Managing director caught red-handed

The managing director of a company that sold ammonia was also a shareholder. In addition, he had a company in Norway that also sold ammonia. He had the right to resell ammonia via his own company in Norway on the Danish company’s behalf.

He signed a managing director contract and a shareholder agreement, which prevented him from exercising competitive activities. Additionally, the shareholder agreement emphasized that competing activities involved the transport and trade of ammonia.

Despite these obligations, the managing director bought ammonia from the Danish company on 11 occasions and resold it via his Norwegian company. About half of the sales resulted in a profit. As a result, a disagreement began between the Danish company and the managing director regarding whether the profit should go to the Danish company or the managing director’s own company.

Profit did not belong to the managing director

Initially, the Danish Western High Court noted that the managing director was subject to a duty of loyalty and an obligation to act in the Danish company’s interests. Because the profit from the resale went to his own company, he had breached the shareholder agreement as well as the managing director contract.

He was unsuccessful in proving that the Danish company had accepted that profits from the resale of the ammonia could go to his own company. Among other things, this was due to the explanation given by the other shareholders in the Danish company and the non-competition clause in the shareholder agreement. It also played a role that the company had paid different expenses relating to the sale of ammonia to the managing director’s Norwegian company.

IUNO’s opinion

In this case, the company successfully proved that it never accepted profits could go to the managing directors’ own company, although there was no documentation in the case. However, the case shows just how important it is to clarify in writing what is agreed upon and accepted in connection with accepting competitive side-line activities.

IUNO recommends that companies are cautious when allowing managing directors or other employees to have competitive side-line activities. Should companies choose to accept such activities, a clear agreement should balance the expectations of each side from the outset. For example, what the company considers “competitive” and what is accepted in that connection should be clear. Ultimately, clear agreements can limit the risk of disputes if an employee breaches their obligations or if the company raises compensation claims.

[The Danish Western High Court in case BS-13690/2021 of 19 September 2022]