This isn’t Sparta! Company denied interim injunction for non-compete restrictions contained in an investment agreement

read time: 3 mins

Famously, as a show of strength and confidence, Sparta, at the height of its power, built no defensive walls to protect itself. Sparta in a modern commercial world, in this case a recruitment company, took no such risks. It sought to protect its legitimate business interests, in the usual way of imposing commercial restrictions, non-compete and non-solicitation clauses, on its exiting employees.  

However, these attempts to protect itself have, for now, been thwarted by the High Court which refused to grant an interim injunction restraining a departing employee with 0.35% interest in the employer company.

This article looks at the Sparta Global Ltd & Anor v Hayes & Anor case, explores the court’s decision and advises how companies could protect themselves to avoid  similar disputes.

The problem for Sparta

Amongst other problems, Sparta had two differing sets of restrictions in place against the employee in question - one set in the employment contract and another in an investment agreement. Whilst the employment contract sought to restrict the employee from working for a competitor for six months, the investment agreement had a 12-month restrictive period. Sparta asked the court to impose an interim injunction for 12-month period provided for in the AI. 

Sparta argued that the investment agreement was in all measures a shareholders’ agreement, and therefore subject to a wider latitude in the court’s assessment of whether the restrictions were reasonable. Typically, reasonableness of restrictions contained in an employment agreement is approached less generously than those in a commercial agreement. 

The court considered the true nature of the investment agreement deciding that it was ‘closer to an employee [agreement than it was to a] shareholder contractual arrangement, based on an inequality of bargaining power, not having being negotiated, having been presented as a fait, without Mr Hayes receiving legal advice and amounting to only 0.35% of the company's shareholding. The defendant's very limited shareholding was compensable on his termination by £1.’

The court also weighed in the fact that Sparta had protection in the employment agreement but was seeking to enforce the longer period in the investment agreement. The court misliked the fact that Sparta ‘continually fail[ed] to explain despite repeated enquiry from the defendant and the court why such protection [in the employment contract was] no longer sufficient.’ 

How to overcome the problem 

There were various other decisive elements of the court’s decision, however, by the time Sparta took this matter to court, it was seemingly already too late for them. The way it sought to protect its position contractually, set the court against it. It is not uncommon for employees to have some kind of shareholding or interest in their employer company. It is entirely lawful and commercially sensible to regulate that interest in an investment or shareholders agreement or similar governing contract.  

Where that is a significant interest, for example a founder shareholder owning 20% of the company, the position is likely be very different to the Spartan battle decided in this case. However, where such a shareholding is very limited, in essence, an employee benefit, any contractual arrangements governing that shareholding is likely to be considered by the court, for the purposes of interim injunctions and assessing reasonableness of any restrictions, as adjunct to an employment contract.

Had the restrictions in the employment contract and the investment agreement aligned or if there was a sensible commercial rationale for increased protection being required by virtue of the employee being a very minor shareholder, the outcome for Sparta could have proven different. 

It’s vital to obtain legal advice before such arrangements are in place to maximise the chances, should the need arise, of enforcing the valuable contractual protection that ought to have been available to Sparta. 

For more information, please contact the commercial disputes team.

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