In a previous article we dealt with the provisions of the law regarding the treatment of cases of conflict of interests of the members of the Board of Directors with the SA (BoD Vs SA: The Conflict of Interests Between them). We were concerned, in particular, with the fiduciary duty of the members of the Board of Directors towards the SA. In this context we find the obligation to promote the interests of the company against the own interests (: obligation to act). In this article we will be concerned with another aspect of it (obligation to not act): the obligation to omit making competitive acts.
Competitive acts
The conflict of interests of the members of the Board of Directors with that of the SA can also appear in the form of the former conducting competitive acts. In this context, the legislator introduced a specific, relevant, prohibition. This is the obligation to omit competition (article 98 of law 4548/2018). The latter also stems from the fiduciary duty. The case law treats it as the main aspect of this obligation (ind. 797/2010 Supreme Court).
The legislation
Article 98§1 of Law 4548/2018 provides: “It is prohibited for the members of the board of directors who participate in any way in the management of the company, as well as for its directors, to act, without the permission of the General Assembly or the relevant provision of the articles of association, for their own account or on behalf of third parties, transactions that fall under the scopes of the company, as well as to participate as partners or as sole shareholders in companies that pursue such objects”.
This legislation seems perfectly justified. It is enough to consider the scope and type of information available to those who exercise the management of the company. This is completely confidential information that is linked, in the end, to the attempt of the SA to prevail over its competitors.
But who are the people who have access to the above information?
Who is affected by the non-compete?
The non-compete concerns any person who participates in any way in the management of the SA. This means that this person can be in a relationship of a “structural” nature with the legal entity. That is, to be on the board of directors. After their election, for example, as a member. Alternatively: after their direct appointment by a shareholder (based on a relevant statutory regulation) or their temporary appointment (: based on a court decision). The non-compete, however, applies equally – according to the letter of the law – to the directors – that is, the substitute bodies of the Board. In fact, the specific prohibition does not differ in the case of a single-member administrative body. Subject to, of course, the non-coincidence in the same person of the qualities of the director and the sole shareholder (in the case of the single-member SA).
A debate, however, has started as to whether the ban covers only the executives of the SA or extends to the non-executives as well. In the prevailing (and, we estimate, correct) view, this prohibition applies indiscriminately to both the executives and non-executives of the SA. This is because the law does not differentiate the extent of the latter’s fiduciary duty towards the SA. It is also argued that this prohibition also applies to the liquidators of the SA, to whom the provisions for management are applied (article 167 par. 2 Law 4548/2018).
Which acts are competitive?
Article 98 of law 4548/2018 expands the objective scope of the prohibition of competition in relation to the relevant article previously in force (: article 23 of law 2190/1920). However, the prohibition of competition still includes the performance of acts by the liable persons, which are under the company’s statutory objectives. Also, the participation of the liable persons as partners in personal companies that pursue the above objectives. Furthermore, the new provision explicitly prohibits such persons from participating as sole shareholders or as partners in companies pursuing the same objectives as the SA. In this way, the ambiguities regarding the indicative or exclusive enumeration of the previous provision and the inclusion (or not) of other corporate types in the provision of article 23 of law 2190/1920 were addressed.
At the same time, according to the established position of the jurisprudence “… competitive acts are considered those that are similar to those that fall within the objectives of the company. Thus, the competitive activity includes the direct competition with the establishment of a competitive enterprise, but also the indirect one, with the participation in a competitive enterprise “(797/2010 Supreme Court).
Corporate objectives mean (: as reasonably expected), those provided by the articles of association. However, the real financial activity of the company proves to be of major importance. This activity includes both the current activities of the SA and the future ones. That is, those that are likely (much more: expected) to be practiced even in a different, related, market.
The lifting of the ban
The statutory provision for the lifting of the ban
The possibility of the articles of association of the company entailing a provision for the lift of the prohibition to act competitively was not expressly provided for in the pre-existing law. It therefore seemed doubtful whether the general lifting of the ban through a provision of the statutes was lawful. That is, whether the granting of a general permit was legal – without it being linked to specific persons and / or acts. The voices of the minority were in favor of this possibility. Opponents, however, held back, expressing well-founded fears of such a possibility. They argued, in particular, that the ex ante general statutory exemption constituted a source of jeopardy of the pursuit of the corporate objectives. Liable persons this way can be in a constant conflict of interests with the SA. A conflict that may pose internal risks to the SA and to its operation for the pursuit of its own interests.
