This Scottish case addresses the enforceability of so called bad leaver terms and indirect non-compete restrictions in the carry partnership of a private equity fund which affected an investment manager’s right to retain his carry interests after he had resigned from his employment. It can also be seen as providing some useful pointers as to how an employer ought to approach the exercise of discretions available to it in bonus or other incentive arrangements such as a share plan.


Mr Greck was employed as an investment manager of a Henderson fund. He held interests in a fairly typical carry partnership which shared in the gains made by the fund. Mr Greck resigned and subsequently joined an alleged competitor of the Henderson group. Henderson treated Mr Greck as becoming a bad leaver under the terms of the partnership agreement when he began employment with a "competitor" within 6 months of leaving Henderson. So called good leavers stood to lose a proportion of their carry interests whereas a bad leaver forfeited all his carry interests.

Expecting to be treated as a good leaver, Mr Greck negotiated with his new employer to be compensated for the proportion of the carry interests that he expected to forfeit. Whilst the court’s decision focused on the construction of the bad leaver provision in the partnership agreement, the judge made some interesting (but obiter) comments on the effect of what were argued to be indirect non-compete restrictions that were part of the bad leaver provisions. It also considered whether, in the circumstances, there was a positive obligation on the partnership’s general partner to consider exercising discretion to allow a bad leaver to retain a proportion of his carry entitlements to “be determined in the General Partner’s sole discretion”. Whilst the court considered these issues in the context of a private equity partnership they may have some relevance if an English court were considering similar issues in relation to an employment contract or a bonus or share incentive plan.

Was he a bad leaver?  

Mr Greck lost his main argument that the bad leaver terms should not apply to him on the basis that the firm he had joined after resigning from Henderson was not a “competitor”. The court concluded that on a proper construction of the bad leaver provisions, they did apply to him. The provisions had some rather unusual wording that deemed a firm to be a “competitor” for the purposes of the bad leaver terms if its business included dealing in unquoted equities (which on the facts Mr Greck’s new employer did).

The court also considered whether on the facts (ignoring the deeming provision) the firm Mr Greck had joined did actually compete with Henderson. The judge was satisfied that on the evidence Henderson and Mr Greck’s new employer did compete against each other for investors’ funds, for deals and for employees/managers even though they were in different geographical markets. The judge accepted that private equity was a global business.

Exercise of discretion  

It was agreed that the General Partner had never turned its mind to consider whether it should exercise the discretion or not. The court concluded that as a matter of construction, the partnership agreement in using the words – “may in its sole discretion determine” - did not place an obligation on the General Partner to consider whether or not to exercise the discretion but it simply permitted the General Partner to exercise its discretion if it were so minded.

The court did, however, go on to consider what the position would have been had it concluded that the General Partner should have considered the question of the discretion. Interestingly, the court looked at how previous leavers had been treated and compared their position to those of Mr Greck. The court concluded that the situations in which previous leavers had been treated more favourably than Mr Greck were not comparable to the present circumstances. The court did, however, note that if a request had been made by Mr Greck not to treat him as a bad leaver then an outright refusal to consider that request could have been open to challenge.

Indirect restraint of trade  

Mr Greck further argued that the bad leaver provision operated as an indirect restrictive covenant since it had the effect of denying him the carry entitlements to which he would otherwise be entitled if he did not compete with Henderson. He claimed the bad leaver terms were an unenforceable restraint of trade unless Henderson could show that it had a legitimate proprietary interest to protect and the protection sought was no more than was reasonable having regard to the interests of the parties and the public interest.

Since this argument had not been pleaded the court did not need to come to any decision on the issue but it took the opportunity to point out some issues that might prove obstacles to a successful argument being made by an employee in a future case.

The court placed some emphasis on the fact that the bad leaver provision was contained in a private equity partnership agreement to which there were many parties and was not in an agreement between just two parties as would be the case in an employment agreement. It commented that the carry partnership provided an incentive through a mixture of “carrot and stick”. If the stick (i.e. the forfeiture of the carry interest) in the form of the bad leaver provisions were found to be unenforceable, then the bargain as between all the carried interest partners would be considerably different to what they had thought they were entering into at the outset – when any one partner’s interests were forfeited, the interests of the remaining partners increased and potentially became more valuable.

In addition, it noted that restraint of trade issues had to be looked at in the circumstances of the parties and the court queried whether such bad leaver provisions could be seen as indirect restraints of trade on the basis that they deterred employees from competing with their former employers if employers were prepared to compensate new hires for the incentives that they expected to lose by reason of their resignation.