Prohibition of competition for partners of a company
It is frequent that in SMEs the partners are also employees of the company, this fact leads to them having access to the know-how of the company, as well as sensitive information, clients , suppliers, etc In many cases, there are situations in which the partner of a company carries out parallel actions in the market, and decides to establish himself, creating another company with the same corporate purpose, taking advantage of the knowledge and contacts acquired and behind the backs of the other partners.
At this point, the questions we have been asked numerous times are: Is there a legal prohibition of non-compete? Or is it possible to prohibit partners from carrying out activities that involve competition with the company?
To begin with, we must point out that there is no prohibition of competition in reference to partners in the legislation, quite the contrary, since article 38 of the Spanish Constitution establishes the freedom of business, therefore, the partners have no limitation to create other companies.
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This right has a caveat, and it occurs in the event that the partner who starts the new activity that supposes a competence for the company exercises the position of administrator or belongs to the body of administration, since based on what is established in the Consolidated Text of the Capital Companies Law (hereinafter, LSC), in this case we are facing a legal prohibition of not performing acts that involve competition with the company.
The prohibition of competition established by the legislator for administrators affects not only the equality or analogy of the activity, but also extends to activities analogous to the activity that constitutes the corporate purpose, so the scope of the prohibition is very broad. Due to this breadth, the doctrine has delimited the cases in which the prohibition of competition will apply. In this way, the doctrine takes into account the temporal and geographical scope of the administrator’s action to determine if we are facing an act of competition.
Focusing now on the possibility that partners can be prohibited from carrying out activities that involve competition with the company, it should be noted that there is no problem to agree between the partners themselves partners the prohibition of competition, since the partners have freedom of agreement between them. This leads us to ask ourselves how the prohibition of competition between partners should be carried out, finding two alternative ways, either by including the prohibition in the bylaws, or by means of a shareholder agreement.
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If the intention is that said prohibitions are registered in the Mercantile Registry, in accordance with the provisions of the General Directorate of Registries and Notaries (hereinafter, DGRN), they must be included in the statutes, in this way the partners (both present and future) are linked to the company, in addition to being enforceable against third parties. In addition, the prohibition must be carried out as an accessory benefit, since it affects both the operation and the structure of the company. In the event that the partners receive compensation due to this prohibition, it must also be specified whether or not the compliant partner is entitled to obtain compensation and the form of payment and amount thereof.
On the other hand, the DGRN has indicated that if the prohibition of competition to the partners is carried out through a parasocial agreement, said agreement cannot be registered in the Mercantile Registry, this is due to its own extra-corporate nature. Therefore, the shareholder agreements that include clauses prohibiting competition would only affect the partners who signed it, and not the future partners of the company, nor would they be enforceable against third parties.
The consequences of breaching the non-competition clause may even lead to the exclusion of the infringing partner, so that the rest of the partners make use of the right of exclusion established in the LSC . The aforementioned law contemplates, specifically in its article 351, that capital companies may include, with the consent of all their partners, in their bylaws the causes that will determine the exclusion. Being necessary for the exclusion the agreement of the General Meeting, leaving a record in the minutes of the favorable vote of the agreement. In the event that the shareholder whose exclusion is sought has a stake equal to or greater than 25% of the share capital, in addition to the aforementioned resolution of the General Meeting, a firm judicial resolution will be necessary, unless the shareholder does not agree with the agreed exclusion. The excluded partner has the right to receive the fair value of their shares or participations, in the absence of an agreement between the partner and the company on their value or on who should be in charge of valuing them, the person in charge will be an independent expert appointed by the commercial registrar.
In the case of limited liability companies, the LSC determines specific causes for exclusion, among which is the infringement by the managing partner of the prohibition of competition.
Other penalties can also be established for the partner, such as the obligation to indemnify for damages, or the loss of the right to receive dividends, among others.
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Alba Sacido
Member of the Commercial Law Department
12/09/2019
