“C-Suite and non-competes in the age of the tweet” – restrictive covenants and social media
Written by Dorothy Murray and Nicola Bartholomew of Proskauer Rose (UK)
People are key to the success of private equity. Returns and growth are driven by good investment decisions and the good management of those investments, which in turn are driven by the skills and contacts of the managers.
We are seeing a hyper competitive labour market as high deal flow combines with a shift in people’s priorities following the experience of the Covid-19 pandemic. Now more than ever, asset managers (and their portfolio companies) must identify, attract and retain the best board talent.
On one hand, social media platforms allow real time sourcing of talent, investment opportunities, market data and competitors’ activities – all of which are just a click away. On the other, social media raises questions about ownership of data and exposes potential limitations in post-termination restrictions. This is relevant because, just as important as retaining team members, is preventing (or at least deterring) leavers from working for your competitors. This is where contractual protections in the form of post-termination restrictions come in.
But are typical post-termination restrictions fit for purpose in our increasingly open online world?
One size does not fit all…
Restrictive covenants seek to limit the competitive activities of a former employee for a period after their departure. Whilst non-competes are the primary weapon in a firm’s armoury, in practice many different covenants are used, including non-solicits (of clients and employees), non-deals, and restrictions designed to prohibit team moves. Ex-employees also remain under confidentiality obligations in relation to the use of business information.
In a private equity context, covenants can be housed in a variety of documents designed to serve different purposes and time periods: from the employment agreements, to carried interest arrangements, bonus scheme rules, shareholder and sale documents.
The challenge is that, under English law, ‘restraints of trades’ are unenforceable as a matter of public policy. To be enforceable, restrictions must: (i) be necessary to protect a legitimate business interest; (ii) go no further than necessary to protect that interest; and (iii) be reasonable in scope and extent.
Inadequate post-termination restrictions leave portfolio companies and firms exposed and potentially undermines any connected incentive mechanism. Covenants must balance being wide enough to protect the underlying business interests with being narrow enough to be capable of being enforced, so as to have the desired deterrent effect. Courts will not re-write a restriction to make it enforceable.
Good covenants are:
- Up to date – reasonableness is assessed at the date of entry into the covenant. It is not uncommon (for example when conducting due diligence on a target) to find management subject to out of date, off the shelf restrictions that are not tailored to the current business, geographical location or the individual’s role (being either too wide to enforce or too narrow to give sufficient protection in one or more respects). Firms should review and update covenants at suitable opportunities - a deal, promotion, or new incentive arrangement.
- Tailored – what is necessary and reasonable for this individual’s role and this business? Should different restrictions apply to the c-suite than the tiers below, or within the c-suite? Do the restrictions actually talk to the business? Restrictions that work for a portfolio company in the healthcare sector will be different to those of a global tech organization. Furthermore, with an eye to exit, do the restrictions cover and align with the manager’s business plan?
- Consistent – the interaction of restrictions in different agreements is often overlooked, particularly, where an individual wears several different hats. For any individual, they must work together. Further, longer restrictions are more likely to be enforced in a shareholder arrangement than in a pure employment context, where there is considered an inherent inequality of bargaining power.
Whilst having robust, well drafted restrictions is a great starting point, whether or not restrictions will be enforced will depend on the facts of a particular case. More and more we are seeing social media play a part in that fact pattern.
Social media and confidential data
Social media platforms such as LinkedIn, Twitter and Instagram are a key form of communication to maintain valuable personal and business connections. More proprietary information is in the public domain than ever before. Firms, portfolio companies and personnel freely disclose data not just through the detailed narrative of a tweet but by the fact of their connections or even a simple like or follow. Individual employees connect with clients and suppliers as well as other employees from their personal social media accounts (often opened under a personal email), entirely openly and legitimately.
When considering whether to enforce covenants, the English Courts have therefore had to contend with the argument that with the increasing use of the internet and social media, relevant information is now in the public domain (available and portable), and so cannot be confidential to any particular business so as to justify protection. The facts in the key case related to a recruitment business seeking to enforce a six-month non-dealing and non-solicitation restriction but the principles are of general application. In East England Schools CIC (trading as 4myschools) v Palmer and another  the Court asked – despite the information available on social media – was there still a legitimate business interest to protect? It considered that there was other valuable information that the individual held about clients (e.g. personalities and their unique requirements) that was not publicly available and which could be exploited to solicit business from the company. It upheld the covenants.
Courts will also apply a degree of scepticism to claims that detailed contact information was obtained from public sources including social media. While theoretically possible that certain information could be painstakingly collated, the evidence may point in reality to use of what was really the employer’s confidential information: Pulse Healthcare Ltd v Medilink Consulting Ltd  10 WLUK 264.
Social media and data ownership
Courts have also wrestled with who owns the information contained on social media. The lines here are somewhat blurred.
Courts have held that a business’s social media account operated by an account manager as part of her role belonged to the employer, not the employee (despite LinkedIn’s terms providing that an account belongs to the individual): Whitmar Publications Ltd v Gamage & Ors  EWHC 1881 Ch.
The position in relation to personal account of an employee is likely to be very different. Personnel are usually contractually required to return or destroy confidential information (such as client lists and details) in their possession on termination. However, it is rare for this to be extended to social media accounts held in their own name. Restrictions that prevent an individual’s access and use of social media are likely to be too wide to be enforceable (although a requirement to delete certain data obtained during the course of employment may be upheld in the rights circumstances: Create Financial Management LLP v Lee & Scott  EWHC 1933 (QB).
Social media and solicitation
Despite being subject to post-termination restrictions including a duty not to solicit clients, as just discussed, former employees will likely still be able to effectively retain and freely access vital business information through their personal social media accounts after they have left an organisation. When will activity on social media be a breach of a non-solicit restriction?
As ever, there is no bright line test. In most situations, a level of positive action and intention with a view to engaging the investor/customers business will be needed. Untargeted activity or a simple announcement of a new job or business on social media platforms (whether by a status update or a post) is unlikely to be a breach of a post-termination restriction. Contact is not of itself solicitation. However, as always, each case will be assessed on its facts and the court will take into account the wider circumstances, the intention and the focus of any communication.
Social media and evidence of breach
Social media accounts can of course assist an employer. It is not uncommon for firms to find out that a key individual has joined a competitor in breach of a non-compete through an announcement on LinkedIn.
The retention of management talent and the protection of core business interests will always be a priority in the private equity space. As technology advances and the usage of social media platforms continues to be pervasive, firms and portfolio companies are presented with new challenges (and opportunities), particularly when drafting, enforcing and complying with restrictive covenants.
Ideally, companies will include express provisions dealing with social media accounts, not just their usage during employment but what happens on departure. Implementing a pragmatic and comprehensive social media policy, in conjunction with robust and up to date covenants, will help businesses navigate the risks.
Dorothy Murray is a partner and Nicola Bartholomew is special international labour & employment counsel at Proskauer Rose (UK).