The Commercial Companies Code prohibits members of the management board of a company from undertaking activity competitive with the company. This ban is intended to protect the economic interests of the company. But what can a company do if the ban is violated?
What is the prohibition of competition?
The prohibition of competition applies to the members of the management board of a Polish limited-liability company (Commercial Companies Code Art. 211) or joint-stock company (Art. 380).
A member of the management board may not pursue interests competitive with the company, or participate in a competing company or partnership as a partner or a member of a corporate board, or participate in any other competing legal person as a member of its authorities. This prohibition also applies to involvement in a competing company when the management board member holds 10% or more of the shares in the competing company or is entitled to appoint one or more members of its management board.
Competitive activity is thus understood broadly, and it is not only prohibited to pursue competitive activity, but also merely to participate in a competing company or partnership.
As the Supreme Court of Poland held in its judgment of 24 July 2014 (Case II CSK 627/13): “A competitive interest for purposes of Art. 211 §1 of the Commercial Companies Code includes not only performance of work or provision of services for an entity conducting competing activity, but also behaviour of a management board member that may unfavourably impact the financial situation of the company—facilitating the conduct of business by such an entity, advising, supplying goods, granting credit, or sharing information about the company’s contracting parties or production methods, and thus taking actions in favour of another entity conducting competitive activity. Such a situation thus also occurs when a member of the management board concludes an agreement with such an entity to perform services that have partially already been performed and are partially being performed by the company the member represents, generating unfavourable financial consequences for the company.”
However, the company may consent to the conduct of competing activity. The ban on competition is thus not mandatorily binding, and a management board member may be released from the ban (Art. 211 §2 and 380 §2). Unless otherwise provided in the articles of association, such consent is to be granted by the body authorised to appoint the management board.
Liability of management board members for violation of ban on competition
A company has several legal instruments at its disposal to protect against the consequences of violation of this prohibition of competition. The most important of these include:
- Suspension of the management board member
- Removal of the management board member
- Claim to exclude from the company a management board member who is also a shareholder (only in the case of a limited-liability company)
- Claim for redress of injury to the company
- Criminal responsibility.
The fundamental instruments for protection of the company’s economic interests are suspension or removal of the management board member (Art. 203 or 370). In a limited-liability company, a management board member who is also a shareholder can be excluded from the company (Art. 266). The shares of the excluded shareholder must be taken over by the remaining shareholders or third parties.
A company that has suffered an injury as a result of actions by a management board member may also demand redress of the injury under Art. 293 or 483 of the Commercial Companies Code. In litigation practice, we often encounter the situation where violation of the prohibition on competition carries consequences in the form of damages. In such situation, the most effective measure may be to file suit for redress of the loss to the company.
The company may file suit for damages within one year after discovery of the act causing the injury, i.e. the violation of the prohibition on competition. After a year has passed, any shareholder may also file suit for redress of the loss to the company. It should be borne in mind that according to the Supreme Court, the purpose of a claim under Art. 295 §1 or 486 §1 is not to protect the interests of the shareholder, but to protect the interests of the company, and thus at trial the injury to the company must be proved (Supreme Court judgment of 24 July 2014, Case II CSK 627/13).
In practice this may present certain difficulties, particularly of an evidentiary nature. At trial the company must demonstrate the loss it suffered in connection with the competing activity by the management board member, a causal connection between the competing activity and the loss, and amount of the loss. It should be borne in mind that under Polish law, consequential damages, involving anticipated, achievable but uncertain benefits, cannot be recovered. It should be expected that when establishing the grounds for the management board member’s liability in damages, the court will need to seek the assistance of a court-appointed expert with specialised knowledge in accounting or other relevant fields. It should also be borne in mind that if the claim is found to be unwarranted, and the court finds that in filing the claim the plaintiff acted in bad faith or displayed gross negligence, the plaintiff will be required to redress the loss suffered by the defendant.
Finally, a management board member may face criminal responsibility (Art. 296 or 487 of the Commercial Companies Code) if the company suffers a significant material loss.
Violation of the prohibition of competition applies to a currently serving member of the management board of a company. The company may consent (e.g. in the employment contract or managerial contract) to involvement in competing activity by a current member of the management board.
The company has its own legal interest in seeking judicial protection if a member of the management board has violated the ban on competition. Both the company and any shareholder have standing to seek a judgment awarding damages compensating for the detriment to the company’s finances. In this manner, protection of the company’s interests also protects the interests of all of its shareholders.
Marta Kozłowska, Jan Ciećwierz, Dispute Resolution & Arbitration practice, Wardyński & Partners