Statutory non-compete

What it means

The statutory non-compete obligation is a restriction the Commercial Code imposes on directors of an s.r.o., board members of a joint-stock company, partners in a general partnership and certain others. They may not, in their own name or for their own account, do business in the company’s field of activity or broker the company’s business for others.

It also means a director may not sit on the statutory body of another company with a similar business or be a partner with unlimited liability in one. The aim is to stop someone who runs the company and has access to its information and customers from using that position against the company’s interests.

It must be distinguished from a non-compete clause in an employment contract, which concerns employees and applies after employment ends in return for compensation. The statutory prohibition for directors applies while they hold office, and the articles of association can widen or narrow it.

How it works in practice

When setting up a company with several shareholders, some of whom already operate in a related field, we consider whether to limit the non-compete in the articles. If a director is to continue their own trade in a similar field, it must be expressly permitted; otherwise they would be in breach from day one.

When a new director joins, we recommend checking which companies they are involved in and what trade licences they hold. Even an innocent position in another company with an overlapping field can formally breach the prohibition and later become a pretext for a dispute between shareholders.

The non-compete is closely linked to protecting trade secrets. Even after the prohibition ends with the office, a former director may not misuse the company’s confidential information. It is therefore worth agreeing contractual restrictions for the period after leaving office too.

What to watch out for

If the prohibition is breached, the company can require the director to hand over the benefit from the transaction or transfer the relevant rights to it, and claim damages. A breach is often also grounds for removal from office and a dispute with shareholders.

The prohibition relates to the activity the company actually carries on, not only what is registered. Companies, however, often register a very broad scope of business. Interpreting the prohibition can therefore lead to disputes, which are best clarified contractually in advance.