How to Determine the Non-compete Obligation of Company Shareholders
I. Overview of non-compete
There are two main types of non-compete obligations in our country's laws and practices. One is the obligation of fidelity and "non-compete" for the directors and senior managers of the company during their tenure; the other is the obligation of non-compete for specific workers who leave their jobs. There is no clear regulation on whether the shareholders and actual controllers of the company have relevant non-compete obligations.
"Non-compete" generally refers to the provisions of Article 148 of the Company Law, which states that directors and senior management personnel shall not use their positions to seek business opportunities belonging to the company for themselves or others without the consent of the shareholders' meeting or the shareholders' meeting, and operate the same business as the company they work for.
"Non-compete" generally refers to the provision in Article 24 (2) of the employment contract law, that is, after the termination or termination of the employment contract, a specific person will not be allowed to produce or operate congeneric products or engage in similar business with other employers who have a competitive relationship, or start their own business to produce or operate congeneric products or engage in similar business.
1.The directors and officers of the company have a duty of fidelity and a "non-compete" duty during their tenure
Article 148 of the Company Law stipulates that: Directors and senior managers shall not (5) without the consent of the shareholders' meeting or the general meeting of shareholders, take advantage of their positions to seek business opportunities belonging to the company for themselves or others, and operate the same kind of business as the company they work for by themselves or for others. The income obtained by directors and senior managers in violation of the provisions of the preceding paragraph shall belong to the company.
Article 216 (1) of the Company Law stipulates that senior management personnel refer to the company's managers, deputy managers, and financial officers, as well as the secretary of the board of directors of a listed company and other personnel as stipulated in the company's articles of association.
According to Article 148 of the Company Law, the subject of non-competition obligations is directors and senior managers, and the period of their non-competition obligations shall begin at the time of their appointment and end at the time of their resignation; the behavior is to take advantage of their positions and usurp business opportunities that should belong to the company; the consequence of the behavior is to return the income from violating the non-competition obligations to the company.
2.Non-compete obligations for specific workers who leave their jobs
Article 23, paragraph 2, of the employment contract law stipulates that: For workers who have a duty of confidentiality, the employer may agree on non-competition restrictions with the worker in the employment contract or non-disclosure agreement, and agree that after the termination or termination of the employment contract, the worker shall be given monthly economic compensation within the non-competition restriction period. If the worker violates the non-competition restriction agreement, he shall pay liquidated damages to the employer in accordance with the agreement.
Article 24 of the employment contract law stipulates that: The personnel subject to non-competition restrictions are limited to the employer's senior management, senior technical personnel and other personnel with confidentiality obligations. The scope, territory and duration of non-competition restrictions shall be agreed upon by the employer and the employee, and the agreement on non-competition restrictions shall not violate the provisions of laws and regulations.
After the termination or termination of the employment contract, the period of non-compete restriction for the personnel specified in the preceding paragraph to other employers who produce or operate congeneric products or engage in similar business with their own units, or to start their own business to produce or operate congeneric products or engage in similar business, shall not exceed two years.
Second, do the company's shareholders have a non-compete obligation?
1. Shareholders do not have a statutory non-compete obligation, and may be prohibited from engaging in similar business by agreement
No matter whether it is a limited liability company or a joint stock limited liability company, the shareholders are not prohibited from engaging in the same kind of business. In reality, it is common for a shareholder to establish multiple similar companies or operate similar businesses at the same time. If the controlling shareholder of a company is a natural person and a director or executive of the company, in the case of minority shareholders, the non-compete provisions of the company law can protect the rights and interests of minority shareholders.
If the controlling shareholder is a legal person shareholder or a controlling natural person shareholder, and the actual controller is not a director or executive of the company, it is necessary for small and medium shareholders to restrict the competitive behavior of the controlling shareholder or actual controller through articles of association or agreements to prevent competition or transfer of benefits from the same industry and damage the interests of shareholders.
In practice, shareholders can be prohibited from engaging in similar business by agreement.
First, create non-compete obligations for shareholders through the articles of association or shareholder agreement.
The articles of association or shareholder agreement create clauses for shareholders to prohibit non-compete obligations, clarify that shareholders shall not engage in similar competitive businesses, and stipulate appropriate liability for breach of contract and liability. It is worth noting that such clauses require the consent of each shareholder. If a shareholder opposes or abstains from the articles of association passed by the majority of the shareholders' meeting, the shareholder is not bound by the relevant provisions of the articles of association and is not subject to the obligation of non-compete.
