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Parent Category: Business Legalities

Created on Saturday, 03 November 2012 19:55

Last Updated on Sunday, 10 March 2013 18:02

CEO's Ban on Competition

Generally, the law forbids managing directors from entering into competition with their own company – duty of loyalty. This especially relates to interesting business opportunities which are in the company’s line of business or even a competing company.

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What is my relationship to the company’s shareholders? Are they my bosses? Do I have to listen to them at all? Shouldn’t I only make make sure that the company’s goals are met?

Your relationship to the shareholders is a relationship of trust. This trust in you determines the general situation. Generally, you are expected to work for the benefit of the shareholders!
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Can you give me a list of the most common “no-no’s” in the everyday life of a CEO?

• You may not compete with your company (§88 AktG for AG, §112 HGB for oHG, §6 III 2 PartGG i.c.w. §112 II HGB).
• You may not take advantage of the company’s business chances for your own benefit, so-called “corporate opportunities“.
• Everything else is to be determined in the individual case as it all depends on the exact relationship, amount of trust granted, etc.

Okay, I am not to enter into competition, but what exactly does this mean? When does is it begin and end?

The director may not engage on his own account during his employment in business opportunities. It begins with the company’s founding (after notarizing the articles of association) and ends with the CEO permanently leaving the company.
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What about the ban on competition during the liquidation of the company? Can’t I start a new business of my own in exactly the same line as my previous employer’s business?

This ban continues to exist during liquidation of the company, but it not so strictly handled anymore. The protection against competition plays a role whenever your activities undermine the liquidator’s activities to wind down the company. If it turns out that you are virtually continuing the business by securing larger assignments over a longer period, then you must cease from doing so.
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Okay. How far does this ban go? Can I not be active in pursuing a sideline activity?

Nobody will complain about activities outside the company’s line of business as long as it does not conflict with your position as CEO of your company. Whether a conflict exists or not depends on the individual case. Ruling case law has worked out the following guidelines:

• You may not be in the management of another company pursing the same line of business.
• You may not be sales agent for a competing company.
• You may not purchase of a significant amount of share (with significant influence) in a competing company. The ban also covers any kind of workarounds e.g. via close relatives or family like spouse or children.
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I own and manage my own corporation. Will this ban also apply to me? It sounds silly that I may not enter into competition. The company has its own legal identity, so maybe it does make some sense.

This ban applies without a doubt for a manager not holding any shares. In the standing ruling of the BGH, a one-man GmbH is not subject to the rules on banning competition.
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All these bans and prohibitions… What are the consequences?

The company as well as other persons who have incurred damages are eligible for:

• cease and forebear (practically easily and quicklyto enforce, typically with a temporary injunction),
• reimbursement of damages,
• occasionally entering in the contract that was illegally closed by the CEO; next to that he will owe the company all benefits he received from competing,
• the company can fire the manager without notice – maybe even demand reimbursement of received payments,
• recall of the shares held by the director or exclusion from the company.
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Bingo! I’ve got an idea how to exempt me from the ban on competition! You mentioned that I can close contracts as I wish. So, I’ll agree with my shareholders that I get a lower salary and they relieve me by the contract of any liability. Hah! Now please you tell me, what do I have consider?

First of all, it all depends if you are also a minor / major shareholder or do not have any shares at all. This exemption is typically based on the articles of incorporation. Bottom line: Your idea sounds practical. However, the BFH still considers this as „verdeckte Gewinnausschüttung”. Therefore get legal advise before implementing anything of the kind!
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