Restrictive Covenants
Discussion
After advice from anyone who has been in a similar situation to myself
I've been with a smallish consulting business c250 heads for around 5 years. 3 years ago the business went through a PE funding round and I ended up with sweet equity which should the business grow, then I'd get a share of the sales proceeds. My equity stake is a low class of share which currently has 0 value, no voting rights and is a tiny stake in the overall size of the company. Whilst I am a director of the company, I am not involved in any board or strategic decisions unless they are filtered down
The economic backdrop coupled with some poor board decisions has meant the business has shrunk to <40% of its size due to redundancy rounds etc. I've started looking at other jobs as the future is uncertain
The main issue I have is that the Investment Agreement which was signed to get the sweet equity means that I have a non-compete clause of not working for business which is the same or similar type and would be in competition.
Given what I do, this will mean it is going to be difficult for me to obtain employment once I resign. Its effectively a handcuff or really a noose given what is going on
The main questions I have are:
1) Do I need to seek advice from an employment solicitor or a commercial law one given the covenant is in the investment agreement
2) How enforceable would the covenant be given its is very wide
Just need some help (paid advice) on unravelling this so I can move on
I've been with a smallish consulting business c250 heads for around 5 years. 3 years ago the business went through a PE funding round and I ended up with sweet equity which should the business grow, then I'd get a share of the sales proceeds. My equity stake is a low class of share which currently has 0 value, no voting rights and is a tiny stake in the overall size of the company. Whilst I am a director of the company, I am not involved in any board or strategic decisions unless they are filtered down
The economic backdrop coupled with some poor board decisions has meant the business has shrunk to <40% of its size due to redundancy rounds etc. I've started looking at other jobs as the future is uncertain
The main issue I have is that the Investment Agreement which was signed to get the sweet equity means that I have a non-compete clause of not working for business which is the same or similar type and would be in competition.
Given what I do, this will mean it is going to be difficult for me to obtain employment once I resign. Its effectively a handcuff or really a noose given what is going on
The main questions I have are:
1) Do I need to seek advice from an employment solicitor or a commercial law one given the covenant is in the investment agreement
2) How enforceable would the covenant be given its is very wide
Just need some help (paid advice) on unravelling this so I can move on
As it is not in the employment contract I would say if you terminated the investment agreement and do not receive any proceeds then it is done and dusted. The essence of the agreement is probably that you agreed to the non compete clause to get the equity, if no equity is forthcoming then the clause is redundant.
No-one can give you any help without looking at the clauses.
For the avoidance of all doubt, Restrictive Convenants can be enforced (subject to certain conditions). Yes, this can even stop you getting another job for a competitor for a period of time.
You also want to consider your notice period, whether you have garden leave and the likely impact upon any restrictive covenant of any such period of garden leave.
For the avoidance of all doubt, Restrictive Convenants can be enforced (subject to certain conditions). Yes, this can even stop you getting another job for a competitor for a period of time.
You also want to consider your notice period, whether you have garden leave and the likely impact upon any restrictive covenant of any such period of garden leave.
Just to clarify, Its a 12 months restrictive covenant on termination of employment. There are the other usual suspects in there such as non-poaching of clients and of staff
Notice is 3 months
I've found a decent employment solicitor to look at this but wondering if its more contract than employment law
Notice is 3 months
I've found a decent employment solicitor to look at this but wondering if its more contract than employment law
http://www.cambridgeemploymentlaw.com/oliver-pryke...
Highly recommended.
You are correct, this is a Commercial contract you will have signed under legal representation (shareholder representative as part of PE), NOT employment Law. The wider the covenant, the less likely it is for them to be bothered to try and hold up if it went nuclear, but you need to get advice. ABS and Traction control are off here.
I'd imagine, that if sanity prevails, you'd be triggering a loss of any equity/shares you hold under current contract but it would be unlikely it would be worth their time enforcing your moving to another company and so they'd let you do it... BUT Restrictive Covenants have teeth, this isn't a mere non-compete.
To be clean on this you'd need to speak to current employer and seek release from the covenant to join other-co. When you join Other-co you'll almost certainly be signing a warranty (& indemnity) in that Employment Contract that will declare you are not under and covenants that would preclude you working for Other-co freely. You don't want to be lying on that..... & you really don't want to join a new-co and have legal proceedings against you and that company commence immediately on starting, that's a bad look and you'll likely not be in the role very long!
Now many don't do this properly and chance it, and most probably get away with it..... but you want to be able to sleep soundly at night. Get advice & act with care.
Good luck.
Highly recommended.
You are correct, this is a Commercial contract you will have signed under legal representation (shareholder representative as part of PE), NOT employment Law. The wider the covenant, the less likely it is for them to be bothered to try and hold up if it went nuclear, but you need to get advice. ABS and Traction control are off here.
I'd imagine, that if sanity prevails, you'd be triggering a loss of any equity/shares you hold under current contract but it would be unlikely it would be worth their time enforcing your moving to another company and so they'd let you do it... BUT Restrictive Covenants have teeth, this isn't a mere non-compete.
To be clean on this you'd need to speak to current employer and seek release from the covenant to join other-co. When you join Other-co you'll almost certainly be signing a warranty (& indemnity) in that Employment Contract that will declare you are not under and covenants that would preclude you working for Other-co freely. You don't want to be lying on that..... & you really don't want to join a new-co and have legal proceedings against you and that company commence immediately on starting, that's a bad look and you'll likely not be in the role very long!
