Company Directors and Non-compete Agreements

06.05.2011

 

Contributed by Ozgun Law

April 26 2011

Subject of the partnership

Participation in other partnerships

Permission

Duration of consent

Subject of the partnership

In order for a transaction that is carried out by a member of a company's board of directors to breach non-compete provisions, it must relate to the subject of the partnership. The subject of the partnership is interpreted literally to mean the business activities carried out by the partnership, rather than those specified in the partnership agreement. However, the Commercial Code does not prohibit company directors from dealing in business activities which are not the subject of the partnership.

Article 335 of the code prohibits company directors from carrying out "commercial transactions" which are the subject of the partnership. Thus, directors can carry out transactions which are the subject of the partnership, but these cannot have a commercial nature. For the purpose of this prohibition, the term 'commercial transaction' is interpreted as a transaction carried out with a commercial intent, rather than a commercial transaction as specified in Article 3 of the code. Therefore, a company director can carry out a transaction that is the subject of the partnership in order to meet his or her individual needs.

Participation in other partnerships

Company directors may not participate as an unlimited liability partner in another partnership that operates within the same profession. The participation of company directors in an incorporated partnership in an unlimited company or as the active party in partnership in commendam is considered a breach of the non-compete obligation pursuant to Article 335 of the code. On the other hand, company directors can participate in a partnership in commendam which operates within the same profession as a silent party in an incorporated or limited partnership. This gives rise to the question of whether a company director can be a member of another partnership's board of directors. Although the law does not prohibit this explicitly, it is not possible since it would contravene Article 335 of the code, which imposes a duty of loyalty, which carries a more extensive liability. A company director's duty of loyalty is a superior concept that also covers non-compete obligations. In general, it states that directors are required to look after the interests of the partnership in all transactions (even if such interests conflict with their own personal interests). Thus, a company director cannot be a director of another limited partnership which operates in the same profession or a director of an unlimited partnership (even as a silent party).

Permission

A company director cannot be granted permission, either in the company's articles of association or later through a general assembly resolution, to carry out business within the same profession if this contravenes the non-compete agreement. However, if the transaction does not contravene the non-compete agreement, the general assembly may grant the director advance permission or give its consent once the transaction has been carried out. The general assembly's permission or consent can be explicit or implicit. If the consent is implicit, it must be possible to ascertain it beyond reasonable doubt from the general assembly resolution. Newly elected board members cannot benefit from consent granted to former members, unless this consent is stated as a general provision in the articles of association.

Duration of consent

Company & Commercial - Turkey

Author

Özgün Öztunç

If consent is granted through the addition of a provision to the articles of association, it is enforceable until this provision is amended. The nature of consent specified in the articles of association is abstract and general, and enforceable for every elected member. However, consent granted by the general assembly is a tangible and personal resolution for company directors. The general assembly may grant consent to some directors and abstain from granting it to others. If a timeframe is not specified in the general assembly resolution, the consent is enforceable for an indefinite period for directors who were in charge on the date of the resolution or for directors who were elected at the same general assembly. In other words, unless the members of the board of directors change, consent need not be requested at every ordinary general assembly as in the original application. On the other hand, the general assembly can pass a resolution for consent to release the changed or newly elected members from the legal prohibition stated in Article 335 of the code.