What is the principle of loyalty and the non-compete obligation? Are they established by law, or do they require explicit regulation in a founding document or a shareholders’ agreement? And how can compliance with these principles be effectively ensured?
Introduction: Why is particularly loyalty crucial for the company’s stability?
The principle of loyalty ranks among the fundamental principles that guarantee the harmonious functioning of the company. It not only strengthens trust among shareholders but also protects the company from risks linked to potential conflicts of interest. In companies where close cooperation between shareholders is essential, it is critical that everyone respects agreed boundaries and avoids situations that could jeopardize the company’s interests.
Loyalty means that each shareholder acts in the best interest of the company, not merely their own. This includes supporting collective decisions and sharing information vital to the company’s development.
The principle of loyalty by shareholders
1. Compliance with the principle of collective interest:
Shareholders should always act in the best interest of the company, not just in their own interest. This involves transparent decision-making and a willingness to compromise.
For example, when voting on strategic issues, they should prefer the company’s long-term development over their personal interests and profit.
Ignoring this principle may lead to conflicts that undermine trust and stability.
2. Confidentiality obligation
Shareholders in limited liability companies are obliged to protect business secrets and must not disclose such information to third parties. This obligation protects the company against misuse of confidential information for the personal benefit of a shareholder or of third parties. For completeness, it should be noted that shareholders of joint stock companies, in contrast, do not have such obligation.
3. Obligation to maintain the company’s internal regulations:
Shareholders are obliged to comply with the company’s internal regulations. In practice, this involves the obligation to comply with the forming juridical acts and other internal regulations issued by the company’s respective body, provided the law allows such regulations, as well as decisions made by the company’s bodies. Failure to respect the above may lead to divisions and harm the company’s operations.
Non-compete obligation Legal framework and practical application
1. Legal regulation of non-compete obligation:
Czech law provides for the non-compete obligation only for members of elected bodies, i.e. executive directors, members of the board of directors, of the management board, and of supervisory bodies. In simple terms, this non-compete obligation covers the prohibition of engaging in business within a competing sector, participating in the management of competing companies, or participating in such companies as a shareholder with unlimited liability or as a controlling person.
The non-compete obligation may also extend to shareholders of a limited liability company if explicitly stated in the founding document or the shareholders’ agreement.
It is essential that the scope of this non-compete obligation is reasonable and clearly defined to avoid ambiguity in its application.
2. Scope of the non-compete obligation:
The scope should be precisely defined to clarify which activities qualify as competitive. For example, operating a similar business or participating in a competitive project.
An insufficiently defined scope may lead to disputes and ambiguities, especially when it is unclear whether a specific activity falls under competitive conduct.
3. Consequences of breaching the non-compete obligation:
Breaching the non-compete obligation may have serious consequences for shareholders of a limited liability company, primarily resulting in the obligation to compensate the company for any damage caused.
In serious cases, a limited liability company may initiate the exclusion of a shareholder who has breached the principle of loyalty or the non-compete obligation. This protects the company’s integrity and the trust of other shareholders.
Mechanisms to ensure compliance with the principle of loyalty and the non-compete obligation
1. Provisions in the founding document or the shareholders’ agreement:
Key rules on loyalty and the non-compete obligation should be embedded in the company’s founding documents and further detailed in the shareholders’ agreement.
These provisions should include clear definitions, penalties for breaches, and dispute resolution procedures. For example, stipulating financial penalties or conditions for buying out the breaching shareholder’s ownership interest or shares.
2. Monitoring and checks:
Companies should have in place mechanisms to monitor shareholders’ activities that may conflict with loyalty or non-compete rules (if such obligations of shareholders are stipulated in the founding documents).
This can involve regular reviews of shareholders’ business activities and the use of external auditors. Emphasizing preventive checks reduces the risk of conflicts.
Examples from practice
1. Breach of loyalty by a shareholder:
In one limited liability company, a shareholder secretly cooperated with a competing company and leaked the company’s business secrets, thus harming the company. After the discovery, the matter had to be resolved in court, which negatively affected relations within the company. This case shows the importance of early discovery and prevention
2. Successful implementation of non-compete rules:
A technology firm incorporated precise non-compete conditions for shareholders in its memorandum of association and shareholders’ agreement. This proactive approach prevented conflicts among shareholders. Clear rules also supported the company’s expansion into new markets.
3. Conflict prevention:
A manufacturing company regularly organized training sessions for its shareholders and members of the statutory body to ensure compliance with the principle of loyalty and the non-compete obligation. This approach helped maintain harmonious relations and strengthen teamwork.
Recommendations for practice
1. Clearly defined rules:
The founding document and the shareholders’ agreement should include detailed provisions on loyalty and non-compete obligations.
2. Regular updating of documents:
The founding documents and the shareholders’ agreement should be reviewed periodically to reflect the company’s current needs.
3. Transparent communication:
Open dialogue among shareholders minimizes the risk of conflicts and promotes trust.
4. Involvement of professionals:
Lawyers, auditors, and other professionals can assist in setting and monitoring rules that protect the company’s interests.
Conclusion
The principle of loyalty and the non-compete obligation among shareholders are essential for the company’s stability and long-term success. Clear rules, transparency, and conflict prevention create an environment that supports cooperation and growth. Building trust and respecting these principles significantly increases the likelihood of the company's successful growth.
At HAVEL & PARTNERS, we have extensive experience in setting up loyalty and non-compete rules. We are ready to help you protect your company’s interests and build harmonious relations among its shareholders.
