Advice firms give up on pursuing restraint of trade cases through court

Advice firms that acquire other businesses are being caught out by restraint of trade clauses that turn out to be unenforceable.

Wednesday, April 5th 2017, 6:00AM

by Susan Edmunds

The issue has played out in court a number of times over recent years. At the end of 2015, Saturn Portfolio Group revealed it had struck trouble with two advisers when it took over the Van Eyk Advice business.

Saturn chairman Craig Stobo said, in the course of moving clients over to Saturn, it had become apparent that clear enforcement of contractual property rights was needed in relation to ownership of client revenues.

A source said while Saturn had reached an agreement with one adviser, it had been forced to give up its court bid against the other because of the cost and effort involved.

Shane Edmond, executive director of Forsyth Barr, said it was something that was often a problem. His firm has previously picked up advisers who have left businesses that were sold.

Some advisers might not like the terms of the deal, or the way it had been handled, and would decide not to go with the business., he said.

“They've received no consideration out of the sale and those people need to earn a living.”

He said in those cases, advisers end up taking their clients with them.

“Ultimately if clients choose to follow an adviser somewhere else – you don’t have a restraint over the client. It’s very difficult, near impossible - the client can’t be stopped from changing.”

Most buyers of entities would have factored into their purchase calculations that a certain percentage of clients would be lost, he said. “Van Eyk is the classic one but there have been lots of others. In these sorts of organisations where there have been some speeding tickets as well, some bad publicity, some clients were already unsettled.”

In 2014, Spicers’ restraint of trade clause was called “draconian” in court. The judge said the perpetual no soliciting clause relating to all Spicers' clients was not enforceable.

Tim Williams, of Chapman Tripp, said advisers would need to get advice on how enforceable a particular restraint of trade was.

“When you are buying a company the restraints of trade should be enforceable by the courts. But in practice it might be an issue. You can get well drafted ones that are fully enforceable but the ones that are vague the courts might be more reluctant to enforce.”

Tags: financial advisers