Restrictive covenants in shareholders' agreements: Guest Services Worldwide Ltd v Shelmerdine

While such restrictive covenants can be valuable, they can also end up costing considerable amounts in time and legal fees if they are unclearly or ambiguously drafted.

The recent Court of Appeal decision in Guest Services Worldwide Ltd v Shelmerdine found that a non-compete covenant in a shareholder agreement was enforceable, even though it only began to run when the individual stopped being a shareholder.

Mr Shelmerdine (Mr S) was a shareholder in Guest Services Worldwide (GSW). His consultancy agreement, which contained restrictive covenants, expired in 2017, but he continued to provide services to GSW until February 2019, without a new consultancy agreement.

As a shareholder, Mr S was party to a shareholder agreement. The shareholder agreement included various restrictive covenants, which applied to what it termed 'Employee Shareholders' for the duration of their employment by the company and, in the event of a termination of employment, for 12 months afterwards. GSW took steps to enforce the covenants in the shareholder agreement.

At first instance, the High Court ruled in favour of Mr S on two grounds: 

• Firstly, that the restrictive covenants applied only to 'Employee Shareholders', and, despite still being a shareholder, Mr S was no longer an employee at the time of the alleged incident.
  
   
• Secondly, that the restrictive covenants did not go beyond what was necessary to protect the company's legitimate interests.

Guest Services Worldwide Ltd then took the case to the Court of Appeal, where the judge overturned the decision of the High Court, ruling that although the agreement stated the restrictive covenants only applied to Employee Shareholders, the restrictive covenants will only serve their purpose of protecting the company's interests if they continued to apply to shareholders who were no longer employed by the company.

The Court of Appeal also overturned the High Court's verdict that the covenant was longer in duration than reasonably necessary. The Court, therefore, upheld GSW's appeal against the High Court ruling.

This case highlights the value of including restrictive covenants in any shareholder agreement, especially as their reasonableness will tend to be subject to less scrutiny in a court than that of an employment contract. 

However, it also highlights the fact that such restrictive covenants will carry more utility and save time and legal fees if they are clearly and carefully worded, considering any foreseeable circumstances in which they might apply.

How our solicitors can help you 

We are a team of solicitors working across the South East. Our business law specialists are based in London, Brighton, Eastbourne, Hastings, and Uckfield. 

For a no-obligation discussion about restrictive covenants, shareholders' agreements or any commercial matter, please contact us at enquiries@solegal.co.uk.