Shareholder, Employee, Executive: When One Key Person Wears Every Hat, Will Your Restraints Hold?

Shareholder, Employee, Executive: When One Key Person Wears Every Hat, Will Your Restraints Hold?

Summary:  The law around restraint clauses has always been difficult, with courts closely scrutinising whether a restraint is broad, generic or disconnected from the real commercial risk. For businesses with complex ownership, shareholder, employment or client relationship structures, the real question is not just whether a clause exists, but whether the entire legal framework is aligned to protect business value.

Restraint of trade clauses have long been used in an attempt to protect value when a commercial or employment relationship comes to an end or a business is sold.

The principles are well established: restraints of trade are prima facie void unless they are reasonably necessary to protect a legitimate business interest. The real battleground is always what is “reasonable” in the circumstances. The issues become more complicated when a key person act in different capacities in a company.

This article examines recent court cases and shows where the courts currently stand.

Complex relationships do not justify broad restraints

A recent Victorian case, 2nd Chapter Pty Ltd & Ors v Sealey & Ors (No 2) [2024] VSC 672, sets a good example.

• This case involved a complex mix of sale of business and employment issues in a financial advisory business. The restrained parties had held various roles over a long period of involvement in the business, including as employees, partners and minority shareholders.
• The restraints were entered into in connection with the acquisition of the Escala business by Focus Financial in 2019. Two of the former employees, who used to be shareholders of Escala, sold their shares to the Focus Financial, and became shareholders in 2nd Chapter Pty Ltd, which is a special purpose management company established for the management of Escala.
• The restraints appeared in both the share sale arrangements and the employment agreements. They restrained the former employees from competing with the business and from soliciting or dealing with clients after the sale and employment relationships ended.
• In particular, the Court was concerned that the restraints extended to clients with whom the former employees had no direct relationship, and that the restraint periods were not properly tailored to each individual’s role, interest in the business or actual risk to the purchaser.
• As the client-coverage restriction was fundamentally flawed, the entire cascading mechanism collapsed, rendering the restraint void from the outset.

A restraint should be a shield, not a sword or net. If it catches more than is needed to protect the business, it may fail when it matters most. Where a person has worn multiple hats — such as employee, shareholder, partner or seller — the restraint must be carefully tailored to the specific capacity, interest and risk involved.

Restraint clauses are not dead: former employee ordered to pay $500,000 for breaching non-solicitation clause

On the other side of the story, AEI Insurance Group Pty Ltd v Martin (No 4) [2024] FCA 1110 showed that a well-drafted restraint can still have teeth.

• This case involved a former long-standing insurance account manager, who was effectively the “face” of AEI’s Queensland business. After he resigned and joined a competitor, he began contacting former clients from a new phone number, including at least one AEI client whom he informed of his updated contact information.
• The restraint was contained in the employment agreement. It contained a specific restraint, stopping the former employee from soliciting, canvassing or dealing with clients of the business for a 12-month period after his employment ended.
• The Court found that the 12-month restraint clause was reasonable, given typical insurance policy renewal periods and the time required to rebuild client loyalty.
• In addition to the usual injunctions, AEI pursued damages after clients moved to the former employee’s new employer and was able to establish a financial loss of $750,000 in annual revenue flowing from the departure of 45 clients.
• Ultimately, the Court awarded $500,000 in damages to AEI. 

A restraint can only have real financial consequences when it is carefully designed. The powerful result in AEI was rooted in a tailored and specific clause directed at client relationships, combined with good practice in collecting evidence of the client connection, the breach, the movement of clients and the loss suffered.

National reform is coming

The current wave of restraint scrutiny is not limited to the courts. In the 2025–26 Federal Budget, the Government announced proposed reforms to ban non-compete clauses for low and middle-income workers from 2027.

For businesses dealing with key personnel who may also be shareholders, executives, sellers or client relationship holders, the reform agenda is a reminder that restraints cannot be treated as generic contract terms. The consultation may also extend to no-poach agreements, wage-fixing arrangements, non-solicitation clauses and restraints affecting higher-income employees.

Together, these developments show that restraints are not disappearing — but where one person holds multiple forms of business value, the restraint needs to be carefully assessed, properly tailored and supported by the broader business structure.

Final Takeaway

For large businesses, the issue is not just whether a key person can be stopped from competing. The harder question is whether the business has properly mapped the value that person holds.

In complex businesses, one person may be an employee, shareholder, seller, adviser or client relationship holder. Each role may protect a different interest — goodwill, client relationships, confidential information, equity value or the business structure itself.

That is why restraints should be reviewed alongside shareholder arrangements, sale documents, employment and contractor terms, client ownership arrangements and exit processes — not in isolation.

If your business is navigating complex ownership, shareholder, employment or client relationship issues, speak with us about how your restraint strategy can better protect the value you have built.