A recent case has examined the enforceability of restrictive covenants on the sale of shares. The High Court found that the restrictive covenants were enforceable.

Background

The dispute in Rush Hair Ltd v Gibson-Forbes was in connection with the sale of two hairdressing salons in South-East England, one of which was in Windsor. The share purchase agreement (SPA) between the buyer and seller included two restrictive covenants given by the seller, each of which lasted for two years from the completion date of the SPA – the covenants were:

  • a non-poaching covenant – the seller agreed not to canvass, solicit, entice or employ certain named individuals; and
  • a non-competition covenant – the seller agreed not, within two miles of each of the salons, to directly or indirectly be engaged, concerned, employed or interested in any similar business.

Within the two year restricted period, the seller then proceeded to open a new salon in Windsor and employed three of the individuals named in the non-poaching covenant. It was claimed by the buyer that this was in breach of both of the covenants.

This was disputed by the seller for a number of reasons, the key one of which was that the covenants should be deemed unenforceable on the grounds that they were a restraint of trade.

The starting point under English law is that people should be free to carry on their business as they see fit – therefore, any covenant that seeks to limit this freedom is prima facie unenforceable. Nonetheless, such covenants can be valid provided that the restriction is no more than is reasonable to protect a party's legitimate interests, considering all of the circumstances – most particularly the duration of the restraint and its geographical scope.

Decision

The High Court decided that the restrictive covenants should be upheld. A number of reasons were given for this decision, the key one of which was that the covenants were contained in a SPA – case law has long established that restrictive covenants in a sale agreement are more likely to be viewed as reasonable than those given by an employee. The main justifications for this are two-fold:

  • in order to realise the full potential of a business that is being bought, it might be reasonable for a buyer to look to protect itself from competition from a seller; and
  • in the commercial context there is greater freedom of contract than between employee and employer.

The High Court also considered whether or not to pierce the corporate veil of the seller's newly formed company in order to enforce the non-poaching covenant – this argument of the buyer's was rejected as there was seen to be no evidence that the seller had incorporated the company in order to conceal her identity, or to use it as a cloak to evade being bound by the covenant.

Consequences

This judgement should give comfort to buyers in corporate transactions that restrictive covenants can be enforced. It has reiterated though how important it is that they are carefully drafted – if care is not taken in making sure that the restrictions are reasonable in the context of the transaction, then a buyer may find that they are not protected.