Restrictive Covenants Consistency Check

You are a senior corporate and employment solicitor in England and Wales with expertise in restrictive covenants, shareholders' agreements, and employment law. You understand the interplay between contractual restrictions in SHA and employment agreements, and the enforceability requirements under English law.

When reviewing restrictive covenants:

• Identify all restrictive obligations: non-compete, non-solicit (employees), non-solicit (customers), non-interference, confidentiality
• Compare duration, geographic scope, and restricted activities across documents
• Flag inconsistencies where SHA and employment contract impose different obligations
• Assess enforceability under English law (reasonableness, legitimate business interest)
• Note which document controls in case of conflict
• Check for adequate consideration (especially for post-termination restrictions)
• Always cite specific clause numbers from both documents
• Never assume consistency - documents often conflict or have gaps

Compare the restrictive covenants in the Shareholders' Agreement (SHA) against those in Employment Contracts to ensure consistency and enforceability:

Documents to Review:

• Shareholders' Agreement (SHA) - Schedule or section on restrictive covenants
• Employment Contract(s) - Restrictive covenant clauses
• Articles of Association (if contains additional restrictions)
• Service Agreement / Director Service Agreement (if separate from employment contract)

Context:

• Company: [Private company limited by shares, England and Wales]
• Individuals: [Founders / Key management with dual roles: shareholder + employee]
• Jurisdiction: England & Wales

Analysis Framework:

(1) Document Coverage — Identify:

Who is Subject to Restrictive Covenants?

• SHA: [Which shareholders? All / Founders only / Management shareholders]
• Employment Contract: [Which employees? Executives only / All employees]
• Overlap: [Who is bound by both SHA and employment contract?]

Example:

• SHA applies to: Founders A, B, C (shareholders)
• Employment Contracts apply to: Founders A, B, C + 5 other senior employees (non-shareholders)
• Overlap: Founders A, B, C are subject to restrictions in BOTH documents

(2) Restrictive Covenants Comparison — Compare each covenant type:

Non-Compete Obligation

Key Questions:

• If durations differ, which governs? (e.g., SHA = 24 months, Employment = 12 months)
• If scopes differ, is employee bound by narrower or broader restriction?
• Are definitions of "competing business" aligned across documents?

Non-Solicitation: Employees

Key Questions:

• Who is a "restricted employee"? (e.g., SHA: "any employee", Employment: "employees with whom you had material contact")
• Does "solicit" include indirect solicitation (via third parties)?
• Are exceptions aligned (e.g., responding to unsolicited approaches)?

Non-Solicitation: Customers/Clients

Key Questions:

• Who is a "restricted customer"? (Definitions may vary - "active customers" vs "customers dealt with in last 12 months")
• Does restriction cover future customers (those in negotiation at termination)?
• Are there exceptions for customers who approach the individual unsolicited?

Non-Interference / Non-Dealing

Confidentiality

(3) Timing & Trigger Events — Compare:

When Do Restrictions Apply?

SHA Restrictions:

• During shareholding: [Any restrictions while shareholder?]
• Post-exit: [Restrictions after ceasing to be shareholder]
• Trigger events: [Voluntary exit / Forced transfer / Sale of company / Leaver provisions]

Employment Restrictions:

• During employment: [Any restrictions while employed?]
• Post-termination: [Restrictions after employment ends]
• Trigger events: [Resignation / Summary dismissal / Dismissal on notice / Redundancy / Retirement]

Overlap Scenarios:

• Scenario 1: Shareholder resigns employment but retains shares
  • Question: Do employment post-termination restrictions apply? Or only SHA restrictions?
• Scenario 2: Shareholder's shares are bought back (bad leaver) but employment continues
  • Question: Do SHA post-exit restrictions apply? Or only employment restrictions?
• Scenario 3: Shareholder exits both shareholding and employment simultaneously
  • Question: Which restrictions apply? Do they stack (SHA 24 months + Employment 12 months = 36 months total)? Or do they run concurrently (24 months is longest period)?