That is to say, shareholders must express their acceptance of the non-compete clause in an express manner, otherwise, it will be invalid.
Second, the obligation of non-compete is stipulated through the equity transfer agreement.
The equity transfer agreement is the true intention of both parties. If it does not violate the mandatory provisions of relevant laws and regulations, it is legal and valid. It is worth noting that the equity transfer agreement does not apply the provisions of the "employment contract law" on non-competition restrictions. The period of non-competition restrictions agreed to exceed two years is still valid. The equity transfer price can be regarded as the market price of the transferred equity and the compensation for non-competition restrictions, and it is also valid without additional compensation for non-competition.
In addition, if a shareholder violates the non-competition prohibition, he shall claim to pay liquidated damages in accordance with the default clause of the equity transfer agreement, rather than the income from the violation of the non-competition obligation by senior managers as stipulated in the company law.
2.Shareholders who serve as directors and senior managers of a company are subject to non-compete obligations for directors and senior managers
There is no doubt that the directors and senior management of the company. Whether it is a shareholder or not, it has a non-compete obligation for directors and senior management. Although shareholders do not have a statutory non-compete obligation, if shareholders serve as directors and senior management of the company, they have a statutory non-compete obligation.
However, although the first paragraph of Article 216 of the Company Law provides a legislative definition of "senior management personnel", that is, "senior management personnel refer to the company's managers, deputy managers, and financial officers, as well as the secretary of the board of directors of a listed company and other personnel stipulated in the company's articles of association." However, in the operation of a company, if the governance mechanism is chaotic, managers are appointed and dismissed at will, and even without the appointment and removal procedures, if the company cannot prove that the "defendant" is a director or senior manager in the trial of the case, it is difficult to obtain the support of the court.
It should be pointed out that in judicial practice, the determination of senior management personnel adopts substantive standards. If the "defendant" is not officially appointed, but the company's general manager handles company affairs in the name of the company and enjoys salary and treatment, or the content of the position and work is similar to the important duties of senior management personnel, and the power of senior management personnel is performed, it will also be determined by the court to belong to senior management personnel.
3.Shareholders who have signed an employment contract with the company and have a confidentiality obligation may enter into a non-compete agreement to stipulate the non-compete obligation
The non-compete agreement is aimed at the workers with confidentiality obligations who are not allowed to work in other units that have a competitive relationship with the original employer within a certain period of time after the end of the labor relationship, or to start their own business to produce or operate congeneric products or engage in similar business. What is limited is the scope of the work field of the workers with confidentiality obligations after leaving.
When imposing non-compete restrictions on shareholders who have signed employment contracts with the company and have confidentiality obligations, the non-compete restriction period and economic compensation should be clarified. It is worth noting that although the law allows employers to agree on non-compete obligations with workers, it also makes mandatory provisions on the content of the non-compete obligations agreed upon by both parties, that is, the scope of personnel, the field of non-compete, and the limitation period to which the non-compete obligations apply are clearly limited by means of effective norms, and requires that the non-compete agreement shall not violate the provisions of laws and regulations, in order to protect the employer's trade secrets and maintain the fair competition market order, but also to prevent the improper use of the non-compete system by the employer from causing excessive damage to the worker's right to freedom of choice.
The person in charge of the Civil Division of the Supreme People's Court explained the distribution of compensation in the "Interpretation of the Supreme People's Court on Several Issues Concerning the Application of Law in the Trial of Labor Dispute Cases (IV) ": "There are two main contents of non-compete restrictions: first, the laborer shall fulfill the obligation of non-compete; second, the employer shall pay economic compensation.
The non-compete economic compensation cannot be included in the salary, and can only be given to the worker on a monthly basis within the non-compete period after the end of the labor relationship. "If the employer and the worker have agreed on the wage compensation that includes the non-compete compensation, the agreement is invalid.
III. Whether the actual controller should be liableNon-compete obligation?
According to the provisions of the Company Law, supervisors and actual controllers do not have the obligation to abide by the non-compete. Whether supervisors should apply the non-compete is debatable, but the actual controllers can play the role of "shadow directors". The identification of directors in our country adopts the method of delegation + registration. If the actual controllers do not abide by the non-compete, only the directors registered with the company registration authority will be bound by the non-compete, while the actual controllers of the company's management power do not have to obey the unfair result of the regulation.
Therefore, the author believes that if there is evidence to prove that the actual controller has played the role of a shadow director and played a decisive role in the company's business decisions, it should be regarded as a director with non-compete obligations. When it violates the non-compete provisions, the company can refer to Article 148 of the Company Law and related provisions to pursue the actual controller's legal responsibility for violating the non-compete.
