Restrictive covenants are often a key part of a private equity deal. Deals are done in niche markets and being able to protect the goodwill of the target business and retain key employees is essential to future success. These covenants need to be robust enough to protect goodwill but must also be enforceable. Covenants that are excessive will be held to be in restraint of trade.
In a recent case - Cavendish Square Holdings BV and Team Y&R Holdings Hong King Ltd v Talal El Makdessi  EWHC 3582 (Comm)- it was held that, based on the specific facts, restrictive covenants potentially in force for eight and a half years were reasonable protection of the acquired goodwill.
Facts of the case
Cavendish Square Holdings (Cavendish) acquired some shares in Team Y&R Holdings (the Company) with a provision to acquire the remainder at a later stage. The purchase price was significantly in excess of the net asset value of the Company, reflecting a substantial amount paid for the goodwill. The agreement contained restrictive covenants effective for a period of 24 months after the occurrence of certain events meaning the covenant period could reach eight and a half years after completion.
Cavendish claimed for breach of those restrictive covenants. The defendant argued that the covenants were an unreasonable restraint of trade and the duration excessive.
The court concluded that the covenants were reasonable and the duration acceptable, due to the following factors, amongst others:
- There was substantial goodwill in the Company for which Cavendish was prepared to pay a substantial price, provided that goodwill was protected.
- The terms of the agreement were heavily negotiated over six months and each side was represented by experienced lawyers - there was a "level playing field".
- The defendant was critical to the success of the group, due to his connections in the Middle East and this was acknowledged in the sale and purchase agreement.
In finding the duration of the covenant acceptable the judge noted that "...in vendor-purchaser covenants, there is no reported case in which a restriction otherwise reasonable has been held unreasonable on ground of duration".
Every restrictive covenant must pass the test of going no further than required for the protection of the buyer's legitimate interests. Each case will be considered in its own specifics. However, this decision does highlight that the courts should be slow to strike down terms which are freely negotiated between parties on a 'level playing field'.