Guest Services Worldwide Ltd v Shelmerdine

Restrictive covenants in a shareholders’ agreement may bind an employee shareholder until the shares are transferred, followed by the agreed post-transfer period. The covenant is not automatically discharged when the shareholder’s employment, agency or directorship ends, where that construction would deprive the clause of practical effect.

Whether a restraint is reasonable depends on the legitimate business interest, the parties’ commercial context, and the duration, area and scope of the restriction. A 12-month restraint may be reasonable in a shareholders’ agreement between experienced commercial parties, even where the period runs from cessation of shareholder status rather than from the end of employment. A merely unlikely risk of delay in transferring shares does not make the covenant unreasonable.

Guest Services Worldwide Ltd appealed against parts of an order made by His Honour Judge Halliwell in the High Court (Chancery Division), Manchester Business and Property Courts, on 12 July 2019. The judge dismissed the company’s claim for relief based on restrictive covenants in a shareholders’ agreement and on a proposed new consultancy agreement.

Permission to appeal was granted on two issues. The first concerned whether the covenants in clauses 5.1 to 5.4 ceased when the respondent stopped being an employee or agent, or instead continued while he remained a shareholder and for 12 months afterwards. The second concerned whether that duration was unreasonable in restraint of trade. The respondent also relied on the scope and area of the covenants and on the absence of a proved breach.

1. Appeal allowed. The court rejected the construction that the restrictions disappeared when the respondent’s agency ended. Clause 5 had to be read as a whole, in the context of the shareholders’ agreement, the business being protected, and the Articles of Association.
2. The purpose of the restrictions was to protect the company, its goodwill and the value of its shares from conduct by employee shareholders who had knowledge of the business. On its proper construction, an employee shareholder identified in Schedule 1, or one who later adhered to the agreement, remained subject to clause 5.1 while a shareholder. The covenant then continued for 12 months after shareholder status ended.
3. This interpretation gave practical effect to the covenant and was consistent with the compulsory transfer provisions. When an employee, agent or director ceased to hold the relevant position, the Articles contemplated a deemed transfer notice and a relatively prompt process for ending shareholder status. The covenant was therefore not of indefinite duration merely because the transfer process might be delayed.
4. All restraints of trade are prima facie unenforceable unless reasonable. The court applied a less exacting level of scrutiny to covenants in a shareholders’ agreement than to ordinary employment restraints. GSW had a legitimate interest in protecting its business, goodwill, client relationships and business knowledge. A 12-month restraint was reasonable in the commercial context, despite the possibility of delay or, in an extreme case, a shareholder remaining locked in indefinitely.
5. The remaining objections concerning the area and scope of clauses 5.1 and 5.2 were essentially factual. They were remitted to the Business and Property Courts.

• Court of Appeal (Civil Division): [2020] EWCA Civ 85 . Appeal allowed on construction and duration. Issues concerning the area and scope of the restraints were remitted to the Business and Property Courts.
• High Court (Chancery Division), Manchester Business and Property Courts: His Honour Judge Halliwell dismissed the company’s claim on 12 July 2019, including on the construction of the shareholders’ agreement and the enforceability of the restrictions. Citation: BL-2019-MAN-000032.