Restrictive covenants

[James uren]

Afternoon.

With regards to a restrictive covenant such as that i'm not to contact any of my current companies clients when i resign as a director.. How long can these be enforced for? I have been in my industry most of my life and its "what i do" so i dont think i can be forced to not work in my industry right?
Also say i leave with a restriction that i'm not to contact any of my current clients after my resignation (Which i dont intend to) What happens if they contact me? have i got to tell them i cant work with them?

Thank you in advance.

J

 

[James uren]

Afternoon.

With regards to a restrictive covenant such as that i'm not to contact any of my current companies clients when i resign as a director.. How long can these be enforced for? I have been in my industry most of my life and its "what i do" so i dont think i can be forced to not work in my industry right?
Also say i leave with a restriction that i'm not to contact any of my current clients after my resignation (Which i dont intend to) What happens if they contact me? have i got to tell them i cant work with them?

Thank you in advance.

J

I forgot to add, that if my business partner and i can not come up with a resolution because she is being difficult and we are at deadlock, Can i hand my notice in as an employee and keep my directorship until a resolution has been reached? are there any rules to comply to with regards to this as theres hardly anything about it on the internet? searching for "resigning as an employee but keeping directorship" doesnt return anything useful. J

 

[MikeJ]

You can continue to be a director. However, as a director you have to work to the best interests of the company. You could resign as a director, but keep your shares, then there's no such requirement.

@The Resolver may be able to help sort this out though.

 

[IanSuth]

How long is the restriction for and what exactly is the restriction ?

There is no right or wrong answer as it is up to a judge to decide but generally - the more restrictive a covenant is the shorter it should be for - if too onerous it is unenforceable.

Thus one saying you can't contact existing clients for 6 months after you leave would likely be fair and upholdable - one saying you are not allowed to do anything that competes with your old company in any way shape or form for the next 2 years would likely not.

You have to ask yourself - would what you are thinking of doing be worth your ex partner spending north of £10k to try and stop you - if no then you are safe. If yes then get professional legal advice

 

[James uren]

You can continue to be a director. However, as a director you have to work to the best interests of the company. You could resign as a director, but keep your shares, then there's no such requirement.

@The Resolver may be able to help sort this out though.

Thanks for thr reply Mike.

However i dont think resigning as a director and leaving my shares in place are a good idea. Ive read somewhere that doing this could mean the remaining director could decide to not pay herself dividends and take a wage instead.. She would do this out of spite!

 

[James uren]

How long is the restriction for and what exactly is the restriction ?

There is no right or wrong answer as it is up to a judge to decide but generally - the more restrictive a covenant is the shorter it should be for - if too onerous it is unenforceable.

Thus one saying you can't contact existing clients for 6 months after you leave would likely be fair and upholdable - one saying you are not allowed to do anything that competes with your old company in any way shape or form for the next 2 years would likely not.

You have to ask yourself - would what you are thinking of doing be worth your ex partner spending north of £10k to try and stop you - if no then you are safe. If yes then get professional legal advice

Thanks for the reply Ian

This restriction has not yet been drafted, but has been brought up verbally. It would be that i cannot contact any of the companies clients (poach) after i have left. I do know that she would want it for the maximum term possible. I have to add that i have no interest in doing so anyway if this restriction is on paper

 

[fisicx]

Just resign as an employee and stay on as a director. That way you will keep getting dividends and keep her from doing anything daft.

 

[DontAsk]

This restriction has not yet been drafted,

So it's for a hypothetical resignation in the future?

Otherwise, you can resign now with no agreement and nothing to enforce against you.

 

[fisicx]

Otherwise, you can resign now with no agreement and nothing to enforce against you.

Good point. Resign now and do whatever you want.

 

[The Resolver]

Good advice by @IanSuth as to the enforceability of such restrictions. All I would add is that if you negotiate a restriction now as part of a deal that benefits you in other ways eg an exit or agreeing a Shareholders Agreement that covers many matters (I am presuming you don't already have one) then you are most unlikely to have a court rule it ineffective for being too wide. After all it was agreed not imposed.

For so long as you remain a Director, whether still an employee or not. you cannot compete since any damage to trading could be recoverable from you in court (for breach of your duty under s172 of Companies Act 2006.)

If you are 50/50 shareholders, so cannot be outvoted, then you cannot lose your directorship against your will. Since your rights of access to all the financial information that you will need to negotiate an exit will be lost if you are no longer a Director, then do not resign until you have a detailed Agreement (ideally a comprehensive Shareholders Agreement covering lots of other matters,)

If you give me more information as to the background and context I can help more- Book a free call as below in my sig

 

[Newchodge]

Thanks for the reply Ian

This restriction has not yet been drafted, but has been brought up verbally. It would be that i cannot contact any of the companies clients (poach) after i have left. I do know that she would want it for the maximum term possible. I have to add that i have no interest in doing so anyway if this restriction is on paper

If there is currently no restriction, why would you agree to one?

 

[The Resolver]

If there is currently no restriction, why would you agree to one?

In order to reach agreement on other mtters of benefit to him.

 

[James uren]

If there is currently no restriction, why would you agree to one?

I cant simply just resign as i have no leverage on selling the shares . Resigning as an employee and leaving my directorship in place until the sales have gone through seems to be my best option. There is now a document drafted up and sent out by the solicitor stating i must not take existing clients.

If there is currently no restriction, why would you agree to one?

 

[MikeJ]

I believe a restrictive covenant agreed as part of a share sale would be much more enforceable than one that's simply in an employment agreement. You can't negotiate a deal that includes certain terms, and then argue they're not enforceable or unfair at a later date.

 

[fisicx]

There is now a document drafted up and sent out by the solicitor stating i must not take existing clients.

But if those clients approach you it’s a different matter. This needs to be in the covenant.

 

[IanSuth]

But if those clients approach you it’s a different matter. This needs to be in the covenant.

Yes and a timescale

For instance why shouldn't you approach them in 2, 5 or 10 years

 

[DontAsk]

I cant simply just resign as i have no leverage on selling the shares . Resigning as an employee and leaving my directorship in place until the sales have gone through seems to be my best option. There is now a document drafted up and sent out by the solicitor stating i must not take existing clients.

What's the trade off between taking the clients with you and hitting the ground running or selling your shares and rebuilding from scratch?

Would your clients want to move with you?

If you resigned as an employee would the workload be too much for your partner?

Lots of options here, and you do have some leverage.

 

[Kixoponev]

IDK
Restrictive covenants can usually be enforced for a specific period, like 6 to 12 months, but it depends on your contract and what's considered reasonable. They can't stop you from working in your industry forever. If a client contacts you after you leave, you should be cautious. It's best to check your contract or get legal advice to be sure, but usually, you should avoid working with them to stay out of trouble.

About resigning as an employee but keeping your directorship, it's a bit tricky. You can technically do it, but it might create some tension. It’s important to follow any rules in your company’s constitution or shareholder agreements. Again, legal advice might be helpful here to make sure you’re doing everything by the book.