Today, we’re tackling an issue that can make or break your business—restrictive covenants and their role in protecting your company during shareholder, director or staff disputes. We will touch on their importance, how these should be incorporated into your documents and what should be included
Restrictive covenants are clauses in contracts designed to protect your business from those who know it best, know your trade secrets, clients and confidential information —these include your directors, shareholders, founders, and key employees.
These covenants prevent them from walking away with your clients, staff, or even setting up a competing business immediately after leaving
Without restrictive covenants, when relationships turn sour, your company becomes vulnerable. Whether it’s a co-founder leaving the company or a senior director moving on, the risk is the same. They could take with them valuable knowledge, contacts, and influence—potentially creating a rival business or poaching your team and clients, unless deterred from doing so
‘The Importance of Restrictive Covenants
For shareholders, directors, and senior staff, the stakes are particularly high. That’s why restrictive covenants for these individuals are often set for longer periods—typically 12 months or more.
For other employees, 3 to 6 months might suffice, but for those in key positions, longer restrictions are essential to give your business the protection it needs.
Caution
They need to be clear and reasonable though as you cannot stop someone from working unreasonably – for example you cannot stop an employee working for a non-competing business in London but who works with your clients as there is no conflict or potential loss. If it is competing business then this changes things
Types of Restrictive Covenants’
- Non-compete clauses prevents them from setting up or joining a competing business within a defined geographic area and timeframe.
- Non-solicitation clauses stop them from approaching your clients or employees.
- Non-dealing clauses goes a step further, ensuring they cannot do business with your clients at all, even if the client approaches them.
- Confidentiality clauses protects your sensitive business information from being used against you or disclosed to third party competitors
“But, it’s not just about adding these clauses to your contracts and hoping for the best. The wording and legal framework of these restrictive covenants must be carefully considered to ensure they are enforceable. Courts will strike down clauses that are too broad or unreasonable, so it’s crucial that they are tailored specifically to your business’s needs.”
‘Creating and Implementing Restrictive Covenants’
This is where policy comes into play. Your company should have a clear policy in place that covers restrictive covenants for all key roles. Make sure these clauses are embedded or considered legally binding in every relevant agreement—from employment contracts to shareholder agreements and director service contracts.
Timeframe
When drafting these provisions, think about what’s reasonable and necessary. For example, a 12-month non-compete clause might be vital for a departing director, but too restrictive for a junior employee. Tailor the duration and scope based on the individual’s role and access to your company’s assets, clients, and strategic information.
Remember, these clauses must align with legal standards. Overly restrictive covenants can be challenged and invalidated in court, leaving your business exposed. This is why it’s important to work with legal experts to ensure your agreements are solid, enforceable, and compliant with the law.
“In short, restrictive covenants are a powerful tool for protecting your business, but they need to be implemented with care. Whether you’re dealing with a departing founder, a shareholder dispute, or just looking to safeguard your company from future risks, having the right provisions in place is essential.
we specialize in crafting tailored agreements that protect your business interests while standing up to legal scrutiny. If you need assistance with drafting or reviewing your restrictive covenants, we’re here to help.”
