Kynixa Ltd v Hynes & Ors

Covenants in restraint of trade contained in a shareholder agreement may be enforceable against an employee-shareholder where the shareholder voluntarily accepted the agreement in return for a potential financial benefit. Enforceability depends on whether the covenant protects a legitimate business interest and extends no further than reasonably necessary, assessed when the covenant was entered into and in the circumstances of the particular person against whom enforcement is sought.

An anti-competition covenant may be justified where confidential information is difficult to identify or police and narrower restraints would provide inadequate protection. A senior employee or director who knows that colleagues are being recruited by a competitor may owe a fiduciary duty to disclose that activity. Preparatory steps towards future competition do not necessarily breach that duty, but concealment of a developing competitive move involving several employees may do so.

Kynixa Limited claimed liability against three former senior employees. The claims concerned breaches of employment contracts, a shareholder agreement, implied duties of fidelity and, in the case of the first and second defendants, fiduciary duties.

The first and second defendants had become shareholders and were subject to restrictive covenants in the shareholder agreement. The second and third defendants had later signed statements of principal terms and an employee handbook, which Kynixa said did not displace earlier employment contracts containing restrictive covenants. All three defendants subsequently left Kynixa and joined Scion Management Limited, within the Parabis Group, which included competing rehabilitation businesses.

The principal issues were whether the shareholder agreement bound the first defendant, whether earlier contractual restraints survived the later employment documents, whether the shareholder covenants were enforceable, and whether the defendants breached contractual, fiduciary or fidelity duties by concealing their recruitment and retaining confidential information.

1. Shareholder agreement. The first defendant became bound by the shareholder agreement when he purchased shares. The offer to sell carried the condition that he would become bound by the agreement. The failure to execute the contemplated deed of adherence did not prevent contractual acceptance where offer, acceptance, consideration and intention to create legal relations were established. Clause 11, read as a whole, contemplated that transferees would be bound.
2. Employment documents. The statements of principal terms and the handbook objectively presented themselves as the contractual basis of employment. They superseded the earlier contracts of the second and third defendants, including their restrictive covenants. No clear communication preserved those earlier terms, and the omission of restraints from the later documents supported that conclusion.
3. Restrictive covenants. Applying the principles summarised in Brake Brothers Limited v Ungless [2004] EWHC 2799, clauses 7.1.2, 7.1.3 and 7.1.4 protected legitimate interests in customer connections and staff stability. Twelve months was reasonable in the competitive rehabilitation market. Clause 7.1.1 was also justified. The defendants were senior employees and shareholders with access to confidential information, much of which would be difficult to identify or police after termination. The clause was not invalid merely because its wording could theoretically include a less senior employee-shareholder. Its reasonableness had to be judged in the circumstances of the defendants against whom enforcement was sought.
4. Fiduciary and fidelity duties. By early January 2007, or at the latest by late January, the first and second defendants were obliged to disclose approaches by the Parabis Group and the recruitment of the other defendants. The third defendant came under the same obligation when she knew of the approaches to all three. Their concealment was a continuing breach of fiduciary duty for the first and second defendants and of the implied duty of fidelity for all three. The incorporation of Flexsure, standing alone, was merely preparatory and did not breach duty.
5. Other breaches and outcome. The first defendant breached contractual and shareholder-agreement obligations by retaining confidential documents and working for competing businesses. The second defendant breached the anti-competition covenant but was not shown to have misused confidential information. The third defendant breached confidentiality obligations by retaining documents, although actual use causing loss was not established. Liability was therefore established in the respects identified; issues of relief were reserved for further submissions.