UK: Shepherds Investments Ltd v Walters

Last Updated: 29 January 2007
Article by Edward Brown
In the recent decision in Shepherds Investments Ltd v Walters, Etherton J, sitting in the Chancery division, set out a broad new approach to the permissibility of employees taking "preparatory steps" to set up in competition with their employer.

The facts

The defendants in the case were all former directors or senior employees of Shepherds, an investment fund that traded in individual life insurance policies. It made its profit by judging which policies would accrue earliest (by reason of the beneficiary deceasing) and assessing their corresponding value.

As is normal at such a company, Shepherds relied primarily upon the skills and experience of its traders. As is also the custom, Shepherds sought to secure its employees’ loyalty with high salaries and appropriately worded restrictions in their contracts of employment.

Two of the three defendants owed fiduciary duties as directors, irrespective of the terms of their contracts of employment. In respect of the single defendant who was not formally a director, the judge noted that in appropriate circumstances, a senior employee could owe fiduciary duties (Nottingham University v Fishel). However, the judge had little difficulty in finding that this defendant owed equivalent fiduciary duties, having held himself out as a director in fact (Re Hydrodam (Corby) Ltd).

Against this background, the defendants, while still in employment and without authorisation from Shepherds, began discussing the creation of a new investment fund to compete in the traded life policy market. The new team distinguished itself from Shepherds by intending to focus upon a slightly different section of the market (the "whole", rather than the "fractionalised" life policy market). These discussions resulted in a draft business plan, emphasising the new team’s experience and including significant improvements that, in their view, could be made to the "Shepherds model". The defendants also developed possible links with banks and auditors for the future transactions and prepared financial predictions for the first few years of trading. In short, much of the groundwork for the future business was in place by the time some (but not all) of the defendants came to resign formally from Shepherds.

Following the resignations of two of the three defendants, the new fund was formally incorporated, and various banking and auditing formalities concluded. Promotional literature was ordered and shortly thereafter the first transactions took place. Soon after that, Shepherds itself decided to move into the whole life policy market and began trading. Upon discovering the extent of the new team’s activities, Shepherds brought claims against its former employees for breach of fiduciary duty, and in contract for breach of express contractual terms and the implied term of fidelity.

"Preparatory steps" to compete

In his decision, Etherton J came down firmly on the side of the company, finding the defendants to have breached both their fiduciary and contractual duties. He held that the steps taken crossed the line between legitimate entrepreneurial activities and illegitimate competition. The significance of the decision lies in the judge’s assessment as to where that line should properly be drawn.

The previous authorities

Previously, the courts had permitted preliminary steps that fell short of actual competitive activities. Accordingly, in a line of cases beginning with Balston v Headline Filters, judicial policy protected fiduciaries who began setting up a competitor company while still in employment, providing it only began trading post-employment (and post-expiration of any reasonable and necessary restrictive covenants).

Identification of premises and the negotiation of a lease; the purchase of an off-the-shelf company; and tendering for contracts all constituted permissible steps. Such a dividing line was upheld in the subsequent decisions of Framlington Group v Anderson and Coleman v Oakes, in which Balston was cited and approved.

However, the Balston approach sat uneasily with subsequent decisions regarding the obligation of a fiduciary to report his own competitive activities to his employer. In British Midland Tool Ltd v Midland International Tooling Ltd, Hart J considered it a "simple proposition" that a director should report any "nascent commercial threat" to the company, particularly where he was personally involved.

The judge considered this duty to arise both from his position as a fiduciary, and by reason of the implied term of fidelity (see Hivac Ltd v Park Royal Scientific Instruments Ltd [1946] 1 All ER 350).

In Item Software (UK) Ltd v Fassihi, the Court of Appeal held that it was incumbent upon a fiduciary to disclose his own participation in the setting up of a rival company as such activities did not constitute legitimate entrepreneurial activities.

The new approach

Etherton J’s decision casts significant doubt on the correctness of the Balston line of authorities. He held that where a conflict arose between the duty of the director to his company and the policy concern of restraint of trade, there could be no suggestion that the policy "trumped" the director’s duty. Insofar as there was any conflict between Balston and British Midland Tools, the judge held that the British Midland Tools approach was to be preferred (paragraph 105).

The judge further held that whether any particular act was permissible depended on the facts of the case. Although discussing an idea with friends and family would be fine, poaching of customers clearly crossed the line. Acts between these two ends of the spectrum were a matter for determination by the judge in the case. The crux was whether an irrevocable intention had been formed by the performance of a particular act.

Significantly, Etherton J also held that the same acts constituted a breach of the implied term of fidelity (paragraph 129). This finding therefore holds mere employees and fiduciaries to the same standard in respect of any preparatory acts. In most instances, it will be of little relief to a mere employee that the employer’s remedies would be limited to damages and not an account of profits in such circumstances.

