The permanent waiver of non-competition: legal scope after a recent case

The article, written by Fabio Virzi in ElDerecho.com, addresses one of the most complex issues of contemporary corporate law: the permanent waiver of the duty not to compete that companies may grant to their directors, and the limits that the law imposes on such authorisation.

The analysis is based on the principle of loyalty that governs the performance of the office of director, enshrined in articles 227 and 229 of the LSC, according to which the director must always act in the best interests of the company, avoiding any conflict between his personal and corporate interests. Within this framework, the prohibition of competition is a direct manifestation of this duty of loyalty, and can only be lifted by means of an express dispensation agreed by the general meeting, with full knowledge of the risks involved.

Virzi recalls that article 230.3 of the LSC allows a permanent waiver of the duty not to compete to be granted, but under very strict conditions: it is only valid if no damage to the company can be expected or if the possible damage is offset by the benefits derived from the authorisation. In addition, the dispensation must be expressly approved by the general meeting, with a reinforced majority and excluding the vote of the director concerned.

The ECIJA partner takes as a starting point Judgment 523/2024 of the Provincial Court of A Coruña, which reviews a paradigmatic case on the application of this figure. In the case analysed, a director had received years ago a general authorisation to carry out activities concurrent with the company's corporate purpose. However, years later, his actions - by diverting a strategic client to his own company - caused significant economic damage to the company.

While Commercial Court No. 1 of A Coruña considered that the authorisation did not cover harmful conduct and declared the administrator liable for breach of his duty of loyalty, the Provincial Court adopted a different approach: it interpreted that the general dispensation remained fully valid as long as it was not revoked, even if subsequent damage occurred.

Virzi describes this approach as "controversial and excessively permissive", as it disassociates the waiver from control over its actual effects. In his analysis, he argues that the meaning of article 230.3 LSC obliges us to understand that the authorisation to compete is permanently conditional on the absence of harm and can be revoked at any time if the risk of harm becomes relevant. Otherwise, he warns, "the duty of loyalty would be emptied of content and the fiduciary balance that protects the corporate interest would be distorted".

The ECIJA partner also cites the doctrine and minor case law (Provincial Courts of Valencia, Balearic Islands, Madrid and Zaragoza) which coincide in considering that the waiver is only effective while the conditions of harmlessness or compensation of the damage subsist. Even the second paragraph of Article 230.3 of the LSC reinforces this interpretation by providing that, at the request of any shareholder, the shareholders' meeting can agree to the dismissal of the director if the risk of harm becomes relevant.

The author concludes that the permanent dispensation must be understood as an exceptional and supervised figure, conceived to allow occasional compatibilities without undermining fiduciary loyalty. "Authorisation to compete cannot be transformed into a shield for disloyalty", Virzi points out, "but rather into a considered manifestation of trust, always subject to the social interest and transparency in management".

Finally, the article stresses that the recent disparity of judicial criteria reinforces the need for the Supreme Court to intervene in order to unify doctrine on this matter. In Virzi's opinion, "future jurisprudence should confirm that permanent dispensation is neither absolute nor irrevocable: it is a conditional, revocable permit subject to constant control".

Read the full article in El Derecho.com here.