Shareholder Agreements Restrictive Covenants

The Court of Appeal in Guest Services Worldwide examined some of the authorities that distinguished between employment and commercial contracts and agreed that the English courts should be less vigilant in assessing shareholder agreements or similar agreements. In that case, the Court of Appeal held that the Court of Appeal had therefore held that the restrictive agreements of the shareholders` pact against Mr. Shelmerdine were enforceable. In the context of restrictive agreements in shareholder or other commercial agreements, English jurisdictions are generally considered to be more flexible, since after negotiation in a commercial context, it is likely that a more balanced bargaining power between the parties exists. English courts will continue to examine the reluctance of commercial doctrine and assess the adequacy of these restrictions, while applying a lesser degree of control. In general, with respect to restrictive agreements and trade restrictions, most of the decisions of the British court deal with employment contracts for which restrictions on trade doctrine are more likely to apply, since there is a tendency to have an imbalance of bargaining power in the context of employers and workers. However, the courts seem less vigilant when it comes to obtaining restrictive agreements for salaried shareholders and in commercial agreements. Mr. Shelmerdine was an advisor and shareholder and was subject (as an “employee shareholder” within the meaning of the shareholders` pact) to the restrictive agreements stipulated in the shareholders` pact. The restrictions applied as long as an individual remained a shareholder and for a period of 12 months after.

In applying the usual construction principles, the Court of Appeal defined the objective meaning of the terms used in the restrictive pact and examined them in relation to the real and commercial context. The Court of Appeal stated that the objective meaning of the words of the restrictive pact, when read in their real and economic context, was clear – to protect the company, its value and the value of its shares.