The Implications of Restrictive Covenants

The Role of Restrictive Covenants

In share purchase agreements (acquiring the entire company) or asset purchase agreements (selecting specific assets), restrictive covenants are critical to preserving the deal’s value. They typically include things such as –

• Non-Compete Clauses: preventing the seller from engaging in competing businesses within a defined area and timeframe;

• Non-Solicitation Clauses: prohibiting the seller from having contact with former customers, employees, or suppliers to safeguard relationships; and

• Confidentiality Obligations: ensuring that trade secrets remain protected, often indefinitely.

Such provisions shield the business’ goodwill - its customer base, reputation, and proprietary know-how - ensuring the buyer receives the full value of what they have paid for and assurance against unexpected hiccups post-sale.

Legal Perspective on Restrictive Covenants

English law views restrictive covenants as restraints of trade, presuming them void unless they meet strict criteria (Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] AC 535). To be enforceable, they must

1.  Protect a legitimate business interest, such as goodwill or confidential information;

2.  Be reasonable in scope, duration, and geography - tailored to the business’ needs; and

3.  Not harm public interest, such as by stifling competition.

Unlike employment contracts, where courts apply stricter scrutiny, restrictive covenants in business sales enjoy broader acceptance. Sellers, often well-advised and well-compensated, are seen as equals in the negotiation, making the provisions more balanced and enforceable.

Courts interpret restrictive covenants by looking at the parties’ objective intent, rooted in the deal’s commercial purpose. Ambiguities are typically resolved against the party who drafted the provisions, and the focus is on whether the restriction aligns with the business’s legitimate business needs. For sellers, the scrutiny is more intense with knowledge and industry connections making them a unique risk to the buyer and so justifying robust protections for a buyer.

Seller Restrictions

Sellers, particularly founders or key shareholders, can pose a competitive threat post-completion due to their intimate understanding of the business. Non-compete clauses aim to neutralise this, often barring involvement in rival ventures. If a seller remains a director or consultant in the business post-completion, fiduciary duties further restrict actions that could harm the buyer’s interests. Even indirect involvement such as funding a competitor or providing strategic advice can trigger a potential breach of the restrictions. Although passive investments, like minority shareholdings, may be permitted if explicitly carved out, active participation usually crosses the line.

Spill Bidco Ltd v Wishart [2025] EWHC 2513 (Comm)

The High Court’s ruling in Spill Bidco Ltd v Wishart offers a clear illustration. Bruce Wishart sold his hazardous materials business, Empteezy, in 2022. The share purchase agreement and an investment agreement prohibited him from being “engaged, concerned, or interested” in competing businesses for 2-3 years. As a non-executive director of the buyer’s parent company, he also owed fiduciary duties under Jersey law.

After the sale, Wishart supported rival ventures. He loaned over €150,000 to a Spanish competitor, Apex, introduced suppliers (misrepresenting Apex as a “sister company”), and offered advice. He also aided a UK rival with pricing guidance and storage facilities. Spill Bidco alleged breaches of the non-compete, non-solicitation, and fiduciary duties.

Mr Justice Foxton found Wishart liable. The court interpreted “concerned or interested” broadly, and while a loan alone might not suffice (William Cory v Harrison [1906] AC 274), combining it with active support constitutes a breach. The covenants were reasonable, protecting Empteezy’s goodwill within its operational markets. Wishart’s fiduciary duties were also violated, as aiding competitors conflicted with his loyalty obligations. The court granted declarations of breach, with remedies like injunctions and damages to be determined later.

Practical Implications

The Wishart case underscores the need for vigilance. Sellers must avoid even indirect involvement with competitors, as courts assess actions objectively, not intent. Buyers should draft covenants precisely, defining restricted activities and including carve-outs for permissible actions such as passive investments. In asset sales, restrictions should align closely with the transferred assets, but the core principle remains: protect the value of the deal.

Conclusion

Restrictive covenants are a buyer’s safeguard, protecting the value of what has been acquired by keeping the business’s goodwill intact. For sellers, the recent decision in Spill Bidco v Wishart serves as a reminder to tread carefully post-sale. As demonstrated, even well-meaning actions can spark legal trouble. Buyers and sellers should negotiate these clauses with care, respect their boundaries, and preserve the value of the deal.