Business Law Legal Alert
The August edition of the Business Law Legal Alert from Spencer Laymond showcases a choice selection of legal developments for SME business owners.
In this edition we have three interesting cases, two in the High Court and one from the Court of Appeal:
- The global headhunting firm’s defective 6 month non-compete restriction
- 8 Reasons why Sports Direct founder Mike Ashley did not agree to pay a £15m bonus
- Valuing the Rolex Watch Valuer
We also have two statutory updates:
- the New Money Laundering Regulations 2017
- Updates to People with Significant Control (PSC) Regulations 2017
I hope you enjoy the read. If you have any particular areas you would like some focus on, the please let me know. Until next time.
Global headhunting firm’s defective 6 month non-compete restriction
The Court of Appeal has held that a Co-Global Head of Financial Services Practice Group and partner of the international headhunting business Egon Zehnder Ltd was not in breach of a six month restrictive covenant clause, by starting work with a US competitor business, within six months of her employment terminating with EZ.
The restrictive covenant clause provided: “You shall not…at any time within the period of six months from the Termination Date…be engaged or interested in any business carried on or in competition with any business of [EZ] which were carried on at the Termination Date or during the period of twelve months prior to that date and with which you were materially concerned during such period”.
It is standard practice in the professional services industry to include contractual clauses in an employee’s employment contract, to restrict employees from damaging the business after they leave. Typically clauses cover non-competition, non-solicitation of clients, non-poaching of staff, and non-interference with business.
There can be a lot of debate about whether restrictive covenants are enforceable. Are they worth the paper they are written on? Under English law, restrictive covenants are potentially void on the basis that they are an unlawful restraint of trade, however, they are enforceable if, and only if, they go no further than is necessary to protect the legitimate business interests of the employer. Classic business interests protected therefore will be relationships with customers and staff, trade secrets and other confidential information.
In reading the above clause in Mary Caroline Tillman’s contract, you may be forgiven for wondering what may have been unlawful about the six month restriction against a senior partner in an international business from being engaged or interested in a competitive business. Surely that is reasonable? Surely the restriction protects a legitimate business interest?
In the present case Ms Tillman argued a technicality in the drafting. She argued the clause was unreasonable as it would have the effect of restricting her from being able to have any interest in any competitive business, whether or not she did in fact intend to have any interest in another competitive business. For example, for investment purposes, she may wish to be a shareholder in a competitive business holding a token one share. Such a small shareholding, even in a competitive business, could not affect EZ’s business. The restrictive covenant, as drafted, restricted Ms Tillman from having this token interest and was therefore unreasonable.
The Court of Appeal agreed and found the clause invalid because its theoretical risk was impermissibly wide.
This case can read as a win for the employee, but it should not be mistaken for a rule that undermines the effectiveness of restrictive covenants. Carefully drafted, restrictive covenants can and will be valid and enforceable. If it is important to you and you are concerned about the validity of restrictive covenants in employment, shareholders or partnership agreements, then specific legal advice should be obtained as there is a fine balance to strike.
In the present case, a short addition to the restriction, permitting Ms Tillman from holding, say, up to 5% of the shares in a competitive business, “for investment purposes only”, would have been the difference to have made the clause effective.
I want to read the case report http://www.bailii.org/ew/cases/EWCA/Civ/2017/1054.html
8 Reasons why Sports Direct founder Mike Ashley did not agree to pay a £15m bonus
The question in the case was whether Mike Ashley, the founder of Sports Direct, had agreed to pay investment banker Jeffrey Blue £15m if Mr Blue could double the share value of Sports Direct from £4 to £8 per share, the purported agreement having taken place in the Horse & Groom public house in Great Portland Street, London W1. The meeting was for Mr Blue to introduce to Mr Ashley three representatives of a potential new corporate broker for Sports Direct; Bank of America Merrill Lynch having resigned as the Sports Direct corporate broker. Mr Ashley then paid £1m to Mr Blue for, “other work”. Mr Blue sued for the balance of £14m.
This is another case affirming the principle under English law that a contract cannot be made without sufficient intention to create a legally binding arrangement.
It may have been an interesting night to have been a fly on the wall at the Horse & Groom, where the drinking and discussions began but the point here is: can you form a valid and binding legal agreement over a beer at the pub? The answer is yes, it is certainly possible. With few exceptions (such as selling your home) there is no legal requirement for a contract to be written, but, and especially in relation to something material, a written agreement is clearly going to be beneficial for certainty and evidential purposes.
