Canopy Law > Shareholder Agreements > Post-termination non-complete clauses

Post-termination non-complete clauses

The thing with business, especially small business, is that people tend to have their fingers in an awful lot of pies. Not surprisingly, this can lead to controversy, particularly if shareholders leave to set up, or are involved in, a company that has the potential to be ‘the competition’.

For some, this will be a matter of morals – how very dare you! I’d never poach customers, staff or ideas from this company I’ve invested so much time and effort in! I have principles, sir!

While for others, it’s a case of every man for him or herself – I have invested time and money in this place, but I think I can get a better return with my new venture, so laters losers!

Whatever your personal views on the right way to behave, a Shareholder Agreement can remove any uncertainty and ambiguity, ensuring that all shareholders comply with an ethical code that suits your company, including when and how they may compete with the company during or after their involvement with it. This is called a non-compete clause.

A non-compete clause in a Shareholder Agreement can place a restriction on shareholders from setting up in competition with the company while they are still involved with the company, and/or for a period afterwards.

This is often one of the most important clauses in a Shareholder Agreement because most departing shareholders will know so much about the company’s business plan and client list that they could do real harm by setting up in competition. However, this is also one of the most commonly infringed clauses.

The downside is that to get your ex-business partner to stop infringing requires you to take legal action to enforce the non-compete clause in the contract. If you are successful you may be able to recover some of your costs but, as with any legal action, it can be a real aggravation.

The point is that it is an imperfect solution, and a civil claim (breach of contract) not a criminal one – so Scotland Yard/NYPD will be singularly unimpressed if you phone them to complain that your former friend is stealing your clients!

If you find that your ex-business partner is poaching clients in breach of a restriction he signed in the Shareholder Agreement promising not to, your remedy is to claim damages for your loss, and possibly also to obtain an order from the court ordering him to cease poaching clients.

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