However, Article 98 §1 of Law 4548/2018 now explicitly provides for the possibility of statutory lifting of the prohibition of competition. The legislator with this provision seems to show confidence in the founders and shareholders of the SA and extends the statutory arrangements that they can make. The legislator accepts (and rightly so) that it is able to understand the disadvantages as well as the risks of such arrangements.
Statutory provisions of this content may be included in the articles of association from the establishment of the company. However, it is also possible to add them afterwards – after a relevant amendment. This amendment obviously requires a decision of the General Assembly, which is taken by a simple quorum and majority. An exception to this decision may be made by the articles of association. In this case, an requirement for an increased quorum and majority on this issue can be provided for.
The permission of the General Assembly
A different way to legitimize the conduct of unauthorized competitive acts is the permission of the General Assembly. Like the act of appointment of the member of the Board of Directors, the said permission of the General Assembly is characterized as an act of an organic nature. Acceptance of this license by the one affected is not required.
This permission can be solely granted by the General Assembly. It is not transferable. The General Assembly, therefore, as the sole competent body, has the right to decide on this permission by a simple quorum and majority. Including, in fact, the vote of the interested party, if they happen to also be a shareholder. This shareholder is not deprived of the right to vote. The relevant decision of the General Assembly is subject (like any other) to a review for unfairness. In any case: the articles of association can call for percentages higher than the simple quorum and majority.
The decision of the General Assembly to grant the above permission must, in addition, be explicit and specific. Permission that (can be argued that) is presumed or that is implicitly inferred, is not enough. As regards its content, this permission may include specific acts or be of a general nature. It must specify the duration of exercise of the permitted competitive acts or that the permission is provided for an indefinite period. It may also be granted subject to revocation. The content of this decision is based on the avoidance of risks that may arise. Therefore, the decision of the General Assembly (as a condition for the legal exercise of competitive acts) has an advantage over the corresponding statutory authorization. The latter cannot weigh the specific risks of the case that will arise in each case, given its (necessary) generalization.
The permission of the General Assembly should be granted before the conduct of the competitive acts. Any ex-post authorization constitutes, in the prevailing view, a waiver of any claims which may arise (Article 98).
The legal consequences of the relevant infringement
The legal consequences of any violation of the prohibition of conducting competitive acts are provided in article 98§2 of law 4548/2018. The SA as the beneficiary of the claims is entitled to choose between: (a) compensation, (b) to substitute the debtor in claiming any financial gain and (c) the return or assignment of the claim of the debtor. At the same time, it maintains (based on what is generally provided for) additional claims. Among them: the claim for the cessation and omission in the future of the competitive acts by the liable party, the right of revocation of the liable member of the Board of Directors or the right to terminate the contract of the offender for a great reason – when the liable person is contractually associated with the SA. It is noted that the exercise of prohibited competitive acts, as a conflict of interest between the Board of Directors and the SA may lead to a judicial appointment of an interim administration (69 Civil Code). It may even be required.
The case of the crime of violation of the fiduciary duty (390 Penal Code) should, in any case, not be excluded.
In particular (regarding the civil claims of the SA):
(a) Regarding the claim for compensation
The basis of the claim for compensation is on the one hand the provision of article 98 §2, on the other hand the provisions for torts. In order for a claim for compensation to be created, a number of conditions must be met. Among them, the legal reason for liability and the other conditions of the law of torts. Specifically: the existence of damages and the causal link between the statutory liability and the damage caused. The company suffers a loss in the cases where due to the competitive behavior of the member of the Board of Directors or Director, it lost a business opportunity which would otherwise be undertaken by it. Or, similarly, in cases where due to the above behavior it had to incur expenses and reduce its assets or increase its liabilities. The person under the non-compete is, of course, liable for the compensation, while the compensation they are required to pay must compensate the actual loss of the SA.
