High Court ruling on reasonableness of restrictive covenants within a share purchase agreement

Background

This case related to the sale of shares by Hayley Gibson-Forbes (HGF) to Rush Hair Limited (Rush) in Hair (Windsor) Ltd (Windsor), which operated a hair-dressing business. The terms of the sale were set out in a share purchase agreement (SPA).

Restrictive covenants within the SPA

In the SPA, HGF covenanted that, for a period of two years following completion, she would not:

  • canvas, solicit, entice or employ certain key employees (employee covenant), or
  • be engaged, concerned, employed or interested in a competing business with the Rush business located within a two mile radius of the business premises of Windsor (non-compete covenant).

Within the two years, HGF created a company, opened a hairdressing salon under the name S.J. Forbes Windsor (Newco) and employed some of the ‘key employees’. Rush claimed this was a breach of the employee covenant and non-compete covenant.

The High Court’s consideration of the covenant enforceability

Non-compete covenant

Although this covenant may be a little stringent from an employment law point of view, the court sided with Rush. It accepted that there are differences between the enforceability of restrictive covenants in employment contracts and those given by the seller of a business, since, without appropriate covenants, the value of the business acquired would be damaged.

Employee covenant

HGF argued that she was not in breach, since Newco, not she, had engaged the key employees. On a simple construction of the covenant, this was correct. However, the Court considered that, in the context of the business sale, it could ‘look through’ Newco to HGF to make her liable for the breach, since she controlled Newco and had created it in order to try to get round the covenants.

The decision provides a useful summary of the legal position on restrictive covenants (frequently heavily negotiated in the drafting of an SPA) and shows that the court will consider looking at all of the circumstances in a business or share sale and not just the letter of the agreement where the person who gave the covenants has tried to avoid them by acting through a corporate vehicle.