Freedom to compete for former directors – unless there is an express contractual commitment

Freedom to compete for former directors – unless there is an express contractual commitment

by Claeys & Engels

Some Belgian case law ruled that a former director cannot exercise an activity that competes with the activity of the company of which he was a director. The courts often reasoned that a director was bound by an obligation called the “continuing duty of good faith”. On this basis, the obligation of loyalty to the company would persist even after the end of the mandate of the director. Violating this duty of good faith would give rise to a possible cessation of the detrimental competitive activity or to financial compensation. The Supreme Court recently overturned such a judgment of the Antwerp Court of Appeals. The Supreme Court thus made it clear that former directors, after the end of their mandate, can in principle perform competing activities.

1. Freedom to compete expressly decided by Belgian Supreme Court.

The Supreme Court decided on 25 June 2020 that a former director of a company is not subject to a post-contractual prohibition of competition on the basis of an obligation to perform the directorship in good faith. The Supreme Court sets aside the theory that a former director has an obligation of loyalty to the company even after the end of their mandate. The principle of good faith and loyalty that is imposed on company directors during their mandate ceases at the end of it. As a result, it is now clear that a former director may exercise an activity that competes with the activity of the company of which he was a director.

The Supreme Court’s reasoning is based on the principle of the freedom to exercise an economic activity.

Hence, the courts will normally protect free competition. The freedom to freely exercise activities after the termination of the mandate can however be restricted (a) by explicit agreement (see 2 below) or (b) by the laws on unfair competition (see 3 below).

2. Non-compete obligation explicitly incorporated in the management agreement

Because of the new case law, a former director may now exercise an activity that competes with the activity of the company of which he was a director. It might therefore be interesting to insert a clause in the agreement that explicitly prohibits a director to do so.

Although there is no specific regulatory framework on the form of non-compete clauses for directors in Belgium, case law clarifies that a non-compete clause can only valid when it is strictly formulated. Hence the non-compete obligation after the termination of the mandate must be:

• limited in time;
• limited in geographical scope;
• limited in to certain specified restricted activities;
• reasonable and proportional.

It can be interesting to include a (reasonable) penalty clause to sanction the breach of the non-competition clause.

If such clause would be broader in scope than what is legally permitted, a court can mitigate the terms of a non-compete clause to what is legally permissible as far as this possibility to mitigate falls within the scope of the parties’ common intention as expressed in the parties’ agreement.

3. Unfair competition

Notwithstanding that a director is free to exercise an activity that competes with the activity of the company of which he was a director, the former director may not commit acts of unfair competition which are prohibited by the laws on unfair competition.

It is in other words prohibited to commit any act contrary to fair market practices that damages or is likely to damage the professional interests of one or more companies. Also prohibited is to solicit or acquire customers/clients of another company when there are special or accompanying circumstances such as when it is performed massively or when it destabilizes the company.