Settlement agreement did not discharge employee from non-compete obligations in shareholders’ agreement


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Posted on 10 Jan 2019

The Commercial Court has ruled that an employee who entered into a settlement agreement on the termination of his employment was not discharged from non-compete obligations contained in a shareholders’ agreement.   

Facts

In Ideal Standard International SA v Herbert, Mr Herbert was employed by Ideal Standard International BVBA (“Ideal Standard”), the main operating company in the Ideal Standard Group, and was a member of the executive management team. His employment contract contained confidentiality obligations but it did not contain any post-termination restrictions. However, he had also entered into a shareholders' agreement with some of Ideal Standard’s group companies (not including his employer) and held a relatively substantial shareholding. The shareholders’ agreement contained a non-compete restriction which stated that Mr Herbert must not, for a period of 18 months following the termination of his employment:

"carry on or be engaged in or concerned or interested in any business within the jurisdictions in which the Group carries on business ... that is in competition with [the business activities of the Group or any Group Company] as carried on at the Cessation Date."

The shareholders’ agreement provided that a waiver of any term or breach of that agreement had to be in writing and signed by or on behalf of the party granting it.   

Mr Herbert’s employment terminated on 18 May 2018 and he entered into a settlement agreement with Ideal Standard which was subject to Belgian law. The settlement agreement stated that:

  • It was intended to settle outstanding differences with the employer "and/or any other company" in the group 
  • The parties had no further obligations to each other, other than as set out in the agreement  
  • Mr Herbert waived his rights
  • Ideal Standard would  ensure the waiver also applied to other group companies
  • It was signed for and on behalf of Ideal Standard. 

A few days after entering into the settlement agreement, Mr Herbert commenced employment with one of Ideal Standard’s competitors.

Interim Injunction

Shortly after Mr Herbert started work at the competitor, two companies in the Ideal Standard group sought an interim injunction to prevent him from working for the competitor in breach of the non-compete provision in the shareholders’ agreement. In response, Mr Herbert argued that the settlement agreement had discharged the post-termination restrictions in the shareholders’ agreement and that in any event the non-compete clause was unreasonably wide and was therefore an unlawful restraint of trade. The Ideal Standard companies argued that non-compete clauses in shareholders' agreements are more strictly enforced than in an ordinary employment context. 

Decision

The Court granted the interim injunction. 

Settlement agreement

The Judge ruled that the post-termination restriction in the shareholders’ agreement was preserved, despite the wording in the settlement agreement. Mr Herbert had waived claims against Ideal Standard, not the other way round. The Judge also noted that there was no reference in the settlement agreement to the shareholders’ agreement and that the shareholders’ agreement explicitly stated that any waiver of its terms had to be in writing.  

Enforceability

The Judge disagreed with the Ideal Standard companies’ argument that non-compete clauses in shareholders' agreements are more strictly enforced than in an ordinary employment context. It is not simply a matter of categorisation of the agreement. The Judge drew a distinction between a business sale (where restrictions on the seller would generally be enforced as reasonable as they are negotiated in a commercial context and have the legitimate aim of preventing sellers from attacking the goodwill of the business after the sale) and ordinary employees who hold a small shareholding in their employer as part of a share scheme. The Judge made clear that enforcement of a post-termination restriction like the one in this case had to be judged according to the principles applicable to other employees.  

The restriction would therefore only be enforceable if the Ideal Standard companies had a legitimate interest to protect and if the restriction went no further than necessary to protect that interest. Mr Herbert was important to the business’s relationship with clients and had access to confidential information with a significant shelf life and had years of working closely with other employees.  The Judge rejected the Ideal Standard companies’ argument that he was bound (because of the Court of Appeal decision in Egon Zehnder v Tillman) to find that the restriction was unreasonably because the restriction on being “interested in” a competing business extended to holding shares and contained no carve permitting a passive shareholding. 

He therefore concluded that there was a serious issue to be tried and that the balance of convenience was in favour of granting an interim injunction, as damages would not be an adequate remedy for the Ideal Standard companies.  

Implications

Although the Judge considered that the terms of the settlement agreement in this case did not discharge the employee from the post-termination restrictions in the shareholders’ agreement, this was down to the agreement’s wording and the fact that the employer was not also a party to the shareholder agreement. To avoid any doubt, where employees are subject to post-termination restrictions in a shareholder agreement or share plan, employers should ensure that there is express wording in the settlement agreement reminding the employees of their on-going obligations under those agreements and make it clear that the settlement agreement does not affect those obligations.   

The case also indicates that although, typically, the courts tend to uphold post-termination restrictions contained in commercial documents more readily than those in employment contracts, strictly there is no difference in approach. The cases should be seen as falling on a spectrum (ranging from business sale agreements at one end to ordinary employees with a small share as part of a share scheme at the other) and the question of reasonableness judged accordingly. A post-termination restriction should therefore always be drafted so that it goes no further than is necessary to protect the legitimate interest it is seeking to protect, whether it is contained in an employment contract, shareholder agreement or elsewhere.

The articles published on this website, current at the date of publication, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your own circumstances should always be sought separately before taking any action.

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