September 2014 . . . The High Court has declared that a former shareholder cannot be prevented from competing with a company’s business forever.
This case concerned the ‘Aerial’ sunglasses brand which is sold at service stations throughout New Zealand. The Aerial brand was developed by a young Australian entrepreneur, Chris Bissiotis. Mr Bissiotis’s Australian company, Pacific Optics Pty Limited (POPL) granted an exclusive license to Pacific Optics Limited (PONZ) to distribute the Aerial brand in New Zealand.
Mr Bissiotis through POPL eventually acquired shares in PONZ, together with three other investors. Over time the relationships soured, one investor sold his shares and the remaining two shareholders worked together to purchase POPL’s shares and remove Mr Bissiotis from the business.
The purchase price was set at $3 million. As part of the sale, POPL and Mr Bissiotis had to agree to a restraint of trade preventing them from ever competing in New Zealand. The transaction went ahead, with a new entity, Bencho Limited (Bencho) acquiring POPL’s shares.
Five years after selling its shares in PONZ, POPL looked at the possibility of distributing a new line of sunglasses in New Zealand under the ‘Black Ice’ brand. To do this, POPL sought a declaration from the High Court that the restraint was not enforceable.
The Court started with the basic legal principle that “a restraint is void unless it is no wider than is reasonably necessary to protect the legitimate interests of the party seeking to enforce it.” Reasonableness is assessed by looking at the relevant circumstances at the time the restraint was entered into, not on the basis of subsequent events.
Bencho had paid a significant amount of money on account of the goodwill in the business. Mr Bissiotis was closely involved in all aspects of PONZ’s business and had developed close relationships with PONZ’s customers. Accordingly, it was accepted that Bencho had a legitimate interest which was capable of protection by a reasonable restraint. The question was whether the restraint imposed was reasonable.
On the issue of duration of the restraint, the Court decided that a “permanent restraint, unlimited as to time, cannot be justified in this case”. However, in terms of the geographical breadth of the restraint, the Court agreed that a restraint applying to the whole of New Zealand was appropriate given that the business had always been conducted nationwide.
Having concluded that the restraint was unreasonably long and therefore void, the court turned to consider Bencho’s alternative argument. Bencho sought to rely on the Illegal Contracts Act which gives the Court a discretion to modify the terms of a restraint of trade to make it reasonable. By the time this case reached the Court, six years had passed since the restraint was entered into. Bencho asked for a period of 20 years commencing on 1 August 2008. POPL asserted that five years was the limit of what could be justified. The Court referred to the changing nature of the market and the fact that PONZ’s key customers had changed. In light of this, the Court was satisfied that six years was sufficient to protect Bencho’s interests under the share sale transaction, and modified the restraint of trade accordingly.
This result leaves POPL and Mr Bissiotis free to distribute its Black Ice sunglasses in New Zealand now that the six year restraint has expired. This case should not be seen as setting a precedent for how long restraints of trade can be effective for. The duration of a restraint of trade provision will depend on the facts of individual cases. However, this case does serve as a reminder to parties negotiating these terms to turn their minds to whether the restraint is reasonable in the circumstances.