Post-termination restrictions and shares

It is very common for a service contract and a shareholder’s agreement to both contain restrictions.

Issue

Whilst those in the service contract may sometimes be regarded as too wide to be enforceable the ones in the shareholders agreement might in the same circumstances still be valid. However, that is not always the case as was seen in Law By Design Ltd v Ali in which the High Court upheld the covenants as enforceable in the contract but not in the shareholders agreement.

Facts

Ms Ali, a solicitor, had  joined the law firm LBD on 13th May 2013 and entered into a contract of employment which contained post-termination restrictions preventing her from soliciting clients away and from being involved in any capacity with any business which was in competition with those parts of the business of LBD with which she was involved to a material extent in the 12 months before termination of her employment. On 31st March 2016 Ms Ali entered into a Shareholders Agreement in which in return for being issued with 3% of shares she agreed to further wider non-competition covenants.

Decision

It was held the restrictions in the contract were valid being limited and focused on the parts of the business in which she had worked immediately prior to leaving. The restrictions in the shareholders agreement were too wide in that they were not qualified or limited. It was taken into account the nature of the work and the time which it might to recruit a replacement and have them carry out work for clients and it was held that a period of 12 months for the restrictions in the contract to last was reasonable.

Key points

The Judge took into account that the parties to the shareholders agreement had not been involved in a commercial arrangement involving the sale of part of a business where a less stringent approach to enforcement of covenants might be applied. In the circumstances the employer and employee relationship had dictated the terms of the agreement which meant that as a matter of public policy the reasonableness of the restrictions had to be taken into account.