How works the managers rule of non-competition with the company? (in Spain)
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Prohibition of competence with the company by the managers, or in other words, prohibition of concurrence with the activities of the company, is laid down in article 230 of the Spanish Companies Act (LSC).
This obligation is established as a prohibition, but not an absolute prohibition, and in consequence, competition by a manager with the company can be allowed. Competition by the manager need to be approved by resolution of the shareholders’ general meeting. That means it is necessary that the shareholders approve the permission with abstention in the meeting by the manager, in case it was at the same time manager and shareholder of the company.
If a manager is competing with the company without prior approval (and taking into account that implicit approval is not accepted), any shareholder may ask to the judge where the company is registered, to remove the manager if the company is a S.L., or may propose such removal first to the general meeting in case of S.A. (if that proposition is not attended this shareholder shall go to the courts and apply for the judicial removal).
Due to the fact that authorization must be express, it is required to execute the agreement in the Minutes of the Shareholders’ General Meeting.
As we saw in “Prohibición de competencia por parte de los administradores y STS núm. 1166/2008 de 5 diciembre” (in Spanish), non-competition rule does not require an actual damage or any evidence of damage, because this mandate is established as a preventive rule.
This prohibition applies to both the same activities and similar or complementary activities of the company.
Finally, we should note that this prohibition is closely linked to the duty of loyalty regulated in article 226 LSC, the prohibition of taking advantage of company’s business opportunities regulated in article 228 LSC, and the obligation to communicate conflicts of interest regulated in article 229 LSC. One of the most important reasons for laying down this obligation of non-competition comes from the need to avoid behaviors contrary to the above-mentioned obligations, due to the possible conflict of interests between manager and company.