A shareholders` agreement is a document that governs the relationship between shareholders (and directors) and how business is to be conducted. Normally, a shareholders` agreement is placed in the bottom drawer and recovered only in the event of a legal dispute or exit from the company. The New South Wales Court of Appeal had reason to consider the appropriateness of a restriction on departing estate agents and the agency`s attempts to protect their confidential information in Agha v Devine Real Estate Concord Pty Ltd & Ors, a decision of 9 March 2021. Shareholder agreements generally contain provisions on the settlement of disputes between shareholders. These clauses may include the requirement to first request that the dispute be resolved through mediation and/or arbitration. Therefore, the parties must first comply with the prescribed conditions for the settlement of disputes before initiating legal proceedings. Non-compete obligations that go too far to restrict either the types of business activities that the former shareholder may engage in or the place or time when the former shareholder may set up a competing company cannot be maintained. The courts are careful not to unfairly restrict trade, and agreements that have this effect are enforced very strictly and narrowly. It is important that a shareholders` agreement contains a rights clause. This ensures that an outgoing shareholder who leaves the company must first offer their shares to the remaining shareholders.
As a result, the remaining shareholders may prevent new shareholders from acquiring a stake in the company. Shareholder agreements generally also include unanimous approval of the issuance or transfer of shares to new shareholders. Does the restriction go beyond what is necessary to protect the interest in question? The restrictions contained in the shareholders` agreement and the employment contract were appropriate in the interest of the parties and the public, given Mr Agha`s seniority, and his position as a former shareholder was correct.  Mr. Agha also sought to undermine the effect of the restriction on the basis that the restriction imposed on the employee in the shareholders` agreement, formulated by reference to the business activity in the prescribed postal codes, was intended to prevent the employee from contacting a “regular customer” of the employer for a prescribed period of time. It is important to understand the effects of a trade restriction clause both as an employer and as an employee. The key is to find the balance between protecting your business and making sure the restriction is appropriate and enforceable. Mr. Brien was a former employee and director of Oomph Out of Home Media (Pty) Ltd (the Company) and continued his business as a shareholder when he terminated his employment relationship. During the course of his employment, Mr.
Brien signed a restriction of the commercial agreement as well as a shareholders` agreement that included a restriction. At the time of termination of his employment relationship, the company owed Mr. Brien more than ZAR 1.2 million. When reviewing your shareholders` agreement, it is a good idea to understand the clauses relating to the appointment of directors. Shareholders generally have the power to vote or elect directors. However, the weighting of a shareholder`s vote depends on the percentage of shares the shareholder holds within the company. If a shareholder wants or must sell their shares to the Corporation or other shareholders, it is important to have a purchase price that can be determined in accordance with the shareholders` agreement. The method of determining the purchase price could be calculated in a certain way. Mr Agha sought to circumvent the clause in the shareholders` agreement to protect the employer`s confidential information, that is to say, Devine`s customer lists, by arguing that the shareholders` agreement prohibited only the disclosure of the information to third parties and did not prohibit the employee from using Devine`s trade secrets or other confidential information for his own purposes. However, that decision was without prejudice to the final judgment that the two agreements were to coexist and each agreement therefore took effect on its own terms and for the purposes it specified. The appeal also pointed out that, since the employment contract had been concluded after the shareholders` agreement, any inconsistency between the two agreements had to be resolved on the ground that the subsequent agreement prevailed.
Other equally relevant considerations include the nature of the work, the geographic location of the restriction, the duration of the restriction, and whether the person has a business relationship or access to confidential and proprietary information worthy of protection. A court will have to decide whether, in all the circumstances of the case, it has been shown that the restraint clause should properly be considered inappropriate. However, the restriction of trade must be proportionate, taking into account the interests of the parties and the interests of the public, and the information to be protected must be genuinely confidential and not accessible to the public. In addition, for a restriction to be maintained, the employer must not have breached the contract on which it must rely to enforce the restriction. A trade restriction is a provision typically found in employment contracts that prohibits an employee from working directly or indirectly with a competitor for a certain period of time and in a limited geographic area after the end of their employment. A trading restriction may be included in other agreements, such as a shareholders` agreement, in which shareholders agree that they are not interested in or involved in another transaction similar to their company`s activities while they are shareholders and after they are no longer shareholders for a certain period of time and in a limited geographical area. This article focuses on trade restriction in the context of employment. You should seek legal advice when drafting the non-compete clause, as a properly worded clause prohibits shareholders from competing with the company while they own the company and for a short period of time after leaving the company.