Restrictions after a business sale

When buying or selling a business, it is not unusual for a buyer to request the seller to enter into certain restrictions. Typically, these state the seller will not, for a set period of time, work for a competing business or seek to entice away customers, employees or key suppliers from the business.

The primary purpose of such restrictions is to maintain the value of the sold business, so it is not undermined by the seller simply setting up in competition with the business and taking customers, employees or key suppliers with it. In essence, it enables the buyer to protect what it is paying for, including the goodwill of the business and the existing relationships between, for instance, staff and customers.

In the recent case of Rush Hair Limited v Hayley Gibson-Forbes, S.J. Forbes Limited [2016] WL 06066006, the High Court was asked to consider the restrictions given by the seller (aka the first defendant) following the sale of two hair and beauty businesses. It was alleged the restrictions had been breached by the first defendant and another company in which she was a director and shareholder (aka the second defendant). In reaching its decision, the court reinforced the importance of such restrictions, noting “if it were not possible to protect the goodwill by appropriate covenants, the businesses would be worthless”.

One restriction prevented the first defendant from canvassing, soliciting or employing named individuals from the sold businesses. In the facts of the case, those named individuals later approached the first defendant to request employment and ultimately came to work for the second defendant. The court considered the meaning of the terms “canvass” and “solicit”, and held they required a positive act on the part of the person giving the restriction to “make the first move”. However, the court went on to apply the “commercially sensible meaning” to the restrictions, considering that a restriction binding only on the first defendant in respect of acts done on her own behalf would be “toothless”. The only commercially sensible construction of the restrictions, in the court’s opinion, was that they apply “whether on her own behalf or as agent for another”. The matter was, therefore, “enough to breach the restriction”.

In determining whether the restriction was reasonable, and therefore enforceable, the court considered other factors. The court held the “inequality of bargaining power is one, but only one, of the factors to be considered” and the consideration paid for the businesses had been “substantial (as opposed to merely nominal)”. On the facts, the court determined a duration of two years was not unreasonable. Importantly, for potential buyers at least, the court reiterated comments from earlier case law that noted comfort can be derived from the fact there no case law has held restrictions have been unreasonable on the grounds of duration alone. Furthermore, the geographical location applied to the restrictions, essentially being Windsor, was also found to be reasonable. The restrictions were therefore determined to be enforceable.

For buyers, this case is a reminder of the importance of restrictions on the seller in a business sale and illustrates the court’s willingness to apply a commercially sensible approach to restrictions that might otherwise be ineffective. For sellers, it serves as a word of warning and a timely reminder to act carefully after a business sale, so as not to intentionally or inadvertently trigger any restrictions.

© SA LAW 2019

Every care is taken in the preparation of our articles. However, no responsibility can be accepted to any person who acts on the basis of information contained in them alone. You are recommended to obtain specific advice in respect of individual cases.
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