The right freely to exercise an economic activity, the obligation for loyalty and the prohibition of

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.

Nature of the membership

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

 This article will focus mainly on the obligation of loyalty and the right of access to company’s documents – some of the most discussed non-property obligations and rights of partners.

The practice, especially in the time of a highly developed market economy, often misunderstands the obligation of loyalty and connects it with the non-performance of a competitive activity of the company. The opinion that a competitive activity is any participation of the partner in several companies with a similar subject cannot be unequivocally shared. Looking at the obligation through the prism of one of the basic principles of commercial law, namely the free economic activity, the obligation of loyalty should be interpreted narrowly.

The case law is consistent with the assessment that the partner’s participation 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 exclusion from the company. As a specific expression of this obligation is considered the performance of specific actions that harm the interests of the company, such as:

• sharing know-how;
• unfair attraction of clients;
• damage to the good name of the company, etc.,

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

In this regard, it is recommended that in the Articles of Association and in the internal documentation of the company contain clearly defined written rules settling the obligations of the partners and which specific actions will be considered a breach of the obligation of loyalty, so that such a manifestation of this breach can be sanctioned and proven convincingly.

 Right of the partners to access the company’s 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. It contains an obligation for the company to provide access of the partner to the company’s documents. Such documents may be:

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

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

The specifics of providing information to a partner may vary. It is often considered that denying access to the company’s documents constitutes a violation of his 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, according to which it can be provided, the levels of access, the obligations for confidentiality, protection of trade secrets, etc. Through such documents it is possible to provide a procedure for exercising the right of access and easy control over the document turnover.

Negotiating a penalty for performing a competitive activity

Since there is no formal requirement for the partner not to perform competitive activity, unlike it is for the manager, it is possible for the parties to agree to owe a certain penalty in the presence of such actions. Complying with the principles of law and the freedom to contract the company can protect its interests with wording within the Articcles of Association or through a separate agreement.

Recently, the issue of the validity of the 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 preservation of production and trade secrets. Its security and sanctioning functions are intended to deter the partner from unfair actions that would harm the interests of the company .

It is important to know:

The violation of the above-described non-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 result in exclusion of the partner by decision of the General Meeting and claiming penalties and compensations.

A prerequisite for the exclusion of a partner is the delivery to the partner of a written warning for exclusion. The excluded partner has the right to receive his company (liquidation) share, whose equivalence also has different dimensions – from balance to market value and should be explicitly regulated in the Articles of Association.

Murgova and Partners Attorneys at Law has extensive experience in the legal service of Bulgarian and international companies in developing a comprehensive set of documents for registration of the most appropriate form of association. We make special efforts to prepare Company Agreements in accordance with the needs and specifics of the company, as well as in the drafting of internal rules explicitly governing the procedure for access to information, protection of trade secrets, loyalty obligations and competitive activities of the partners. The members of our team have many years of expertise in the legal representation of companies in case of violation by partners or companies of these rules. If you have any questions or need a consultation, you can contact us at www.murgova.com.