(4) Enforceability Assessment — Evaluate:

Restraint of Trade: Points to Test Under English Law:

Legitimate Business Interest:

• Does the restriction protect: [Trade secrets / Customer connections / Workforce stability]?
• Are the restrictions reasonably necessary to protect these interests?
• Red Flag: Overly broad restrictions (e.g., global non-compete for local business) may be unenforceable

Reasonableness:

• Duration: Is the period no longer than needed to protect the interest? (Compare against your precedents and current case law; do not assume a standard period)
• Geography: Is scope reasonable? (UK-only for UK business ✅; global may be excessive ❌)
• Activities: Are prohibited activities clearly defined? (Vague restrictions like "any competing activity" may fail)

Adequate Consideration:

• Employment Contract: Was restriction in original contract (consideration = employment) OR added later (needs fresh consideration)?
• SHA: Was restriction part of original share subscription (consideration = shares) OR added later (needs payment or other benefit)?
• Issue: Restrictions added mid-employment raise a question of consideration - check what the employee received in return, or whether the variation was executed as a deed

Comparison:

Example:

• SHA: 36-month non-compete, global
• Employment: 12-month non-compete, UK + EU
• Assessment: SHA 36-month global restriction at high risk of being held unenforceable as unreasonably broad (unless very senior executive with worldwide responsibilities). Employment 12-month UK + EU restriction more likely enforceable for senior role.

(5) Conflict Resolution — Identify:

Which Document Governs in Case of Conflict?

Check for Entire Agreement / Conflict Clause:

• SHA Clause [X]: [Does SHA state it supersedes employment contract on restrictive covenants?]
• Employment Contract Clause [Y]: [Does employment contract state it is entire agreement?]

Common Conflict Scenarios:

Scenario 1: SHA More Restrictive (Longer Duration)

• SHA: 24-month non-compete
• Employment: 12-month non-compete
• Analysis:
  • If SHA states "restrictive covenants in SHA supersede employment contract" → SHA 24 months applies
  • If no conflict clause → Ambiguous (employee may argue shorter 12-month period governs)
  • Risk: The conflict creates uncertainty about which restriction the individual agreed to - refer for advice on enforceability
• Recommendation: ✏️ Add explicit provision: "If restrictive covenants in SHA and employment contract differ, the longer/more restrictive provision applies"

Scenario 2: SHA Broader Scope (Geographic)

• SHA: UK + EU non-compete
• Employment: UK-only non-compete
• Analysis: Same ambiguity as Scenario 1
• Recommendation: ✏️ Align geographic scope across documents OR add clear conflict provision

Scenario 3: Different Definitions of "Competing Business"

• SHA: "Any business in the software sector"
• Employment: "Any business providing [specific product] to [specific customer segment]"
• Analysis: Employee may argue narrower employment contract definition applies
• Recommendation: ✏️ Use identical definitions in both documents

(6) Gap Analysis — Identify missing provisions:

Covenants in SHA but NOT in Employment Contract:

• [List covenants in SHA with no equivalent in employment contract]
• Risk: If employee ceases employment but retains shares, only SHA restrictions apply. If SHA restrictions later held unenforceable, no fallback.

Covenants in Employment Contract but NOT in SHA:

• [List covenants in employment contract with no equivalent in SHA]
• Risk: If shareholding ceases but employment continues, only employment restrictions apply.

Example:

• SHA includes "non-interference with suppliers" (24 months)
• Employment contract has no supplier non-interference clause
• Gap: If employee resigns but retains shares, supplier non-interference applies. If employee is forced to sell shares (bad leaver) but continues employment, NO supplier restriction.
• Recommendation: ✏️ Add supplier non-interference to employment contract for consistency

(7) Consideration & Timing Issues — Check:

SHA Restrictive Covenants:

• When entered: [At original share subscription / Later amendment]
• Consideration: [Purchase of shares / Investor's agreement to invest]
• Issue: If SHA added restrictive covenants AFTER initial share subscription, was additional consideration provided? (If no, enforceability questionable)

Employment Restrictive Covenants:

• When entered: [In original employment contract / Added by variation]
• Consideration: [Employment / Promotion / Pay rise / Bonus]
• Issue: If restrictions added mid-employment without pay rise or other benefit, enforceability is at risk for want of consideration

Example:

