Restraint Clauses: When Buying a Business

The REIQ contract provides a restraint by geographic area and time only (clause 12). While this may be useful when a majority of a business’s customers are within a certain radius of the business premises (takeaway shops, grocery stores & newsagencies), it will not be when the business’s customers are spread far and wide (professional service firms, specialised retail shops & manufacturing businesses). Further, the REIQ restraint does not address other important issues such as:

  • Restraining business activities: the seller buying, selling, importing or manufacturing products competitive with products dealt with or distributed by the business sold.
  • Assisting Competitors: the seller promoting or assisting any other business which competes with the business sold.
  • Soliciting customers: the seller soliciting the customers of the business sold.
  • Interference with employees: the seller attempting to entice away the employees of the business sold.
  • Disclosure of confidential information: keeping or revealing the confidential business and financial information of the business.

Further, it may be the case that restraining the seller (and it’s directors) alone may not be sufficient. Restraints of shareholders, managers and key employees may also be appropriate.

Solution: unless clause 12 provides sufficient protection for the business sold, it should be made not to apply and a special condition incorporating the necessary level of protection inserted. When drafting the condition, ensure that the restraints cover the practical needs of the buyer without being at risk of being too wide and hence invalid. The total restraint must be reasonable in the interests of the parties. Consider:

1.    the scope of the activity prohibited:

2.    the duration of the restraint (time); and

3.    the area within which the restraint operates (space).

Restraint clauses are often critical to preservation of value.  Early discussion with the buyer and their solicitor regarding restraint clauses is always recommended.

 

Joe Kafrouni, Legal Practitioner Director, Kafrouni Lawyers

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The information provided by Kafrouni Lawyers is intended to provide general information and is not legal advice or a substitute for it. Business people should always consult their own legal advisors to discuss their particular circumstances. Kafrouni Lawyers makes no warranties or representations regarding the information and exclude any liability which may arise as a result of the use of this information. This information is the copyright of Kafrouni Lawyers.

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