Restrictive Covenants: A Bad Hair Day
In a recent case, the court provided some useful reminders about non-compete clauses in share purchase agreements.
Non-compete clauses are generally used to protect the buyer of a company by restricting the activities of the sellers after they have sold their company.
Facts of the case
Hayley Forbes owned a limited company which, in 2008, entered into a franchise agreement with Rush Hair to open a Rush Hair salon as a franchisee. Following the success of this franchise, Hayley Forbes opened two further Rush Hair franchised salons which were operated by a second company.
In March 2015, Hayley Forbes sold the companies that operated the salons to Rush Hair. The sale agreement contained restrictions which required Hayley Forbes not to employ three named individuals nor be involved with a business in competition with Rush Hair within a 2 mile radius of any of the salons for a 2 year period.
In July 2016, Hayley Forbes opened a new salon in Windsor (less than two miles away from a Rush Hair salon) through a new company. This new company employed one of the three named individuals as a consultant and the other two as employees. Rush Hair subsequently made a claim against Hayley Forbes.
What did the court say?
Based on the way the clauses were written, they only prevented Hayley Forbes from employing the three individuals on her own behalf rather than through a company.
However, the court decided that it was appropriate to give the clause a “commercially sensible meaning”. Even though it didn’t explicitly stop Hayley working through a new company, the Judges applied the restriction to the limited company that Hayley Forbes was operating through as well as to her personally. The court also confirmed that the two year restricted period, as well as the geography of a 2 mile radius from the salons, were enforceable as they did not go further than was necessary to protect Rush Hair’s legitimate business interests.
What does this mean for you?
If you are or will be subject to a post-sale restriction in a share purchase agreement, this case serves as a reminder that the court will not let you off the hook if it is clear that the commercial intention of the clause is wider than the actual written words. If you are in doubt as to whether you can or cannot do something, always seek legal advice to prevent yourself getting caught up in costly legal proceedings.
If you intend to sell your business, the case serves as a reminder to ensure that you think very carefully about what the post-sale restrictions are meant to do. In this case, if the words had been more explicit, removing any ambiguity, then both parties could have avoided a costly and lengthy legal battle.
For more information, please contact our Corporate team on 0345 070 6000.