Shareholders’ Agreements often include restrictive covenants designed to prevent employees from taking actions that go against the interests of the company for a certain period after they have ceased to be employees. While such restrictive covenants can be valuable, they can also end up costing considerable amounts in time and legal fees if they are unclearly or ambiguously drafted.
The recent Court of Appeal decision in Guest Services Worldwide Ltd v Shelmerdine found that a non-compete covenant in a shareholder agreement was enforceable, even though it only began to run when the individual stopped being a shareholder.
Mr Shelmerdine (Mr S) was a shareholder in Guest Services Worldwide (GSW). His consultancy agreement, which contained restrictive covenants, expired in 2017 but he continued to provide services to GSW until February 2019, without a new consultancy agreement.
As a shareholder Mr S was party to a shareholder agreement. The shareholder agreement included various restrictive covenants, which applied to what it termed ‘Employee Shareholders’ for the duration of their employment by the company and, in the event of a termination of employment, for 12 months afterwards. GSW took steps to enforce the covenants in the shareholder agreement.
At first instance, the High Court ruled in favour of Mr S on two grounds: firstly, that the restrictive covenants applied only to ‘Employee Shareholders’, and, despite still being a shareholder, Mr S was no longer an employee at the time of the alleged incident; and secondly, that the restrictive covenants did not go beyond what was necessary to protect the company’s legitimate interests.
Guest Services Worldwide Ltd then took the case to the Court of Appeal, where the judge overturned the decision of the High Court, ruling that although the agreement stated the restrictive covenants only applied to Employee Shareholders, the restrictive covenants will only serve their purpose of protecting the company’s interests if they continued to apply to shareholders who were no longer employed by the company.
The Court of Appeal also overturned the High Court’s verdict that the covenant was longer in duration than reasonably necessary. The Court therefore upheld GSW’s appeal against the High Court ruling.
This case highlights the value of including restrictive covenants in any shareholder agreement, especially as their reasonableness will tend to be subject to less scrutiny in a court than that of an employment contract. However, it also highlights the fact that such restrictive covenants will carry more utility and save time and legal fees if they are clearly and carefully worded, considering any foreseeable circumstances in which they might apply.
For a no-obligation discussion about Restrictive Covenants, Shareholders’ Agreements or any Commercial matter, please contact our Corporate and Commercial Team
A Shareholders Agreement is an agreement between the shareholders of a company. Its aim is to protect the shareholders’ investment in the company and to create a fair relationship between the shareholders. It outlines how the business should be operated and each shareholders’ rights and obligations… Read more.
SO Legal Solicitors Eastbourne – 01323 407555
SO Legal Solicitors Brighton & Hove – 01273 069920
SO Legal Solicitors Hastings – 01424 709050
SO Legal Solicitors Uckfield – 01825 729840
SO Legal Solicitors Notting Hill – 0203 9677700