Shareholder Agreement Restrictive Covenant

The judgment of the Court of Justice on the duration highlights an important point that companies and employee shareholders should take into account, given that, even in the case of forcible transfer provisions, there is no guarantee that there will be a buyer for the shares of a former employee, especially in a small private company. If a restrictive agreement continues to apply as long as a former employee remains a shareholder and for a period that will follow, that former employee could, in certain circumstances, remain bound by the restrictive obligations for a significant period. For this reason, shareholder contracts are generally drafted in such a way that the restrictions apply either from the date on which an employee shareholder`s employment relationship ends or, in the case earlier, from the date on which the employment relationship is terminated. When restrictive agreements are challenged in court, they are interpreted against the context surrounding the rest of the agreement. But this is not the only obstacle – to remove the Covenants, a party must show that restrictive Covenants are not only akin to a trade restriction, but that reluctance must also be perceived as inappropriate. For this reason, employees to whom shares are given should closely abide by the terms of all Covenants in a shareholders` agreement and not expect to apply the same principles as if they were covenanted in an employment contract. With respect to trade agreements between experienced parties, the courts have also shown a willingness to maintain the applicability of restrictive agreements as long as a party can demonstrate that the agreements meet a legitimate commercial interest and are appropriate in the broader context of the agreements. As regards the duration, although the restrictive agreement limited trade, the Court of First Instance considered that a period of 12 months was not inappropriate, since “the company had a legitimate interest in preventing the employee shareholders from competing with its activities”. The court also found that both the company and Mr. Shelmerdine were experienced business parties, so there was no imbalance in bargaining power and at that time it would have been understood that any employee shareholder who ceased to be an employee would likely cease to be a shareholder at the same time or shortly thereafter. In Guest Services Worldwide Ltd v. Shelmerdine [2020] EWCA Civ 85, the Court of Appeal considered a shareholders` agreement that contained clauses prohibiting employee shareholders from competing with the company`s business and promoting customers, employees and suppliers, both during their employment and for a period of 12 months from their cessation of business. The High Court had found that, as soon as S was no longer employed by the company or engaged as a consultant, it was considered that he had notified a transfer notification concerning his shares in the company.

Despite this, he remained a shareholder of the company at the time of the proceedings. In its view, no reasonable person with the appropriate basic knowledge would have understood that as the intention of the parties when the shareholder agreement was concluded. The court considered the transaction as a whole, including the consideration of GSW`s articles of association (which was adopted approximately one month after the conclusion of the shareholders` agreement). It is therefore essential that the wording of an agreement be clearly formulated, taking due account of the duration of the federal state and the circumstances in which it is applied. For the individual, an unfair restrictive alliance could have a great influence on his career; For a company, an ineffective restrictive agreement could jeopardize its future….

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