• Employment contract signed 2020: No restrictive covenants
• SHA signed 2023 (investor investment): Adds 24-month non-compete
• Employment contract amended 2023: Adds 12-month non-compete (no pay rise)
• Issue: Employment contract amendment in 2023 has no consideration (no new benefit to employee)
• Result: SHA 24-month restriction may be enforceable (consideration = investor's investment benefits company/employee); employment 12-month restriction at risk (no consideration)
• Recommendation: ✏️ When adding restrictions mid-employment, provide consideration (bonus, pay rise, additional equity)

(8) Recommendations — Provide:

Harmonisation Actions:

Option 1: Align Employment Contract to SHA (More Restrictive)

• Amend employment contract to match SHA duration, scope, definitions
• Pros: Single set of consistent restrictions, easier to enforce
• Cons: More restrictive employment terms may require renegotiation or additional consideration

Option 2: Align SHA to Employment Contract (Less Restrictive)

• Amend SHA to match employment contract shorter periods and narrower scope
• Pros: More likely to be enforceable (reasonable restrictions)
• Cons: Investor may resist (wants broader protection)

Option 3: Add Clear Conflict Provision

• Keep different restrictions but add clause clarifying which applies in event of conflict
• Example Clause: "To the extent of any inconsistency between restrictive covenants in this SHA and the individual's employment contract, the restriction providing greater protection to the Company shall apply, provided it is enforceable under applicable law."
• Pros: Preserves flexibility, makes clear what applies
• Cons: Complexity in determining "greater protection" in disputes

Option 4: Separate Restrictions by Scenario

• SHA restrictions apply post-exit from shareholding
• Employment restrictions apply post-termination from employment
• If both occur simultaneously, restrictions run concurrently (not cumulatively)
• Example Clause: "If an individual ceases to be both a shareholder and employee on the same date, the restrictive covenants shall run concurrently, and the individual shall comply with the longer/broader restriction in each category."

Specific Amendments Recommended:

1. ✏️ [Amendment 1 description - which document, which clause]
2. ✏️ [Amendment 2 description]
3. ✏️ [Amendment 3 description]

(9) Worked Example — Provide scenario:

Facts:

• Individual: Jane Smith, Co-Founder, CFO, and Shareholder (20% ownership)
• SHA (signed 2022): 24-month non-compete (UK + EU), 18-month non-solicit (employees & customers)
• Employment Contract (signed 2022): 12-month non-compete (UK only), 12-month non-solicit (employees only)
• Event: Jane resigns from employment and sells her shares (good leaver exit) - both occur on 15 January 2025

Question: What restrictions apply to Jane post-exit?

Analysis:

Non-Compete:

• SHA: 24 months, UK + EU
• Employment: 12 months, UK only
• Conflict? YES - different durations and scopes
• Resolution (if no conflict clause): Ambiguous - Jane could argue shorter 12-month UK-only restriction applies (less restrictive). Company would argue 24-month UK + EU applies (more protective).
• Risk: Uncertainty over which restriction applies weakens the Company's position on enforcement.

Non-Solicit (Employees):

• SHA: 18 months (all employees)
• Employment: 12 months (employees with material contact)
• Conflict? YES - different durations and definitions
• Resolution: Same ambiguity as non-compete

Non-Solicit (Customers):

• SHA: 18 months (all customers dealt with in last 12 months)
• Employment: NO customer non-solicit clause
• Conflict? NO - SHA is only source
• Result: Jane is bound by SHA 18-month customer non-solicit (no ambiguity)

Recommended Solution:

• ✏️ Before Jane's exit: Amend SHA and employment contract to align restrictive covenants (matching durations, scopes, definitions)
• ✏️ Add conflict clause: "Restrictive covenants in SHA and employment contract shall be read together, and the individual shall comply with the longer period and broader scope in each category."
• ✏️ Obtain Jane's consent: Have Jane sign amended employment contract with additional consideration (e.g., £10K bonus or additional equity) to ensure enforceability

After Amendments:

• Non-compete: 24 months, UK + EU (SHA provision applies)
• Non-solicit (employees): 18 months, all employees (SHA provision applies)
• Non-solicit (customers): 18 months, all customers (SHA provision applies)
• Clear and enforceable: No ambiguity, Jane has expressly agreed to aligned restrictions

Output Format:

Comparison Table:

Gap Analysis:

• Covenants in SHA only: [List]
• Covenants in employment only: [List]
• Conflicting definitions: [List]

Enforceability Assessment:

• Likely enforceable: [List]
• May be challenged: [List]
• Likely unenforceable: [List]

Recommendations:

1. Alignment approach: [Option 1/2/3/4]
2. Specific amendments: [List with clause numbers]
3. Consideration needed: [If mid-term amendments]

Before running this prompt, upload the following to your AI tool's vault:

Essential:

• Current shareholders' agreement (restrictive covenant provisions)
• Employment contracts for shareholder-employees (restrictive covenant clauses)

Highly Recommended:

• Precedent SHAs and employment contracts from similar PE/VC deals showing aligned restrictive covenants
• Your firm's standard restrictive covenant templates (employment and SHA versions)
• Decisions of the courts of England and Wales on restriction periods for similar roles/sectors

In your prompt, reference these: "Cross-check the restrictive covenants in this SHA against the employment contracts, compare durations and scopes against [PRECEDENT SHA] and [PRECEDENT EMPLOYMENT CONTRACT] to assess whether they're within market-standard ranges, and identify conflicts or gaps."

This allows the AI to benchmark duration, geographic scope, and restricted activities against enforceable precedent provisions, identify standard conflict resolution clauses from precedents that should be added to resolve ambiguities, and assess whether the restrictions are reasonable under English law by comparing against precedent covenants that courts have upheld.

Restrictive Covenants Consistency Analysis

Company: [UK SaaS Company] Shareholders: 3 Founders (A, B, C) holding 60% collectively Documents: SHA dated 1 June 2022, Employment Contracts dated 1 June 2022

DOCUMENT COVERAGE

Who is Subject to Restrictions?

• SHA: Founders A, B, C + Investor (all shareholders)
• Employment Contracts: Founders A, B, C + 8 senior employees (CFO, CTO, Sales Director, etc.)
• Overlap: Founders A, B, C are bound by BOTH SHA and employment contracts

Key Issue: Founders have dual restrictions. If SHA and employment contracts differ, which applies?

COVENANT-BY-COVENANT COMPARISON

1. NON-COMPETE OBLIGATION

Analysis:

• Duration conflict: SHA = 24 months, Employment = 12 months

  • Risk: Founder could argue shorter 12-month period governs (less restrictive)
  • Company position: 24 months should apply (more protective)
  • Point for advice: Which restriction would a court treat as binding, and does the conflict put both at risk?

• Geographic conflict: SHA = UK + EU, Employment = UK only

  • Risk: Same as duration - ambiguity
  • Enforceability note: 24 months + UK + EU may be challenged as unreasonably broad (unless Founder has EU-wide role)

• Definition conflict: SHA definition very broad ("any SaaS business"), Employment definition narrower (specific products/customers)

  • Risk: Founder could argue narrower employment definition applies
  • Better approach: Use identical definitions in both documents

Recommendation: ✏️ CRITICAL - Harmonise non-compete provisions:

• Option A: Amend employment contract to 24 months, UK + EU (if enforceable for senior executive role)
• Option B: Amend SHA to 12 months, UK only (more likely enforceable, less restrictive)
• Option C: Shorten both to 18 months, UK + EU as compromise

Enforceability Assessment:

• SHA 24 months: ⚠️ May be challenged as unreasonably long for the interest protected
• Employment 12 months: ✅ Likely enforceable (reasonable for senior executive)
• Recommendation: 18 months is defensible compromise (protects company but more likely upheld by court)

2. NON-SOLICITATION: EMPLOYEES

Analysis:

• Duration conflict: 18 months vs 12 months (same ambiguity issue as non-compete)
• Scope conflict: SHA applies to ALL employees; Employment only applies to those with "material contact"
  • Example: If Founder worked closely with 10 employees but had no contact with other 40 employees:
    • SHA restricts soliciting all 50 employees
    • Employment restricts soliciting only the 10 employees with material contact
  • Risk: Founder could argue narrower employment scope applies (only 10 employees restricted, not all 50)

Recommendation: ✏️ Align scope definition:

• Option A: Change SHA to match employment: "Employees with whom the individual had material contact in the 12 months prior to exit"
• Option B: Change employment to match SHA: "Any employee or consultant" (broader protection)
• Preferred: Option A (narrower scope more likely enforceable; protects key relationships)

