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Restrictive Covenants in Shareholders’ Agreements

Restrictive Covenants in Shareholders’ Agreements

The recent case of Guest Services Worldwide Limited v Shelmerdine [2020] EWCA Civ 85, sets a reminder that restrictive covenants which apply to an “employee shareholder” will continue to apply to them when they cease to be an employee but remain a shareholder. The Court of Appeal ruling was made on the basis that when these restrictive covenants are read in their factual and commercial context, it is clear they are intended to protect the company, its goodwill and the value of its shares.

It was also held by the Court of Appeal that restrictive covenants of 12-months on “employee shareholders” following cessation of their employment was not unreasonable on the basis that this is to protect a company’s legitimate interest by preventing "Employee Shareholders" from enticing away clients and business.

Careful drafting is required to ensure that restrictive covenants would not however be unenforceable on the basis of their scope and territory. If you are concerned about the enforceability of your restrictive covenants on “Employee Shareholders”, Avery Law can review, advise on and assist in drafting restrictive covenants in shareholders’ agreements to ensure they are likely to be enforceable.



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