8. Restrictive Covenants
Most shareholders in companies would rather that their fellow shareholders did not:-
- disclose confidential information to third parties
- set up or carry on a competing business across the road whilst remaining a shareholder in the company
- set up or carry on a competing business across the road in the period immediately after they cease to be a shareholder
- sell their shares and immediately ‘poach’ key staff
- use the company’s trading name (or one very like it) in a competing business.
Without a Shareholder Agreement there is little to prevent any of the above. Whilst some shareholders who are employed by the company may be subject to the terms of a service contract which might contain restrictive covenants which would operate for a certain period of time after termination of employment, it is important to consider the same sort of restrictions for shareholders who are not so employed.
Even if the shareholders are also directors and have a service contract with restrictive covenants, it is important to consider what restrictions ought to apply to them as shareholders too. For example a shareholder may cease to be a director or employee but remain a shareholder. If there were no restrictive covenants in a Shareholder Agreement, such a shareholder would be free for example to compete with the company as soon as the period of the restriction under his employment contract had ended.
These kind of provisions in a shareholder Agreement require careful drafting, else they may not be enforceable. However they are worth including anyway in the best interests of the company and the other shareholders as it can act as a deterrent, regardless of whether a court would ultimately decide about reasonableness and enforceability.
9. Enforced Departure
A Shareholder Agreement can be used to set out the circumstances in which a shareholder can be forced to leave on the occurrence of certain stipulated events. These ‘relevant events’ could include:-
- fraud/dishonesty
- material breach of the shareholders agreement
- physical incapacity
- bankruptcy
The consequences of not having previously agreed provisions in place to cover such scenarios can be significant.
Nothing in this awareness article is intended as legal advice. If you have a specific legal requirement or query you should consult a solicitor directly.