In the recent case of Austress-Freyssinet Pty Ltd& Ors v Kowalski [1], the NSW Supreme Court considered whether a restraint clause in a shareholders' agreement should be enforced.
Background
Mr Andrew Anthony Kowalski ("Mr Kowalski") was employed as a Managing Director of Austress-Freysssinet Pty Ltd ("Austress") from 1999 to 2005 and had been a director since 1984. Austress was a specialist construction contractor specialising in "pre-stressing" concrete. Its principal activities were in Australia but it also held contracts in Indonesia, Hong Kong and Malaysia.
20% of the shares in Austress were owned by Freyssinet SAS ("Freyssinet") and 80% by Immer (No 141) Pty Ltd ("Immer"). Freyssinet owned 75% of the voting shares and 68.75% of the ordinary shares in Immer, whilst Mr Kowalski owned the remaining 25% of voting shares and 31.25% of ordinary shares.
The shareholders' agreement ("the Agreement") between Freyssinet, Austress, Immer and Mr Kowalski provided for the grant of a call option (after July 2009) to Freyssinet over all of Mr Kowalski's shares in Immer in addition to a put option to sell all of Mr Kowalski's Immer shares to Freyssinet. The put option was exercisable upon:
- Austress' Board deciding that Mr Kowalski should cease to be the Managing Director of Austress;
-
any disability suffered by Mr Kowalski, preventing him from continuing employment; or
-
Mr Kowalski's death, by his executors.
Mr Kowalski also undertook to refrain from the following activities for the following time periods:
| 1. |
being involved in any capacity in any business similar to that of Austress (3 years after termination); |
| 2. |
soliciting any customers of Austress (2 years after termination); and |
| 3. |
enticing away any employee, director, agent associate or adviser of Austress (1 year after termination) as well as during the Agreement. |
Additionally, Mr Kowalski agreed that he would not at any time after the Agreement, use or disclose any confidential information unless required by law or use a logo, symbol, trademark or business name substantially similar to those used by Austress.
Mr Kowalski was removed as Managing Director of Austress in November 2005. He did not exercise his put option and remained a director of Immer.
In March 2006, Kowalski became a director of NT Pre-Stressing Pty Ltd ("NT") (then Hiloft Pty Ltd). In May 2006, he became a shareholder in Global Concrete Industries Pty Ltd ("Global") (then Ventor Holdings Pty Ltd). As of May 2006, Global owned all the shares in NT. NT engaged in the same pre-stressing work as that carried on by Austress.
Restraint of Trade
The issue in this case revolved around whether the restraint in the Agreement could be enforced against Mr Kowalski.
Under the Restraints of Trade Act 1976 (NSW) determination of whether enforcement is possible depends on:
Court Conclusions
Employment restraint
It was clear that Mr Kowalski was in breach of the employment restraint provisions. The court also found that the restraint was not contrary to public policy. The purpose of the restraint was to retain the value of Austress and Immer after Mr Kowalski's departure. Mr Kowalski's activities with the new company could result in reduced earnings and profit for Austress and Immer in the future. Therefore, the restraint on those activities was reasonable.
However, the area of restraint was geographically unlimited and thus unreasonable. The restraint should have been limited to the areas claimed as areas of operation.
The restraint to 2012 (the year of the call option, 2009, plus 3 years) was not unreasonable. The period of restraint was agreed after negotiation; Mr Kowalski received substantial benefits from the Agreement (including the put option); the benefit of the put option continued for his estate; Freyssinet had a real interest in maintaining the value of its business and Mr Kowalski had been with Austress for over 20 years so that a departure to a competitor would be detrimental to Immer's value as a company.
It was also open to Mr Kowalski to end the restraint period in December 2008 (by exercising his put option) but he considered his shares worth keeping. Austress' aim was to ensure the shares remained valuable after it acquired them. Given Mr Kowalski would only be 59 or 60 years of age by 2009, he would still be able to be involved with a competing business.
An order was therefore made restraining Mr Kowalski from acting in breach of the 3 year time period in the restraint clause.
The restraint from being a shareholder in a competing company was too wide. It should not restrict Mr Kowalski from being a shareholder in any listed public company of any country.
Confidential information
The fact that a person has access to confidential information may justify restraint in both a business sale type situation and an employment situation. However, the confidential information relating to Austress' budgeted margins and pricing systems was already 2 years old. 2 years from dismissal was therefore considered a maximum period of restraint for confidential information.
Lessons to be learned
This case illustrates that restraint clauses may be enforced in situations where a departing key employee and shareholder has the capacity to affect the value of a business. However there is no “one size fits all” formula. Where restraint clauses are in place, it is important to:
- consider carefully what is reasonable in the circumstances;
- consider geographical limitations, even if a business operates on a worldwide scale; and
- ensure that the restraint is not too wide so as to prevent holding an investment in a public company.
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[1] (2007) NSWSC 399
