Non-compete Reform: When Equity Becomes The Restraint

A senior executive at a private equity-backed business wants to join a competitor. Their employment contract contains a six-month non-compete, but the more significant deterrent may be elsewhere. Under their management incentive plan (MIP), joining a competitor could cost them £1 million. The employment contract restricts what they can do. The equity documents determine what doing it might cost.

Businesses have legitimate reasons to protect themselves when important people leave. Under English law, an employee’s non-compete must protect a legitimate business interest and go no further than reasonably necessary. A founder selling a business may accept wider restrictions because the buyer has paid for goodwill. A senior executive can be an employee, director and shareholder, with restrictions arising from several different commercial bargains. But putting a restriction in shareholder documents does not, by itself, turn an employment restraint into a sale-of-business covenant. The