Permissible acts post-Shepherds

Etherton J’s analysis and findings of fact suggest that the scope of permissible acts is remarkably limited. Although he expressly considered it permissible to formulate an intention to leave employment at some point in the future and to discuss potential projects with family and friends, the judge left virtually any further act liable to cross the line. In particular, the following acts can no longer be considered safe in light of the decision:

  • identifying suitable premises for the new business, and negotiating a lease and signing it (Balston v Headline Filters);
  • purchasing an off-the-shelf company (Balston v Headline Filters);
  • negotiating and agreeing terms of employment with a competing business (Framlington Group v Anderson)
  • encouraging (or even failing to act to thwart) the recruitment of employees by a competitor (British Midland Tool Ltd v Midland International Tooling Ltd)
  • preparing a company for incorporation (Shepherds Investments Ltd v Walters)
  • contacting investment banks for support several months prior to the commencement of trading (Shepherds Investments Ltd v Walters)
  • contacting lawyers with details of the proposals (Shepherds Investments Ltd v Walters).

Inevitably, the weight given to any one act will be a question of fact and degree, depending on the circumstances of the case. The focus of the court’s attention will be on the extent to which any one act constitutes evidence of a settled intention. Clearly, the existence of several acts will strengthen the case against an alleged wrongdoer. However, no guidance was given in Shepherds as to whether any acts might have the status of aggravating factors and this may fall to be decided by future courts.

The specific problem facing legal advisers

The comments made in Shepherds in relation to contact with lawyers are significant. In particular, lawyers should be aware that their own legal advice may, unwittingly, cause a client to cross the line. Further, it may not be safe for lawyers to assume that any such contact would be covered by legal professional privilege.

Although the judge did not expand beyond the general comment that consulting lawyers may cross the line, a distinction can be drawn between two broad situations:

  • first, if a client approaches his or her solicitors seeking advice about the legal implications of a proposed course of conduct, such a step cannot have been intended to constitute a breach of duty. It is clearly in the public interest that individuals are able to establish the extent of their legal obligations and the implications of any wrongdoing; nothing in Shepherds should be taken as suggesting otherwise. As such, any advice given by solicitors in this respect would be covered by LPP
  • secondly, if a client approaches his or her solicitors seeking assistance in relation to the implementation of a proposal, he or she may, at that stage, have crossed the line. Legal teams are placed in an invidious position when contacted out of the blue by a client to discuss proposals that are sufficiently advanced. By agreeing to a meeting, advisers may unwittingly cause clients to cross the line. Any active participation by lawyers in furthering the clients’ objectives may not necessarily be privileged, on the ground that privilege cannot be used as a cloak for iniquity. Again, this will depend on the circumstances of the case. In any event, even if a client does have a dishonest (or even fraudulent) intention, it will not always follow that the proposed conduct would be regarded as iniquitous by the court. It is likely therefore that privilege will only be lost in rare cases, if at all.


The decision has significant implications for both directors and employees, and those advising them. The message is clear: if a client has formulated an irrevocable intention to compete and wishes to avoid liability, he or she must usually be advised to resign. Obviously, a remedy in damages may survive if the employee’s activities are in breach of any posttermination restrictive covenants. Those acting as legal advisers must consider their own role as advisers in any such competitive activity, insofar as they assist a client’s wrongful acts and cause him or her to incur further liability.

The decision also does little for the common law’s traditional objective of keeping potential restraints of trade within reasonable bounds. As Arden LJ commented in Item Software v Fassihi (paragraph 63), an overly intrusive approach to the law would discourage legitimate entrepreneurial activity and would not be a beneficial outcome. The line drawn in Shepherds offers scant protection for employees contemplating the establishment of a competitor company, who fail to resign at an early date. Accordingly, entrepreneurial activities by employees in the same sector as their existing employment (which may well be the only sector they know) are now strongly discouraged.

Cases referred to:

Shepherds Investments Limited v Walters [2006] EWHC 836 (Ch)
Nottingham University v Fishel [2000] IRLR 471
Item Software (UK) Ltd v Fassihi [2004] EWCA Civ. 1244; [2005] ICR 450
Re Hydrodam (Corby) Ltd [1994] 2 BCLC 180
Balston v Headline Filters [1990] FSR 385
British Midland Tool Ltd v Midland International Tooling Ltd [2003] EWHC 466; [2003] 2 BCLC 523
Framlington Group v Anderson (1995) 1 BCLC 475.
Coleman v Oakes [2001] 2 BCLC 749.
Hivac Ltd v Park Royal Scientific Instruments Ltd [1946] 1 All ER 350

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.