The 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. Although this could theoretically have been many years after the termination of his employment/ consultancy, the clause was not unreasonable.
Mr Shelmerdine was a shareholder in Guest Services Worldwide Ltd and also provided services to it as a consultant. His consultancy agreement, which contained restrictive covenants, expired in 2017. He continued to provide services to GSW until February 2019 but did not enter into a new consultancy agreement.
He was also party to a shareholder agreement. This contained restrictive covenants that applied to "Employee Shareholders" (as Mr Shelmerdine was) and for 12 months after someone ceased to be a shareholder. After Mr Shelmerdine stopped providing services to GSW, GSW took steps to enforce the covenants in the shareholder agreement.
At first instance, the High Court found that the restrictive covenants in the shareholder agreement did not apply to Mr Shelmerdine but even if they had, they would have been unenforceable because they were longer in duration than reasonably necessary to protect GSW's legitimate interest. The restrictions remained in force while the individual remained a shareholder and for 12 months thereafter, regardless of how long it had been since he had ceased to be an employee or agent of the company. This meant that Mr Shelmerdine could remain subject to the restrictions for a potentially indefinite period, which was unreasonable.
The Court of Appeal overturned both aspects of the decision. Not only did the covenants apply but they were also enforceable. Courts are less vigilant in their approach to covenants in a shareholders' agreement than in an employment contract and in this case the shareholders' agreement was made between experienced commercial parties. GSW had a legitimate interest in preventing employee shareholders and former shareholders from competing with the company or soliciting its clients and 12 months was entirely reasonable to protect that interest. In most cases, the individual would stop being an employee and a shareholder at the same time or there would only be a limited period of time between the two events. The clause should not be declared invalid on the basis of a "relatively unlikely possibility" of a considerable delay in the disposal of shares after the termination of employment/ an employment type relationship or on the basis of an "extremely unlikely" possibility of an indefinite lock-in under the shareholder agreement.
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