When agreements are not written down, the courts apply an objective test to determine the intention of the parties. What is required is a consideration of what was communicated between the parties by words or conduct and “whether that leads objectively to a conclusion that they intended to create legal relations and had agreed upon all the terms which they regarded or the law requires as essential for the formation of legally binding relations”.
We can make our own assessment of intention, objectively speaking, by briefly looking at some of Mr Blue’s evidence. Mr Blue’s evidence was that at the Horse & Groom Mr Ashley said words to the following effect: “What should I do to incentivise Jeff? If he can get the stock to £8 per share why should I give a **** how much I have to pay him, as I will have made so much money it doesn’t matter. So let’s say if Jeff can get the stock to £8 per share in the next three years, I’ll pay him £10 million. Jeff: what do you think?”
Later on, one of the other corporate advisers had said, following a trip to the toilet:
“Look Mike, I’ve given this some more thought and given how much money you stand to make if Jeff can get the stock to £8 per share, you should really pay him £20 million.”
The response from Mr Ashley was then something like: “Now that’s more like it, but I’ll tell you what, let’s split the difference and call it £15 million if the stock gets to £8 per share in the next three years.” and words to the effect of: “Yes, that sounds fair.”
This alleged agreement was not recorded in writing and within months of the agreement the share price started to increase and an increase to £8 per share became a real possibility.
Mr Blue also said in evidence that he approached Mr Ashley some months later and said: “Mike, can I have a word? … I just want to make sure that we are still on with our agreement.” According to Mr Blue, Mr Ashley replied with words along the lines of: “Jeff, I’ve got it, I’ve got it. We’re cool, we’re cool.” So, do we think there was sufficient intention?
Having assessed the evidence, Mr Justice Leggatt set out eight reasons why there was no valid contract in the present case. Here are just some of them. For all of them you will have to read the case transcript:
- First – even recognising that a contract can be made informally and that Mike Ashley liked to conduct business in informal settings where alcohol was consumed, an evening of drinking in a pub with investment bankers is an unlikely setting in which to negotiate a contractual bonus arrangement for Mr Blue.
- Second – the evidence showed that the conversation was jocular in nature and tone and that the suggestions as to Mr Blue’s remuneration were mere “banter”.
- Third – it was fanciful to suggest that it was within Mr Blue’s power to move the share price to £8 per share.
- Fourth – the alleged offer was too vague for it to be taken as seriously meant. For example, there was no consideration of what work Mr Blue would have to do to earn the payment and how that work would be measured.
For a binding contract to exist and be enforced, the terms must be certain. Further, whether over drinks at the pub or more formally, agreements should be complete and not lack any essential term. Agreements should be certain, clear and unambiguous.
In the present case, as the judge concluded: “The fact that Mr Blue has since convinced himself that the offer was a serious one and that a legally binding agreement was made, shows only that the human capacity for wishful thinking knows few bounds”.
I want to read the case report http://www.bailii.org/ew/cases/EWHC/Comm/2017/1928.html
Valuing the Rolex Watch Valuer
Watchfinder.co.uk is a company which buys and sells pre-owned watches – the idea being that a pre-owned watch will cost you less than the equivalent purchased new.
A misunderstanding over the meaning and application of a term in a share option agreement in late 2010 entitled option holders to secure 5% of the issued capital of the company for £150,000 when they exercised it in March 2016. Between these dates the company had significantly increased in value – in 2010 turnover was £11m with pre-tax profits of £670,000 and in 2016 turnover was £60m with pre-tax profits of £3m. Indeed, in late 2014 other investors paid US$5m for a 15% shareholding.
It should be noted that the option holders had, at the same time, also been retained by Watchfinder to provide business development services under a separate services agreement. The option holders had relationships with large network of businesses, investors and high net worth individuals in the lifestyle and luxury goods sectors for example having acted for Rolls Royce, Bentley and Cartier. One of the option holders was also a director of the luxury goods group owning Cartier and Montblanc.
