Restrictive Covenants in Shareholders Agreements approved by Court of Appeal

On the 4th February 2020, the Court of Appeal considered the enforceability of restrictive covenants in shareholders agreements.  This was in the case of Guest Services Worldwide Limited v. Shelmerdine 2020 EWCA Civ 85.

The Defendant was a consultant in Guest Services Worldwide Limited and a shareholder. Restrictions in the Shareholder Agreement prevented him from dealing with company customers or soliciting customers, employees or suppliers from the company’s business for a period of 12 months after he ceased to be a shareholder.

The Company alleged breach of restrictive covenants.

The consultant argued that on leaving the company, he ceased to be a shareholder and therefore the restrictions did not apply.  Further, that those restrictions of a 12 month non-solicitation period were unenforceable in restraint of trade and unreasonably wide.

In the High Court, the Judge agreed yet the Court of Appeal came to a different view.

It was held that whilst all covenants in restraint of trade were unenforceable unless reasonable, restrictions contained within a shareholders agreement were akin to those in an employment contract. The company had a legitimate interest in preventing the consultant from competing with the business and soliciting clients given the knowledge that was likely to have been acquired; further, the clause within the shareholder’s agreement had been made between experienced commercial parties and finally the period of restraint lasting 12 months was reasonable when protecting a commercial interest in these circumstances.

The 12 month period ran from the time when the consultant ceased to be a shareholder rather than when his consultancy came to an end.

For further advice and assistance please contact our Private Client Team on 01604 828282 / 01908 660966 or email info@franklins-sols.co.uk