Legal updates

When the founders agreement prohibits competition with the company but does not set its scope of activity one need find what was the intention upon its execution

March 11, 2021

In a company engaged in military projects in the naval field, which was established by Israeli Navy veterans, the founders agreement stipulated that the shareholders are not to engage in the field of the company scope of activity other than via the company. Over the years, the company has expanded its activities to other types of projects, in Israel and abroad, maritime and non-marine, projects for various security forces, including consulting, brokerage, finding new markets, sales promotion, marketing and any other service that may promote projects of customers and business partners of the joint venture.
The Court held that the shareholders did not breach the non-compete clause, as its scope of activity was limited to Navy projects. A company is an independent legal entity entitled to every right, duty and action which is consistent with its nature and character as an incorporated entity, insofar as it is not illegal. A company’s main purpose is to act according to business considerations for the maximization of its profits. The establishment of a company is done by an agreement between its founders, which is usually inferred from its articles of association, which determines its legal framework, including its scope of activity and may include non-compete limitations of its shareholders. If it is not possible to infer the scope of activity of the company from its articles of association, it may be inferred from objective observation of the founders' intention when establishing the company, their pervious occupation, how the company actually operates, etc. Here, in the absence of defined scope of activity in the articles of association, the baseline suggests that the company may engage in any field that might maximize its profits, subject to the limitations of the law, when the conduct of its founders as well as their intention at the time of the incorporation of the company, which sets the scope of the non-compete obligations, indicates that its main scope of activity was limited to naval military projects only. Thus, a shareholder that acted in fields in which the company also acted, but were not naval army projects, did not breach the non-compete clause of the founders agreement.