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Can a restrictive covenant prevent a former employee from being a shareholder in a competitor business?

Mary Caroline Tillman v Egon Zehnder Ltd [2017] EWCA Civ 1054

In the case of Mary Caroline Tillman v Egon Zehnder Ltd [2017] EWCA Civ 1054 the Court of Appeal has determined that a non-competition covenant that restrained a former employee from becoming a shareholder in a competitor for a period of six months was impermissibly wide and in restraint of trade.

The non-competition clause in the appellant’s contract of employment stated that “[y]ou shall not without the prior written consent of the Company… within the period of six months from the Termination Date. … directly or indirectly engage or be concerned or interested in any business carried on in competition with any of the businesses of the Company … which were carried on at the Termination Date or during such period.”

The Court of Appeal held that on its proper construction the clause prevented the appellant from having a shareholding in a competitor business. In accordance with common usage and authority, it was impossible to say that a person holding shares in a company was not “interested in” the business of the company. The clause was therefore impermissibly wide and in restraint of trade, unless it could be severed.

Severance was not a viable option in the present case for two reasons. First, the clause would still be too wide even if the words “or interested” were omitted. If those words were deleted the question would then be whether a shareholding was covered by the words “directly or indirectly engage or be concerned… in any business carried on in competition”. In short, being a shareholder in a company carrying on a business did amount to being concerned in that business albeit “indirectly”. Secondly, the relevant clause was a single covenant. Severance could only take place where there were distinct covenants.

Although the appellant did not intend to actually acquire any shares in a competitor business, in allowing her appeal, the Court of Appeal underlined the public interest policy in the law avoiding contracts in unreasonable restraint of trade to promote competition and protect employees from too readily abandoning the exercise of their right reasonably to compete after termination.

Elizabeth Dwomoh / 27th Jul 2017


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