4 minute read
Discovering that a company director has established or become involved with a competing business can be extremely concerning.
Directors may have access to valuable information about customers, pricing, suppliers, employees and the company’s future plans. If that knowledge is used to benefit another business, the original company could suffer significant financial and reputational harm.
However, the existence of another business does not automatically establish wrongdoing. The circumstances surrounding the director’s involvement must be examined carefully.
Directors in Ireland owe important duties to the companies they serve.
Under the Companies Act 2014, a director must act in good faith in the interests of the company, act honestly and responsibly and avoid conflicts between their duties to the company and their personal interests.
A director must also refrain from using the company’s property, information or business opportunities for their own benefit, or for someone else’s benefit, unless this has been properly permitted.
Starting or assisting a competing business could potentially conflict with these obligations, particularly if the director:
Whether a breach has occurred will depend on what the director has done, what the company knew and whether the director’s activities had been disclosed or authorised.
The company’s governing documents and contractual arrangements can be particularly important.
A company constitution, shareholders’ agreement or director’s service agreement may contain provisions concerning conflicts of interest, confidential information, outside business interests and competition. There may also be restrictions dealing with the solicitation of customers or employees.
Board minutes and other company records may help establish whether the competing interest was disclosed and how it was treated by the company.
These documents should be considered together. The fact that a director is also a shareholder or employee can make the position more complicated because each role carries different rights and responsibilities.
A director may resign before launching or joining a competing business. However, resignation does not necessarily bring every relevant obligation to an end.
Contractual restrictions may continue to apply after the director’s departure. A former director may also remain restricted from exploiting confidential information, company property or business opportunities obtained through their previous position.
At the same time, not every restriction on future competition will necessarily be enforceable. Its effect will depend on how it was drafted and the circumstances in which it is being applied.
Suspected competing activity should be addressed promptly but carefully.
It may first be necessary to establish the extent of the director’s involvement, whether company information or opportunities have been used and whether the business has suffered any loss.
Depending on the circumstances, possible outcomes could include an agreement requiring the competing activity to stop, the return of company property, changes to the director’s role or a negotiated departure from the business.
Mediation or direct negotiation may provide a commercial resolution. In more serious cases, court proceedings may be considered to protect the company, prevent further harm or recover losses and gains resulting from a breach of duty. The Companies Act 2014 provides that a director who breaches certain duties may be required to account for gains made or indemnify the company for resulting loss.
The appropriate response will depend on factors such as the seriousness of the conduct, the urgency of the situation and the relationship between the directors and shareholders.
Disputes involving competing businesses can escalate quickly, particularly where the director concerned is also a significant shareholder.
Removing access to company systems, excluding someone from management or attempting to remove them as a director may have wider legal and commercial consequences. Public accusations could also damage the business and make a negotiated solution more difficult.
Obtaining legal advice at an early stage can help the company understand its position and decide on a proportionate response.
A director’s involvement in a competing business may place valuable customers, information and commercial opportunities at risk.
Augustus Cullen Law advises companies, directors and shareholders on complex commercial disputes, breaches of directors’ duties and disagreements concerning the ownership and management of businesses.
If you are concerned that a director has established or become involved with a competing business, Contact Us to discuss the circumstances with an experienced commercial disputes solicitor. Or visit Commercial Disputes to learn more about our services.
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