Germany: Employers can dismiss employees with shares in competitors

Under German law, an employee having a major influence on a competing company can justify a termination for good cause with immediate effect of an employee.

In a recent judgement in April 2017, the Higher Regional Labour Court of Schleswig Holstein decided that holding 50% of the shares in a competing company without obtaining prior approval of the employer can amount to a violation of the statutory non-compete obligation, if resolutions of the competing company are passed by majority vote.

In this case, the employee was found to be in breach of both the statutory obligation as well as his contractual obligation not to hold any shares of a company in direct or indirect competition with his employer without first obtaining prior approval. The competing activities took place during the employee’s notice period, and were found to be both a severe violation of the interests of the employer and an unbearable business risk that justify a termination for good cause with immediate effect. The Court decided that the termination was justified after weighing the relevant interests of the employer and the employee. The employee, who had been very active in his work for the competing company, was a proxy holder at the employer, and thus held a key position representing his employer in legal and business matters. Therefore the immediate end of his access to important documents of his employer was necessary.

Against the background of this decision, it is recommended to examine carefully to what extent an employee holds interests in companies in direct or indirect competition. Factors, such as the form in which resolutions in the company are taken, may lead to a major influence on a competitor, which constitutes a violation of the statutory non-competition obligation, even if the employee does not hold more than 50% of the shares of the respective company.

Written by Simone Gregori, Associate, and Tra My Nguyen Thi, Associate, Herbert Smith Freehills LLP