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If you own a business with other shareholders, where multiple parties are involved, it is best to be prepared for a situation where one or more shareholders want to leave the business. This is a 3-part series on what to consider when a shareholder leaves. Article 1 discussed administrative and company secretarial requirements. Article 2 discusses the sale of shares agreement.

This article looks at business protection, including protecting confidential information, intellectual property and imposing a non-compete clause.

Why is this important?

If you are buying shares, you are making a significant investment in a business. It is important that the confidential information is protected, the intellectual property is protected, and there is a well-drafted non-compete clause.

Protecting confidential information

A shareholder will have had access to a range of confidential information, including annual financial information and business plans. A shareholder who also appointed a director and/or worked in the business is likely to have had considerably more confidential information.

The sale of shares agreement needs to include a strong confidential information clause, to define confidential information in broad terms, and to prohibit the seller from using the confidential information for any purpose. There are standard exceptions for disclosure required by law.

Protecting intellectual property

A shareholder may have been involved in creating intellectual property. A shareholder who also worked in the business may have had considerable involvement in creating intellectual property.

The seller needs to be confident that the intellectual property stays with the company. It should be listed and assigned to the company, along with supporting clauses about the seller signing other documents as required to support this assignment. Moral rights should also be waived. A separate intellectual property assignment agreement can be signed.

If the seller refuses to assign the intellectual property, then the buyer may accept a license, but this would be unusual as there is considerable value in intellectual property for a company.

Non-compete clause

A non-compete clause sets out the prohibitions for the seller on competing with the business. These are to protect the buyer’s investment, so the seller does not sell their shares then set up or join a competing business.

Whether the courts will uphold a non-compete clause, and how strict it can be, depends on the facts of the case including the seller’s role.

A well-drafted non-compete clause will include cascading areas and time-frames for the non-compete clause, for example, Australia, New South Wales and Sydney, as alternative options, in case the courts find that Australia and/or New South Wales are too broad. It will also have time options e.g. 3 years, 2 years and 1 year, in case the courts find that the longer periods are unreasonable.

It is important to have an experienced lawyer create your restraint of trade clause so that they can help draft a strong clause that is more likely to be upheld.

A good non-compete clause will also cover not poaching clients, staff or suppliers.

Conclusion

At LegalVision we have specialist commercial lawyers who can assist you to draft a sale and purchase of shares agreement and to negotiate the terms to protect your interests in the sale or purchase.

LegalVision has high-quality experienced business lawyers. Please call our office on 1300 544 755. We will happily provide you with a fixed-fee quote and an obligation-free consultation.

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