Can restraints in shareholder, share sale and business agreements be enforced? In short, yes

Author: Holding Redlich partner Brendan Wykes and senior associate Megan Cant
Publication: SmartCompany
Publication date: 14/09/2020

During these turbulent times, a lot of businesses are changing directions.

Accordingly, ‘pivoting’ is an expression and behaviour that has been used much more this year.

In fact, we probably all know a business owner who has initiated or suffered significant change in 2020.

We are often asked whether restraints (such as non-compete obligations, undertakings not to poach customers/employees and restrictions on the use of similar names/trademarks) in shareholders agreements, share sale agreements and business sale agreements can be enforced.

The short answer is generally yes.

While courts may be reluctant to enforce (fully) restraints in employment arrangements, they are more willing to enforce them in commercial agreements.

We continue to see shareholders (who are also employees/directors) wanting to leave a company and set up or join another business, sometimes in competition with or servicing the same clients and customers as the company they are leaving. They may also want to take some of the company’s staff with them.

It is dangerous to assume (as many people do) that restraints are unenforceable.

If they are well-drafted, tailored to the specific needs of the business and the shareholder receives value for their shares or otherwise (in addition to their usual pay and benefits up to and upon the termination of any employment), then the courts will be more inclined to enforce reasonable restraints that protect the legitimate interests of the business (meaning its goodwill, customer connection, valued workforce and confidential information).

For example, in two recent cases in Queensland, the court determined that restraints in shareholders agreements for two years and 12 months respectively could be enforced.

Similarly, in a subsequent case in Victoria, a four-year restraint in a business sale agreement was determined by the court to be enforceable.

You can often act quickly to protect a business from damage or threats.

Remedies for breaches of restraints include compensation for, and court orders stopping, actual or threatened actions.

If you are starting a new business, or have another opportunity to do so (such as a pay review or providing new funding), take the time to consider what existing restraints apply to you and what new restraints can be agreed with your new colleagues for everyone’s protection.

The scope and duration of restraints should be specifically considered, and drafted in the context of the business and the roles of the individuals, with particular clauses to help courts enforce them to the maximum extent with a choice of remedies.

For departing shareholders, owners or employees, agreeing on share sale agreements or deeds of release, as well as agreements to divide up a business, with specifically considered and negotiated restraints in return for an exit payment, are frequently the best ways to achieve more certain outcomes for everyone concerned and to help them move forward with confidence.

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