There are good reasons to having a Shareholders’ Agreement when running a business through a private company with co-shareholders, some of which I set up in my previous article 6 Reasons to Have a Shareholders’ Agreement”.
Most Shareholders’ Agreement will include Restrictive Covenants provisions - what do we mean by Restrictive Covenants and why are they important?
Restrictive Covenants, as the name hints, come to restrict a leaving Shareholder from competing with the business of the company, for a certain period of time (usually around 12 months) after his/her departure. This includes not only the setting up of a competing business, but also a restriction on the solicitation of employees/clients/suppliers to leave the company.
These restrictions are especially important, where the leaving Shareholder was acting as a director or officer of the company possessing crucial information on the company and its business. The remaining Shareholders would want to make sure that the leaving Shareholder does not, for example, immediately upon his/her leaving start a new similar business and having had the crucial knowledge and connection, compete and negatively affect the business. They would wish to have some kind of a cooling off period.
Of course, the restrictions could not be too wide or too long. They should be within those reasonable parameters that are needed for the legitimate protection of the company and its business. It could be limited by distance from the business (for the setting up of a similar business, although in some cases a complete restriction may be more appropriate) and of course limited in time.
What should be regarded as reasonable?
That would depend on the circumstances, of course, such as, for example, how involved the leaving Shareholder was in the business.
The Agreement will usually also contain some Restrictive Covenants during its time, i.e. making sure that the Shareholders invest their entire time for the benefit and promotion of the business. However, in some cases, as we recently dealt with for our clients, not all the Shareholders are equally involved in the running of the business, and therefore any such terms should balance between the need to protect the interests of the business and the other Shareholders. The Agreement should provide a workable framework.
If you own a business with co-Shareholders and not yet have an agreement in place or you have an agreement that may need some updating, please do not hesitate to contact us for a friendly chat to see how we may help you.