DIRECTORS- WHEN TO COMPETE AND NOT TO COMPETE

A Hand Morgan & Owen Factsheet

Irrespective of the terms of contracts of employment, directors on the board of limited companies owe fiduciary duties to the company and its shareholders.
Where a director is contemplating leaving the employment of his existing employer therefore, he must be very careful when considering setting up in competition.  The steps or ‘permissible acts’ are quite limited. Although it would be possible to form an intention to leave employment at some time in the future and to discuss potential projects with family and friends, the following acts can no longer be considered safe, as acts which would not give rise to a breach of the duty of a director:

• identifying suitable premises for the new business and negotiating a lease and signing it;
• purchasing an off the shelf company;
• negotiating and agreeing terms of employment with a competing business;
• encouraging (or even failing to act to thwart) the recruitment of employees by a competitor;
• preparing the company for incorporation;
• contacting investment banks for support several months prior to the commencement of trading;
• contacting lawyers with details of the proposals.

It should also be remembered that in the appropriate circumstances, a senior employee could also owe fiduciary duties, irrespective of the terms of the contract of employment.

The message is clear, to avoid liability he or she must usually resign if any claim for injunctive relief and/or damages is to be avoided.

For further information contact Patrick Farrington on 01785 211411.

10 October 2008

The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. The law may have changed since this article was published.

Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances