When employees leaves companies, it is often an issue whether or not they may compete with their former employers. This situation is frequently faced by minority shareholders who have been the victims of a corporate squeeze out. Often the business of the corporation is the only business that the shareholder knows.
Non-competition or confidentiality provisions contained in an employment or shareholder agreement may govern a shareholder’s ability to compete. However, even absent an agreement, a shareholder who has resigned as an employee, officer and director or has been squeezed out of management of the corporation who seeks to compete may find themselves having to defend against a claim that they have breached their fiduciary duty as a shareholder.
Certain Illinois courts as well as Federal courts applying Illinois law have held that it is a breach of fiduciary duty for a shareholder to compete with the corporation in which they own shares even if they are no longer participating in management of the corporation. Other Illinois courts have reached the opposite conclusion and determined that a shareholder who no longer has any ability to hinder, influence, or control the corporation no longer owes a fiduciary duty to the corporation and may compete.
The conflicting decisions created quite a bit of confusion until, in 2005, the Illinois legislature attempted to rectify this problem by enacting Section 7.90 of the Illinois Business Corporation Act. This Section provides that, unless otherwise provided by the corporation’s articles of incorporation, a shareholder may execute an irrevocable waiver of their right to vote their shares, to be a director of the corporation, and to directly or indirectly control corporate actions or the election or removal of any director or officer of the corporation. If a shareholder executes such a waiver, he or she will have no fiduciary duty to the corporation or any of the other shareholders arising out of his or her status as a shareholder. Section 7.90 does contain a statement providing that the statute shall not affect any other rights or obligations of the shareholder. It also contains a statement providing that the statute does not affect any claim of breach of fiduciary duty that arises prior to the effective date of the waiver.
Section 7.90 does, however, provide a shareholder who executes the waiver described above with protection against claims that they have breached their fiduciary duty as a shareholder by competing with the corporation after the effective date of the waiver.
The shareholder cannot be a director or officer at the time that the waiver is executed. Therefore, if the shareholder is an officer or director, he or she must resign prior to executing the waiver.
It is important to remember that even after executing a waiver, a shareholder’s ability to compete may be limited by agreements that the shareholder executed and that the shareholder’s ability to engage in certain competitive activities such as soliciting customers or using confidential information may also be limited by the Illinois Trade Secrets Act.
It is also important to remember that the waiver is irrevocable. Therefore, shareholders who execute the waiver will not be able to later change their minds and seek to vote their shares, serve as directors or officers, or otherwise participate in the management of the corporation.
Horowitz Law Offices represents shareholders and partners in all manner of disputes. You are welcome to contact us at (312) 787-5533 or firstname.lastname@example.org