agreement.
• The implicit non-competition obligation ceases at the end of the director’s mandate. The Supreme Court has ruled that a director’s obligation of loyalty does not imply a post-contractual non-competition obligation.
• It is still possible to agree otherwise, for instance by including a non-competition clause in the management agreement or the appointment decision, up to a given period of time after the termination of the director’s mandate.
• In any case, unfair/unlawful competition remains prohibited, both during and after the end of the mandate.

Therefore, a company that wants to make sure that a directors refrains from performing competitive activities after the termination of his or her mandate, should consider to expressly agree upon this, by including a clause in the management agreement, or, in the absence thereof, the appointment decision. Please refer to our previous blog post of 31 October 2019 “Validity conditions for non-competition clause in takeover agreements and mitigation powers of the court” by Kim Van Herck to learn more about the terms that a contractual non-competition obligation must meet (under penalty of possible mitigation by the court).

Within the specific scope of the acquisition of shares, the agreement can provide, for the same reason, a non-competition clause against the selling shareholder-director, in order to prevent competition after the closing of the acquisition. Please refer to our previous blog post of 14 April 2014 “Non-competition clause in acquisition agreements: a necessity?” by Matthias Jans addressing the absence of a non-competition obligation of shareholders after a transfer of shares.

In any case, we advise to include a contractual non-competition obligation in the management agreement or the appointement decision, also with regard to the period during which the director’s mandate is exercised. The principle of non-competition during the mandate is undisputed, but in the absence of a specific legal framework, the scope of this implicit non-competition obligation can still be questioned. The actual scope of this obligation can be contractually determined in concreto (e.g. geographical scope, prohibition to participate as a (non operationally active) investor-shareholder in a competing company, prohibition extended to director’s relatives or affiliated companies, prohibition to exercise activities that are not yet performed by the company but already foreseen in practice, etc.). Needless to say that this can only be done by taking into account de validity conditions of the non-competition clauses (please refer to our previous blog post of 31 October 2019 addressing this topic). Finally, a contractual provision also allows to link a flat-rate indemnity amount to a potential violation of the non-competition obligation, in order to prevent futur issues as to the provison of proof of the actual damage suffered.

Anneleen Steeno and Kim Van Herck, intui lawyers

anneleen.steeno@intui.be and kim.vanherck@intui.be

www.intui.be

[1]In our opinion, the principles set forth in this blog post, apply in a similar way to the permanent representative who is appointed to exercise the mandate on behalf and for the account of the director-legal entity. The CCA provides that the permanent representative must fulfill the same requirements as the director-legal entity and bears the same responsibility as if he were exercising the mandate on his own behalf and for his own account. For this reason, we believe it must be assumed that the permanent representative must equally carry out the duty of loyalty which underlays the implicit non-competition obligation.