In a recent decision, Shanghai Pudong Intermediate Court confirmed the validity of the dismissal of a foreign general manager by WFOE. This was said to be on the grounds that the manager was also a director of a competitor.

The general manager was fired by company X – as soon as his appointment as director of company Y had been discovered – on November 2013, on the grounds that he had violated the labor contract law, the company by-laws as well as its statutory duties towards the company because of its involvement with the competitor.

The general manager had then sued Company X for unfair dismissal, claiming that (i) he was only a nominal director of Company Y, without real involvement in its business operation, (ii) company X’s by-laws forbid employees from entering into labor agreement with - not from being directors of – other companies and (iii) no damage had been caused to Company X.

The general manager had never entered into any non-compete or confidential agreement with its employer.

The Shanghai Pudong Intermediate Court held that the dismissal was fair, mainly based on the following grounds:

  • The general manager is not only an employee, but also a key organ in a company;
  • special obligations for the general manager arise directly from the Company Law and the Articles of Association, on top of those from his employment contract ;
  • The Articles of Association of Company X provide that “the general manager and other senior executives of the company shall not simultaneously act as general manager, principal or employee in other economic organizations. The employees (including general manager and other senior executives) shall not conduct commercial competition against the company”;
  • Company Y has a business scope including production of same products as Company X, therefore shall be deemed as a competitor;
  • Being a director of Company Y implies – even just potentially - involvement in key decisions and strategy of such company, therefore can be considered as involvement in a competing business.

Despite the case was very peculiar in many aspects (i.e., the legal representative of the competitor was the general manager’s wife; some key-employees had left company X to be hired by the competitor), it is still interesting to consider that – when senior managers are involved – employers can in some cases rely on a broader protection than the mere (and very restrictive) provision of labor Contract Law.