IV. Determination of violation of non-compete obligations
Article 148 (1) (5) of the Company Law stipulates the non-compete obligation of directors and executives, that is, directors and senior managers shall not, without the consent of the shareholders' meeting or the general meeting of shareholders, take advantage of their positions to seek business opportunities belonging to the company for themselves or others, and operate the same business as the company they work for.
However, the provisions of the current company law on non-compete are too crude. From the other normative documents we found, only the "Opinions of the Higher People's Court of Jiangsu Province on Several Issues concerning the Trial of Cases Applicable to the Company Law (Trial) " (hereinafter referred to as the "Opinions") provide detailed provisions on the obligation of non-compete in the company law, and it has become invalid.
However, it may also be useful to refer to this provision to help understand the determination of a violation of Article 148 (1) (5) of the Company Law. Article 79: A company director or manager who commits any of the following acts shall be found to have violated the obligation to prohibit non-compete: (1) engaging in the same business activities as the company's business in his own name; (2) engaging in the same business activities as the company's business for others; (3) serving as a partner in other enterprises with the same business as the company; (4) embezzling business opportunities provided to the company by others; (5) using the company to create business opportunities for himself; (6) using the company's trademark rights and patent rights.
Copyright, proprietary technology, and trade secrets for the benefit of oneself or an enterprise in which oneself concurrently serves as a director or manager; (7) other acts that violate the obligation of non-compete.
In practice, the first step for the court to judge whether the defendant has a non-competition obligation; the second step is to determine whether there is a violation of the non-competition obligation; the third step is whether there is a causal damage result. To determine whether a shareholder has a non-competition obligation, as mentioned above, the judicial determination adopts a substantive standard. In addition, it should be noted that, in addition to the shareholders who are directors and senior managers themselves violating the duty of fidelity, directors and executives use their spouses, parents, children and other related persons to evade their obligations of fidelity, and the use of related persons to engage in non-competition obligations should also be regarded as the behavior of directors and executives.
To determine whether there is a violation of the obligation to prohibit non-compete, the same substantive standard is adopted to determine whether directors and senior management personnel take advantage of their positions to seek business opportunities belonging to the company they work for, or to operate the same kind of business as the company they work for. There are two prerequisites, one is to serve as a company director and senior management personnel and actually engage in management activities such as the company's business decisions, and the other is to carry out relevant activities without the consent of the shareholders' meeting.
Therefore, if a company wants to hold directors and senior managers accountable for violating the obligation of non-compete, it must not only prove that the infringer has the name of directors and senior managers, but also prove that directors and senior managers are engaged in business management decisions. Because if directors and senior managers do not participate in the company's business management and decision-making, they cannot access the company's core business, trade secrets and other information. Even if they carry out similar business, there is no conflict of interest and unfair competition, which does not constitute infringement on the company.
It is also important to note that if directors and senior management personnel have stopped actually performing the duties of directors and executives, and are no longer engaged in the management of directors and executives, they should require the company to promptly remove their directors and executives, and complete the registration procedures for industrial and commercial changes in a timely manner. Do not be a nominal director, so as to avoid the company or shareholders from settling accounts after autumn, collecting evidence, and pursuing their own legal responsibilities.
conclusion
The non-compete obligation stipulated in the Company Law only applies to company directors and senior managers during their tenure. If it is necessary to strengthen the protection of trade secrets and important industry information, non-compete should be restricted for those who leave their jobs. At the same time, citizens have the right to work and the right to choose a career. Without legal basis and agreement, directors and senior managers shall not be restricted from operating similar businesses after leaving their jobs.
For example, if the specific work done by the worker based on his own knowledge does not involve the company's trade secrets, or the company has not taken confidentiality measures for the so-called "trade secrets", the court will inevitably not support the claim for violation of the non-compete obligation.
About the Author
Lawyer Wang Qionghua
, Partner Lawyer
Secretary General, Copyright Law Professional Committee of Shenzhen Law Association
Secretary General of Zhiheng Intellectual Property Center, Deputy Director of Copyright Law Professional Committee
Areas of expertise:
intellectual property
Corporate compliance
Corporate legal advisor
Civil and commercial dispute resolution
Publication representative:
"Long'an Lawyers Interpretation of the Civil Code" Contract Compilation
"Internet Law Course"
"Evaluation on Typical Cases of People's Mediation in Futian District, Shenzhen"