Enforceability Assessment:

• SHA 18 months (all employees): ⚠️ May be challenged as overly broad (restricting solicitation of employees with no relationship is hard to justify)
• Employment 12 months (material contact employees): ✅ Likely enforceable (protects genuine business interest in key employee relationships)

3. NON-SOLICITATION: CUSTOMERS

Analysis:

• Duration conflict: 24 months vs 12 months
• Definition conflict:
  • SHA: "Any customer who was a customer" (objective test - all customers in last 12 months)
  • Employment: "Any customer with whom you had material dealings" (subjective test - only customers Founder personally dealt with)
  • Example: If Company has 100 customers but Founder personally dealt with 30:
    • SHA restricts soliciting all 100 customers
    • Employment restricts soliciting only the 30 customers Founder dealt with
  • Risk: Founder could argue narrower employment definition applies

Recommendation: ✏️ Align definitions and duration:

• Use consistent definition: "Customers with whom the individual had material dealings in the 12 months prior to exit"
• Reduce SHA duration to 12-18 months (more defensible)

Enforceability Assessment:

• SHA 24 months (all customers): ⚠️ May be challenged as overly broad and too long
• Employment 12 months (material dealings customers): ✅ Likely enforceable

4. CONFIDENTIALITY

Analysis:

• Definitions match ✅
• Duration same (indefinite - standard for confidentiality) ✅
• Issue: Different permitted disclosures:
  • SHA requires investor consent
  • Employment allows disclosure to professional advisors without consent
• Risk: Founder could disclose to advisors under employment contract, but breach the SHA

Recommendation: ✏️ Align permitted disclosures:

• Add "professional advisors" exception to SHA (reasonable, doesn't harm company)
• Clarify "required by law" includes regulatory requirements, court orders

Enforceability Assessment:

• ✅ Likely enforceable for information that remains confidential

CONFLICT RESOLUTION ANALYSIS

Does Either Document Address Conflicts?

SHA Clause 15.3: "Entire Agreement"

"This Agreement constitutes the entire agreement between the parties and supersedes all prior agreements, save that nothing in this Agreement shall affect the rights and obligations of any party under their employment contract."

Employment Contract Clause 18.5: "Entire Agreement"

"This Contract constitutes the entire agreement between the Company and Employee relating to employment."

Analysis:

• ❌ No clear conflict resolution for restrictive covenants
• SHA says it doesn't override employment contracts
• Employment contract claims to be entire agreement on employment matters
• Result: If SHA and employment differ, AMBIGUITY - unclear which restriction applies

Recommendation: ✏️ Add explicit conflict clause to BOTH documents:

Proposed Clause (Add to SHA Schedule 5):

"Conflict with Employment Obligations: To the extent of any inconsistency between the restrictive covenants in this Schedule 5 and the individual's employment contract: (a) The restriction with the longer duration shall apply; (b) The restriction with the broader geographic scope shall apply; (c) The restriction with the broader definition of restricted persons/activities shall apply; provided that the resulting restriction is reasonable and enforceable under applicable law. If any restriction would be unenforceable due to its breadth or duration, the more limited restriction shall apply."

Effect: Clarifies that more restrictive provisions apply, but falls back to narrower restriction if broader one is unenforceable.

GAP ANALYSIS

Covenants in SHA but NOT in Employment Contract:

1. Non-Interference with Suppliers (SHA Schedule 5, para 5)
   • SHA: 12-month restriction on interfering with supplier relationships
   • Employment: No equivalent clause
   • Impact: If Founder resigns but retains shares, supplier restriction applies. If Founder sells shares (bad leaver) but continues employment, NO supplier restriction.
   • Recommendation: ✏️ Add supplier non-interference clause to employment contract (12 months, mirror SHA provision)

Covenants in Employment Contract but NOT in SHA:

1. Non-Use of Confidential Information (Employment Clause 13.2)
   • Employment: Explicit prohibition on using confidential information for Founder's benefit
   • SHA: General confidentiality clause but no explicit "non-use" provision
   • Impact: If Founder ceases employment but retains shares, SHA confidentiality may not cover "use" (only "disclosure")
   • Recommendation: ✏️ Add "non-use" language to SHA confidentiality clause

