Even in the midst of economic uncertainties, corporate M&A activity has undeniably been heating up. Forefront: By TSMP takes a look at a recent high profile banking acquisition, and how banker poaching concerns may have factored into the mix.
Far removed from grassy African savannas, poaching remains an ever-present reality in corporate jungles.
In April this year, as part of Barclays’ ongoing efforts to scale down its assets in the region, the bank sold its Singapore and Hong Kong wealth and investment management business to OCBC for US$320m. While the Barclays unit had also attracted initial interest from other banks like DBS and Julius Baer, the bid was ultimately won by OCBC.
Intriguingly, Reuters reported sources close to the bidding process as having revealed that early favourite DBS, the only other bidder in the final round, was put off by concerns of poaching at the Barclays unit. Several Barclays bankers had apparently already been in talks to leave following the recent departure of Barclays Asian wealth chief Didier von Daeniken (who joined Standard Chartered). This, amongst other things, is said to have ultimately curtailed DBS’ enthusiasm to bid aggressively, paving the way for OCBC to acquire the Barclays unit. DBS is said to have no regrets.
The Reuters report also noted that poaching is always more of a risk for private banks. High net worth clients often stay loyal to their bankers, allowing these bankers (sometimes, entire teams of bankers) to bring over the lion’s share of their client portfolios when they jump ship.
Poaching, which corporates say necessitates non-poaching clauses and other restrictive covenants like non-competes, certainly isn’t a phenomenon unique to Singapore business circles. At this very moment, a high-stakes restrictive covenant war is being waged between M&A giants on Wall Street. In what the Financial Times has dubbed the “Battle of the Bankers”, blue chip financial services firm Parella Weinberg is suing its former partner Michael Kramer and three of his associates (now with Ducera Partners) for employment and restrictive covenant breaches. Kramer and his colleagues have countersued, alleging defamation and accusing Parella Weinberg of the wrongful seizure of US$60m of their equity by “weaponising” their employment contracts against them.
Other than casting a glaring spotlight on the inner workings of a hallowed investment bank, the FT notes that this tussle of Wall Street titans is made even more fascinating by the fact that a Court ruling could open an unwanted discussion on the controversial legality of restrictive covenants under New York law. This could lead to an overhaul of employment agreement standards for the US financial elite.
Bringing back the discussion to our shores, how effective are non-poaching and non-compete clauses and other such restrictive covenants in Singapore anyway? Are they generally upheld by the Courts or struck down? And to what extent should employers and employees place confidence in, or feel deterred by, such clauses?
State of play
These days, it’s common to find non-poaching and other such clauses in senior employees’ contracts. These restrictive covenants kick in post-employment to protect the ex-employers’ various interests. Then there are the clauses prohibiting ex-employees from joining competitors altogether (non-competes). Of all these clauses, non-competes are the most divisive. Typically useful to employers as they are the easiest to police, they are also the most draconian to employees, who cannot work during the stipulated period of non-competition. So where does the Court strike the balance, especially when the ex-employer companies can potentially sue and seek injunctions against the ex-employees, and even their new employers, on the basis of such restrictive covenants?
In Singapore, these restrictive covenants are only enforceable if they protect the employers’ legitimate interests, and are also reasonable. To date, only three such interests have been recognised by the Courts: employers’ confidential information, customers or clients, and workforce. The Courts have previously made it clear that if the ‘full suite’ of clauses protecting all these three interests (confidentiality, non-solicitation, and non-poaching clauses respectively) are already found in an employment contract, then any additional non-compete clause cannot be enforced. This potentially means the more comprehensive an employment contract, the lower the employer’s chances of enforcing the non-compete clause. Consistent with this, the Courts have shown greater willingness to enforce non-compete clauses and grant injunctions for contracts with a non-compete clause, but lacking one or more of the other three clauses.
This rather invidious position has been questioned by the High Court on more than one occasion: should an employer with a full suite of restrictive covenants be worse off than an employer with less clauses, or even just a single non-compete clause? Does it actually pay not to be ‘kiasu’? (Non-Singaporeans may wish to refer to the Oxford English Dictionary definition.)
And quite remarkably, even while the precise ambits of non-competition remain elusive, there are signs the Courts could be prepared to move beyond non-compete clauses altogether. In a decision last year, the High Court suggested that in the right case, it might even be willing to impose a “springboard” non-compete injunction without needing any non-compete clause in the corresponding contract.
Clarion call for clarity?
Certainly the law on restrictive covenants could stand to be clarified, but is that even what everyone wants? As with Wall Street firms, some employers here are actually quite comfortable with the current vagaries of the law, since this causes some employees to simply abide wholesale by their restrictive covenants for fear of litigation. Before we feel too sorry for all employees though, it’s worth remembering that the employees subject to the most extravagant restraints are often also those at the highest echelons of the corporate world, earning the highest salaries and fattest bonuses.
Either way, with or without greater clarity, the truth remains that corporate moves are never risk free. And as always, employers and employees should carefully weigh the risks and rewards of making a move. Poach at your peril.