The specific issue here though was the clause in the option agreement which provided that the option could only be exercised with the consent of the majority of the board of directors [emphasis added] of Watchfinder. At the time of exercise, the board did not consent and so they rejected the option as valid. Apparently all the directors had in mind was the share value. They had barely discussed the matter, they had not exercised any discretion and any discussion they may have had was on a mistaken view of the meaning of the clause and was arbitrary. The legal question here looks at the rationality of directors when they make decisions.
When directors make their decisions, there is a requirement that they do so in a way which is not arbitrary, capricious or irrational. There should be a proper process adopted in making the decision, for example taking into account the material points and not taking into account irrelevant considerations. The decisions of directors should not be outside what any other reasonable decision maker could decide, irrespective of how the decision is made.
In the present case, the role for the directors when considering whether to provide consent to option holders, was to have considered, in the wider context of the separate services arrangements, whether the option holders had made a real or significant contribution to the growth or progress of Watchfinder. The directors could not just disregard giving the matter any consideration. If they could, then the option would have been meaningless and in light of the wider services, the option was part of an overall package.
If you are a director of a company, the case refreshes the requirement for directors to be mindful of their legal duty to act rationally when making decisions. Directors will also owe many other legal duties under company law, such as the duty of care, the fiduciary duty, and the duty to avoid conflicts of interest.
When drafting option agreements, it will be considerably clearer to contract in absolutes when it comes to whether the option is exercisable. For example, the option agreement could have provided the option holders the right to exercise if, through their separate services, they increased the value of the Watchfinder by £X. By fixing a line in the sand, there is a clear hurdle. The hurdle is either cleared and the option is exercisable, or it is not and the option is not exercisable.
I want to read the case report http://www.bailii.org/ew/cases/EWHC/Comm/2017/1275.html
The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 aka The Money Laundering Regulations 2017
Effective from the 27 June 2017, the new Money Laundering Regulations 2017 are the fourth iteration of the EU’s legislative program to combat money laundering and terrorist financing. It is a larger document coming in at 118 pages, whereas its predecessor regulations of 2007 were (only) some 48 pages.
Those of us working in the professional sector are no strangers to the principles of having to identify and verify the identity of our clients. The new regulations impose a higher level of obligations in certain areas, however two points are worthy of note for this update.
First, when dealing with clients who are corporate bodies (the limited company or limited liability partnership), the obligation on the advisor is now more prescriptive. For small and medium sized corporate clients, the obligation will be to obtain and verify the following information:
- legal name;
- company number or other registration number; and
- the address of its registered office and, if different, its principal place of business.
- the law to which it is subject and its constitution or other governing documents and
- the names of the board of directors (or equivalent management body) and the senior persons responsible for its operations.
Second, UK corporate body clients must now provide the above information on request, and within 14 days notify the advisor of any changes it becomes aware of. For professionals who may have experienced resistance from clients, it may be helpful to now point out that non-disclosure (assuming the client is required to disclosed by section 43 of the Money Laundering Regulations 2017) is now a criminal offence.
The Information about People with Significant Control (Amendment) Regulations 2017
On 6 April 2016 new regulations came into force requiring companies to keep a new statutory register of persons of significant control (PSC Register). The requirement is for companies to produce, keep and maintain a dedicated register of people with significant control of that company. Hopefully all corporate clients will now have created their PSC Registers and filed the relevant PSC disclosures with Companies House.
As a recap the key requirements are for companies, within scope, to take reasonable steps to identify individuals that hold significant control by reference to five separate measures, known as the specified conditions.
For an individual to be a PSC, the main conditions to be a PSC are:
- they hold, directly or indirectly, more than 25% of the shares in the company (first specified condition).
- they hold, directly or indirectly, more than 25% of the voting rights in the company (second specified condition).
- they hold the right, directly or indirectly, to appoint or remove a majority of directors of the company (third specified condition).
- they have the right to exercise, or actually exercise, significant influence or control over the company (fourth specified condition).
In relation to the fourth specified condition, there is no statutory test for what constitutes “significant influence and control”, but according to the Government’s guidance:
“Control” indicates that a person has the right to direct the policies and activities of a company, whereas “significant influence” allows a person to ensure that the company adopts the policies and activities that the person desires. Neither concept seems to depend on a person seeking economic benefit.
From 26 June 2017, a key change to the PSC Regulations is that companies are now required to record changes to their PSC Register within 14 days of obtaining the information, and file the information with Companies House within a further 14 days.