Prohibition to perform competitive activity by a partner in an LLC

The limited liability company (LLC) is a favored kind of form to do merchant activities in Bulgaria. Thus, the matter of shareholder’s rights and obligations in an LLC is of particular interest in business life, as various aspects of it are at the core of many theoretical papers and a considerable amount of case law.

The question at hand is the shareholder’s obligation in LLC to restrain himself from any competitive activity, even after leaving the LLC, because this matter is of particular interest for people who are shareholders in multiple LLCs which have identical or similar activities.

Prohibition to perform competitive activity from a partner in an LLC

The Commercial Code does not explicitly prohibit the competitive activity of a partner in an LLC. Thus, in reality, such prohibition could be agreed upon by the partners in the company act. The non-compliance with this obligation could be punishable by a penalty or could be a reason to exclude the partner performing the competitive actions.

If the company act doesn’t prohibit the performance of competitive activity, the exercise of the competitive activity may be treated as an act against the interests of the company which could be a reason to exclude the partner. However, this is not a generally accepted principle and the specifics of the subject of the company’s activity must be taken into account in each specific case, as well as the exact actions of the partner and the exact facts and proof.

The current case law is unanimous that the participation of an LLC partner in multiple companies with a similar activity mustn’t be treated unambiguously as a competitive activity. It also isn’t an indisputable reason to exclude the partner from the company or claim a penalty if such was agreed in the company act. Assessments and conclusions are made for each case based on certain facts and proof, keeping in mind the essence of the company act’s prohibition.

Prohibition to perform competitive activity after leaving the LLC

The constitutional guarantee of people’s right to work and freely choose their profession and place of work is of principal value in this case. Thus, these rights couldn’t be limited by a contract. The Supreme Court of Cassation accepts in its current case law that the right to work is not an absolute right although it’s enshrined in the Constitution, because in reality, it is limited by a number of laws (including the Commercial Code).

For example, art. 41, line 2, art. 142, line 1, art. 237, line 4 from the Commercial Code regulates a temporary ban on competitive activity for certain people in order to store the trader’s interests when they have represented, managed, or controlled by contract or law.

Thus, the labor right of the partner who terminated his partnership in the LLC is not limited because he could freely perform it by means of a labor contract as a manager or partner in companies with a different activity. In any case, the prohibition to perform competitive activity from the departed partner couldn’t be introduced indefinitely.

Penalty for competitive activity performed by a partner in LLC

In addition, the Supreme Court of Cassation accepts that the penalty for the violation of the partner’s obligation not to perform the competitive action, agreed upon in the company act, is not void.

The Court concludes that given the freedom of bargaining the company has the legal right to protect its interests through a penalty in case of violation of the obligation not to perform the competitive activity, to keep the clients, the positions on the market, and the non-proliferation of production and trade secrets. The penalty’s aim in this case is to stop the partner or former partner to commit unfair acts which would harm the interests of the company, which is why the penalty does not contradict good manners.

Keeping in mind all of the above, the company act should include in detail, clearly, and accurately the obligation of the partner not to perform the competitive activity, given the specifics of the company’s activity, and also certain repercussions for the partner if he doesn’t comply.

This article is up to 18.07.2022 and aims to outline the legislation on the matter. The content set out in this article is not legal advice, and we advise the consumers not to make a commercial decision based solely on the information in it, without any qualified legal aid. For more information and assistance on legal matters about online trading you could contact us on the following e-mail: office@recht.bg.

Desislava Tsoneva