SME Corner: When are Restraint Clauses in a Share Purchase Agreement Valid?

When buying a business it is important to ensure that the day after completion the seller(s) are prevented from immediately setting up in close proximity, damaging the revenue of the purchased business and harming the value of the investment. Thus it is standard for the buyer to insist on restrictions on the sellers for a period of time and within a territory.

Restraint of trade is contrary to public policy unless it is imposed to protect a legitimate interest of the beneficiary. Accordingly you cannot put in a blanket restraint of trade clause and expect it to work The restraint must be for the protection of a business being sold and no wider. Thus, a purchaser of a business is entitled to protect himself against competition on the part of the vendor but no more. So a parent company cannot impose restricted which would also protect its business from the competition of the vendor.

In an agreement for the sale of a business the reasonableness of a vendor’s restrictive covenant is to be judged by the extent and circumstances of the business sold and not by those of any business of the purchaser of which, after transfer, the business sold is to form a part.

It is essential when purchasing a business that you identify the geographical locations from which business obtains its work so that this spread can be included in the covenant. Furthermore, you also need to be extremely careful about the length of time that the restraint will last. Putting harsh terms in the agreement may have the affect of stopping the vendor from competing but that does not make the clause valid. The courts are entitled to strike out certain provisions if they find that the clause or clauses are contrary to public policy. The outcome can be perverse as it will mean that the business actually has not protection from the vendor at all.

If this is of interest to you please contact Brendan O’Brien on 01992 558411 or at Brendan.obrien@breezeandwyles.co.uk

 

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