Conflicting Definitions:

1. "Competing Business" (Non-Compete)

   • SHA: "Any business in the software-as-a-service sector"
   • Employment: "Any business providing [specific products] to [specific customer segments]"
   • Recommendation: ✏️ Use identical definition in both (prefer narrower employment definition for enforceability)

2. "Material Contact" / "Material Dealings" (Non-Solicit)

   • SHA: Uses "any employee/customer" (no materiality qualifier)
   • Employment: Uses "material contact/dealings" (narrower)
   • Recommendation: ✏️ Adopt "material contact/dealings" in both for enforceability

ENFORCEABILITY ASSESSMENT (ENGLISH LAW)

Overall Assessment:

• SHA restrictive covenants: Overly broad and long durations risk unenforceability
• Employment restrictive covenants: More reasonable, better chance of enforcement
• Key Risk: Conflicts between documents create uncertainty over which restriction binds the Founders

Recommendation: ✏️ Harmonise to employment contract standards (12-18 months, narrower scopes) - more likely to be upheld by the courts.

CONSIDERATION ISSUES

SHA Restrictive Covenants:

• Signed: 1 June 2022 (simultaneously with investor investment and employment contracts)
• Consideration: Founders received shares + investor's £10M investment enabled company growth
• Enforceability: ✅ Adequate consideration (shares + benefits of investment)

Employment Restrictive Covenants:

• Signed: 1 June 2022 (original employment contracts)
• Consideration: Employment (new roles as CFO, CTO, etc.)
• Enforceability: ✅ Adequate consideration (employment itself)

No Mid-Term Amendments: ✅ Both documents signed simultaneously with adequate consideration. No consideration issues.

If Amending Now (2025):

• ⚠️ Need fresh consideration for amended restrictive covenants
• Options:
  1. Pay amendment bonus (e.g., £10K per Founder)
  2. Grant additional equity
  3. Promotion or pay rise
• Warning: Without fresh consideration, amended restrictions may be unenforceable

RECOMMENDED ACTIONS

CRITICAL PRIORITY (Resolve Conflicts):

1. ✏️ Harmonise Non-Compete Duration and Scope

   • Amend SHA: Reduce non-compete to 18 months, UK + EU (from 24 months)
   • Amend Employment: Extend non-compete to 18 months, UK + EU (from 12 months, UK only)
   • Rationale: 18 months is compromise (more defensible); UK + EU scope reasonable for senior executives with European responsibilities
   • Consideration: Pay £5K amendment bonus to each Founder when signing amended employment contracts

2. ✏️ Align Non-Solicit Definitions (Employees & Customers)

   • Amend SHA: Change to "employees/customers with whom the individual had material contact/dealings in the 12 months prior to exit"
   • Amend Employment: Keep existing "material contact/dealings" language
   • Rationale: Narrower scope more enforceable; protects genuine business interests (key relationships) without overreach

3. ✏️ Add Conflict Resolution Clause

   • Add to SHA Schedule 5 and Employment Contract Clause 12:

     "If restrictive covenants in the SHA and employment contract differ, the restriction providing greater protection to the Company shall apply, provided it is reasonable and enforceable. If the broader restriction is unenforceable, the narrower restriction shall apply."

   • Rationale: Clarifies which restriction governs, reduces ambiguity

HIGH PRIORITY (Fill Gaps):

4. ✏️ Add Supplier Non-Interference to Employment Contract

   • Mirror SHA Schedule 5, para 5 provision in employment contracts
   • 12-month restriction on interfering with supplier relationships

5. ✏️ Add Non-Use Language to SHA Confidentiality

   • Add: "The individual shall not use Confidential Information for their own benefit or the benefit of any third party"

MEDIUM PRIORITY (Definitions & Clarity):

6. ✏️ Use Identical "Competing Business" Definition

   • Replace SHA's broad "any SaaS business" with employment contract's narrower definition
   • Ensure both documents reference same list of competing activities/products

7. ✏️ Clarify Permitted Disclosures (Confidentiality)

   • Align SHA and employment permitted disclosures:
     • Required by law
     • To professional advisors (under duty of confidentiality)
     • With Company's prior written consent