Employee Poaching and Misuse of Confidential Information by Ex-Staff

The Problem Facing Malaysian Businesses

A common and painful situation: a key employee or director resigns and joins a competitor, or starts their own competing business. Within weeks, your clients start leaving. Your other staff members follow. You discover that customer lists, commercial terms or trade secrets have walked out the door.

This article explains the legal tools available to Malaysian businesses when this happens, and how to protect your company before it does.

Breach of Confidence

Malaysian law recognises a duty of confidence that applies even without a written contract. To establish breach of confidence, you generally need to show three things:

• The information had the necessary quality of confidence (it was not public knowledge)
• The information was shared in circumstances creating an obligation of confidence
• There was unauthorised use or disclosure of that information

Trade secrets, customer databases, cost and margin data, business strategies and technical know-how can all qualify as confidential information. However, general skills, knowledge and personal relationships that an employee develops during their employment typically do not.

The distinction matters. A salesperson who remembers client names and builds on relationships is different from one who downloads your entire customer database before resigning.

What Qualifies as Confidential Information

Courts will consider factors including whether the information was treated as confidential within your organisation, whether it was shared only with those who needed to know, and whether it would be harmful to your business if disclosed. Marking documents as confidential and implementing access controls strengthens your position.

Directors and Fiduciary Duties

Directors owe fiduciary duties to the company that go beyond those of ordinary employees. Section 213 of the Companies Act 2016 requires directors to exercise their powers for a proper purpose and in good faith in the best interest of the company. Section 218 restricts directors from using company property, information or opportunities, or competing with the company, without proper approval.

A director who, while still in office, diverts business opportunities to themselves or prepares to compete unfairly may breach these duties. The same applies to a director who solicits the company's employees or clients before resigning.

Former directors remain bound by duties regarding confidential information they obtained during their directorship. They cannot use that information to benefit themselves or harm the company after they leave.

Shadow Directors and De Facto Directors

These duties can extend to shadow directors and de facto directors—people who act as directors without being formally appointed, or whose instructions the board habitually follows. This is relevant where a departing employee was effectively running part of the business.

Contractual Protections

Employment contracts and director service agreements can include specific protections that strengthen your position.

Confidentiality Clauses

Express confidentiality clauses define what information is confidential and what the employee or director must not do with it. They can extend the duty of confidence beyond what the law would otherwise imply and make your expectations clear.

Non-Solicitation Clauses

Non-solicitation clauses typically prohibit a departing employee or director from soliciting your clients or poaching your staff for a period after they leave. Because section 28 of the Contracts Act 1950 is strict, Malaysian courts have taken differing views on these clauses, and their enforceability depends on the wording and the facts.

A narrow clause that protects confidential information and the clients the person actually dealt with is generally easier to defend than a blanket prohibition on any contact with any client.

Non-Competition Clauses

Section 28 of the Contracts Act 1950 provides that agreements in restraint of trade are void. However, there is an exception for agreements where a party sells the goodwill of a business and agrees not to compete within specified limits.

For employment contracts, pure non-competition clauses face difficulty under Malaysian law. Non-solicitation clauses that protect legitimate business interests without preventing the person from earning a living are more likely to survive scrutiny.

Garden Leave

Garden leave clauses allow you to require a resigning employee to stay away from work during their notice period while remaining employed. This keeps them bound by their employment duties while preventing access to current information and clients.

Injunctions

When you discover a breach, speed matters. An injunction is a court order requiring someone to stop doing something or, less commonly, to do something. Injunctions are often the most valuable remedy because they prevent ongoing harm.

Interim Injunctions

An interim injunction can be obtained quickly, sometimes within days, before the full trial. The court will consider whether there is a serious question to be tried, whether damages would be an adequate remedy, and where the balance of convenience lies.

You will usually need to give an undertaking as to damages—a promise to make good the other party's loss if it turns out the injunction should not have been granted.

Final Injunctions

A final injunction is granted after trial if you succeed in your claim. It can permanently restrain the former employee or director from using your confidential information or soliciting your clients in breach of their obligations.

Damages and Other Remedies

Beyond injunctions, the court may award damages for losses suffered. In cases involving fiduciary duties, the court may also order an account of profits—requiring the wrongdoer to hand over profits they made from their breach.

Where confidential information has been taken, the court may order delivery up or destruction of documents and electronic files containing that information.

Practical Steps for Prevention

Prevention is better than litigation. Consider these measures:

• Ensure employment contracts and director service agreements contain clear, reasonable confidentiality and non-solicitation provisions
• Mark confidential documents as such and limit access to those who need it
• Implement IT policies that prevent bulk downloading of data and monitor for unusual activity
• Conduct proper exit procedures including reminding departing staff of their ongoing obligations
• Require return of all company property and data, and obtain written confirmation of compliance

Acting Quickly When Problems Arise

If you suspect a former employee or director is misusing confidential information or breaching their obligations, gather evidence carefully and take legal advice promptly. Delay can weaken your position, particularly when seeking injunctive relief.

Document what has happened, preserve relevant communications and records, and avoid actions that might tip off the wrongdoer before you are ready to act.

Common questions

Can I stop a former employee from working for a competitor?

Pure non-competition clauses are generally void under Section 28 of the Contracts Act 1950. Narrow non-solicitation and confidentiality clauses protecting specific business interests stand a better chance, depending on the wording and facts.

What is the difference between confidential information and general skills?

Confidential information includes trade secrets, customer databases and proprietary methods. General skills, industry knowledge and personal relationships developed during employment typically belong to the employee.

How quickly can I get an injunction?

Interim injunctions can sometimes be obtained within days in urgent cases. The court will assess whether there is a serious issue, whether damages would be adequate, and where the balance of convenience lies.

Do directors have stronger duties than ordinary employees?

Yes. Directors owe fiduciary duties, and sections 213 and 218 of the Companies Act 2016 set out duties on proper purpose, good faith and improper use of company property, information or opportunities. These duties can be broader than those of ordinary employees.

What evidence do I need to prove breach of confidence?

You need to show the information was confidential, was shared in circumstances creating an obligation of confidence, and was used or disclosed without authorisation. Documented confidentiality policies and access controls strengthen your case.