However, it is important to point out the extent of the (sometimes insurmountable) difficulty we encounter in practice in accurately determining the actual damage suffered by the SA. Also, for the connection of the damage with the prohibited competitive act (: causal link).
(b) Regarding the right of financial substitution of the SA in the position of the liable party
As mentioned above, the difficulties of proving the causal link with the amount of damage caused are significant. This problem is tackled, in part, through the exercise of the other rights of the company recognized by article 98 §2. Such a right is the right of substitution. On the basis of this right, the SA is entitled to claim the return of the respective net benefit obtained by the debtor by violating the obligation not to conduct competitive acts. In other words, it is considered that the transactions performed on behalf of the debtor took place on behalf of the company.
Through the exercise of this right, the SA does not enter into the contractual relations of the debtor with their counterparties and the validity of these contracts is not affected. On the contrary, the debtor is obliged to reimburse all the benefits received after deducting the expenses incurred.
(c) Regarding the claim of return or assignment of the debtor’s remuneration claim to the SA
The obligor may, of course, carry out competing transactions not on their own account but on behalf of third parties. In this case, the SA reserves the right to claim either the fee received by the debtor for the mediation or the assignment of the relevant claim from the third party.
The concept of the fee must be interpreted broadly. Included in this is any property benefit that the debtor derives from their illegal behaviour. The property benefits of the obligor may derive either from a contractual relationship (between them and the third party) or from an organic relationship. In the latter category falls the case of the debtor particilating in the Board of Directors of another company that pursues the same purposes as the adversely affected SA. So, in this case, the debtor must pay in addition to any dividends, fees, etc. received by them as a member of the Board of Directors, any other benefits they obtained (eg the right to free distribution of shares or the right of option to acquire shares-stock options).
The duration for the obligation to omit competition
According to the settled position of the case law “… The obligation to omit competition ceases to be valid in any way upon termination of the capacity of consultant, who participates in the management of the SA or as its director…”. However, as it is accepted, it becomes possible to extend the obligation even after the termination of the above status or the departure of the obligor from the company, with an explicit contractual obligation (post-contractual non-compete clause). The latter is in principle valid (797/2010 Supreme Court). The validity of the prohibition clause, however, depends, as the case-law accepts, “… on its validity, its extent, the prohibited professional activity and the compensation to which the company is entitled if the obligor disregards their contractual obligation of non- compete…” (Indicatively 5131/2011 Court of Appeal of Athens, 797/2010 Supreme Court).
Limitation period
Finally, Article 98§3 provides for the limitation period of the above claims. The limitation period reserved for these claims is short. It is provided, in particular, that the claims described above expire only one (1) year after their announcement at a meeting of the Board of Directors or their notification to the company. Therefore, the action of the SA to deal with such behaviours and be compensated for the damages suffered must be immediate. In any case, the expiration of these claims occurs five (5) years after the realization of the prohibited act.
Participation in the Board of Directors of a Societe Anonyme is not without responsibilities. Not without restrictions. One of the most important amongst them: the non-compete obligation.
A possible breach of the relevant non-compete creates significant (and often unproven) damage to the company. Of course, it also creates an obligation to restore it by the offender. Criminal liability (sometimes serious) should not be ruled out.
The relevant vigilance during the operation of the company is not enough. The relevant, precise and specific in content, statutory provisions become absolutely necessary.
More necessary, however, is the absolute compliance of the members of the Board with their relevant obligation.
The principles of Corporate Governance require it.
The law sets strict limits and threatened (civil and criminal) sanctions.
However: the omission of such actions to the detriment of the legal entity should be based on the ethics and conscience of the members of the Board.
In the absence of these, the members of the Board of Directors cannot have a place in the body.
Stavros Koumentakis
Managing Partner
P.S. A brief version of this article has been published in MAKEDONIA Newspaper (February 28, 2021).
Disclaimer: the information provided in this article is not (and is not intended to) constitute legal advice. Legal advice can only be offered by a competent attorney and after the latter takes into consideration all the relevant to your case data that you will provide them with. See here for more details.