Now many don't do this properly and chance it, and most probably get away with it..... but you want to be able to sleep soundly at night. Get advice & act with care.
Good luck.
Edited by stuthe
on Sunday 25th February 20:44
on Sunday 25th February 20:44stuthe said:
said:http://www.cambridgeemploymentlaw.com/oliver-pryke...
Highly recommended.
You are correct, this is a Commercial contract you will have signed under legal representation (shareholder representative as part of PE), NOT employment Law. The wider the covenant, the less likely it is for them to be bothered to try and hold up if it went nuclear, but you need to get advice. ABS and Traction control are off here.
I'd imagine, that if sanity prevails, you'd be triggering a loss of any equity/shares you hold under current contract but it would be unlikely it would be worth their time enforcing your moving to another company and so they'd let you do it... BUT Restrictive Covenants have teeth, this isn't a mere non-compete.
To be clean on this you'd need to speak to current employer and seek release from the covenant to join other-co. When you join Other-co you'll almost certainly be signing a warranty (& indemnity) in that Employment Contract that will declare you are not under and covenants that would preclude you working for Other-co freely. You don't want to be lying on that..... & you really don't want to join a new-co and have legal proceedings against you and that company commence immediately on starting, that's a bad look and you'll likely not be in the role very long!
Now many don't do this properly and chance it, and most probably get away with it..... but you want to be able to sleep soundly at night. Get advice & act with care.
Good luck.
Thanks for the adviceHighly recommended.
You are correct, this is a Commercial contract you will have signed under legal representation (shareholder representative as part of PE), NOT employment Law. The wider the covenant, the less likely it is for them to be bothered to try and hold up if it went nuclear, but you need to get advice. ABS and Traction control are off here.
I'd imagine, that if sanity prevails, you'd be triggering a loss of any equity/shares you hold under current contract but it would be unlikely it would be worth their time enforcing your moving to another company and so they'd let you do it... BUT Restrictive Covenants have teeth, this isn't a mere non-compete.
To be clean on this you'd need to speak to current employer and seek release from the covenant to join other-co. When you join Other-co you'll almost certainly be signing a warranty (& indemnity) in that Employment Contract that will declare you are not under and covenants that would preclude you working for Other-co freely. You don't want to be lying on that..... & you really don't want to join a new-co and have legal proceedings against you and that company commence immediately on starting, that's a bad look and you'll likely not be in the role very long!
Now many don't do this properly and chance it, and most probably get away with it..... but you want to be able to sleep soundly at night. Get advice & act with care.
Good luck.
Edited by stuthe on Sunday 25th February 20:44
on Sunday 25th February 20:44On leaving, I'd be classed as a bad leaver and loose my share allocation. Whether I would get any of the cash back I paid to get those shares, I might but I've already written it off
I'd much rather sleep soundly at night and will play fairly in terms of not soliciting current or prospective clients (those being targeted or inflight), nor poaching their staff for the 12 month period. I will 100% up hold my end of the bargain in terms of not causing them a commercial loss knowingly
Potential employer knows there are restrictive covenants in place but not to the degree of not joining competition - I will obviously appraise them once I've got legal advice. I know I might have to bail on potential offer which will really grate on me!
If other-co really want you, they’ll give you time to make the exit work. Finding good people is hard, and you’re senior. It’s painful now, but if other-co see you hold up your end of your bargain with current employer, it actually reflects well on you as a professional.
So I’d explain to other-co and get advice asap.
You may be eligible for some Market Value of shares you have (if you have them and not options), not Fair Market Value it’ll be a pittance but it may be something- it would be in the Share Holders Agreement (SHA) Bad leaver provision, which you’ll almost certainly trigger!
So I’d explain to other-co and get advice asap.
You may be eligible for some Market Value of shares you have (if you have them and not options), not Fair Market Value it’ll be a pittance but it may be something- it would be in the Share Holders Agreement (SHA) Bad leaver provision, which you’ll almost certainly trigger!
The answer is negotiate with your employer. If you were to leave and join a competitor you have to assume they'd find out. Do you want to commit to changing your job and discovering after the event it's cost you a lot, or confirm with your current employer you'll lose your shares in return for them not enforcing the covenents?
As has been intimated, shareholder agreements with restrictions are less likely to be interfered with by the courts than employment contracts.
As has been intimated, shareholder agreements with restrictions are less likely to be interfered with by the courts than employment contracts.
dudleybloke said:
Could you argue that the bad decisions by the board have negatively affected the value of your shares and that the board had a duty of care towards maintaining the value of your investment?
Might help negotiate a better deal for your exit.
Given you’re asking the board a favour to let you leave, I’d be more structuring it more as, “wanting new opportunities, new challenges, exciting new direction for me”, rather than, “you’re all rubbish at your jobs” Might help negotiate a better deal for your exit.
Ultimately the moment you indicate a desire to leave they know they’ve likely lost you, you’ve checked out mentally. Forcing you to stay retains an annoyed and unmotivated employee that can be poisonous for other staff members. Any sane company would let you go unless you’ve got lots of big secrets and know-how. And as above, they may agree a gardening leave period if they really don’t want you going elsewhere quickly, but if they’re strapped for cash they’ll cut their losses too. Most likely. He says.
It's rarely worth burning bridges on the way out.
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