THE LOYALTY ОBLIGATION AND THE PROHIBITION OF COMPETITIVENESS AMONG THE PARTNERS IN LTDS

The rights and obligations of the partners in a limited liability company (LTD) is always an interesting and very controversial topic, both in theory and in case law and doctrine. Today it is impossible to imagine the economy without the existence of a limited liability company as the most preferred form for the implementation of commercial activity in Bulgaria.

The essence of the membership

Certain membership rights and obligations arise with the establishment of a limited liability company for the partners. In general, they can be divided into property and non-property such.

This statement will focus mainly on the obligation of loyalty and the right of access to company securities - one of the most discussed non-property obligations and rights of  the partners.

In practice, especially during times of a highly developed market economy, there’s an often misunderstanding of the obligation of loyalty which usually connects it with the non-performance of competition in the company's activity. It cannot be unequivocally shared that a competitive activity is any participation of a partner in several companies with a similar subject. Looking at the obligation through the prism of one of the basic principles of commercial law, namely free enterprise, the obligation of loyalty should be interpreted narrowly.

Court law is consistent with the assessment that the participation of a partner in several companies with a similar subject of activity should not be unambiguously understood as a competitive activity and is not an indisputable ground for his/hers exclusion from the company. The performance of specific actions that harm the interests of the company is a particular expression of this obligation such as:

• know-how sharing;
• unfair attraction of clients;
• damage to the company's reputation, etc.,

and those would be grounds for termination of the membership and the resulting claim for compensation by the company to the partner who committed the violation.

It is recommended that the company contract and internal documentation of the company have clearly defined rules, governing the obligations of the partners and which specific actions will be considered a breach of the obligation of loyalty, so that a manifestation of this breach can be sanctioned and proven convincingly, not the general spelling of the legal obligation of loyalty.

Right of the partners to access the company documents

The obligation for loyalty is closely related to one of the granted non-property rights to the partners, which is incorporated in Art. 123 of the Commercial Law and contains an obligation for the company to provide access to the partner to company documents. Such documents may be:

• commercial and employment contracts;
• financial documents;
• Accounting reports;
• trade books.

The content of this right includes the possibility for each partner to receive information at any time about the overall condition of the company. The obligation is not to provide original documentation or to send it to the partner, but to provide him or her with access to it.

The specifics of providing information to a partner can vary. It is often considered that the refusal of access to the company's shares in the presence of suspicious behavior by the partner constitutes a violation of his/hers right of access. There is no explicit provision in the law for the cases in which access to these documents may be denied, but nevertheless the company has other means of protection such as preparation and adoption by the general meeting of internal rules for access to information, in which the procedure is explicitly regulated, ie what information can be provided, the levels of access, the obligations for confidentiality, protection of trade secrets, etc. They can provide a procedure for exercising the right of access and control over the document flow.

Negotiating a penalty for performing a competitive activity

As there is no requirement for the partner not to compete, unlike the manager, it is possible for the parties to agree on a certain penalty in the presence of such actions. In accordance with the principles of law and freedom of contract, the company may protect its interests through a company contract or a separate agreement.

Recently, the issue of the validity of the agreed penalty clause was resolved by a decision of the Supreme Court of Cassation, which rightly defines it as a legally recognized opportunity to protect the Company, which aims to ensure customer retention, developed markets and confidentiality of production and trade secrets. Its security and sanctioning functions are intended to restrain the partner from unfair actions that would harm the interests of the company.

It is important to know!

The violation of the above-described property obligations of the partner in Ltd., as well as the obligation to assist in carrying out the company's activities and personal participation in company affairs and the obligation to implement the decisions of the General Meeting of the Partners, may have the consequence - the exclusion of the partner by decision of the General meeting and claiming penalties and indemnities.

A necessary precondition is a sent written warning for the exclusion of the partner. The excluded partner has the right to receive his company (liquidation) share, the equivalent of which also has different dimensions - from a balance share to a market one and should be explicitly regulated in the company contract.

The material was prepared by Murgova & Partners Law Firm. The company is a member of the Bulgarian Industrial Association and has significant experience in consulting online retailers