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Can A Shareholder Compete With That Company After Employment Termination?

Often employees sign non-compete and non-solicitation agreements that spell out what an employee can and cannot do after employment is terminated. Usually, if an employee never signed such an agreement, he or she is free to compete post-employment, provided confidential information is not involved. However, when the employee is also a shareholder, as is often the case in closely held corporations, there is a twist. Despite the fact that you never signed a non-compete, you may be held by a court to have a fiduciary duty not to compete with the company that you partially own, even if you were fired.

Somewhat surprisingly, there is no New Jersey case law relating to the precise duties owed to a company you partly own not to compete with it. However, it is likely enough for a court to conclude that you cannot compete with a company that you own. The issue will be whether that duty still applies if you have been terminated. After all, if the majority shareholders have just fired you, they are taking the position that they do not want you working for them anymore. How, then, can they argue that you should not be able to work for someone else? They can make this argument, but whether it is successful or not is likely to be dependent upon the particular circumstances of your case.

As readers of this web site well know, when an employee or shareholder is terminated, it may constitute shareholder oppression, resulting in judicial remedies including a forced buyout of your shares. If you file such a suit, announcing that you no longer wish to remain a shareholder and are seeking a buyout, your argument to legally compete is likely strengthened. Conversely, if you sit on your rights and do not sue for a buyout, you may be indicating (in the Court’s eyes) that you are content with being a “passive shareholder”, and may be prevented from competing more readily than if you had sued.

As with many issues involving an oppressed minority shareholder involved in a dispute with a business partner, your rights in such an instance are likely to be very fact specific. You should consult an attorney conversant in such issues before deciding to take a job with a competitor, even if you hadn’t signed a non-compete agreement. A brief legal consultation can make the difference between being sued and knowing that you are operating within the law.