Share purchase agreements – enforceability of onerous clauses
10 March 2013
Great care should be taken to find the right balance between a clause which protects your position and one which may be struck down as a penalty clause.
A penalty clause is usually described as one which provides for the payment of a sum of money on breach, where the sum is unconscionable in comparison to the amount which would have been a genuine pre-estimate of the loss suffered by the innocent party as a result of the breach.
It has long been held that a clause which imposes an obligation on a party to pay ‘extravagant or unconscionable’ compensation for breach of contract may be deemed to be a ‘penalty clause’ and therefore unenforceable.
Similarly, a restraint of trade clause in a share purchase agreement will be unenforceable to the extent that it goes beyond what is reasonable to protect the interests of the purchaser.
A recent case – Cavendish Square Holdings BVand Another v El Makdessi – has upheld a clause in a share purchase agreement which said that no further instalments of the purchase price would be payable if the vendor breached one of his restrictive covenants. This clause was not considered to be a penalty as there was, on the facts of the case, commercial justification for the provision based on the substantial loss of goodwill arising from the breach. The terms of the share purchase agreement had been negotiated on a level playing field.
The High Court held that the restrictive covenant imposed on the vendor, which was expressed to last for no less than eight and a half years, was not an unreasonable restraint of trade. It was justified in this case as the vendor would be a formidable competitor and the buyer had paid very substantial consideration for the goodwill in the business. Again, the court took account of the fact that the deal had been negotiated on a level playing field and it was held that the restrictions were reasonable in all of the circumstances.
As always, if you need commercial and pragmatic advice, we’re here to help so please get in touch.
A recent High Court decision has shone the spotlight on material adverse change (MAC) clauses and their effectiveness. What is a material adverse change clause? You will most likely come…
Despite the chief economist of the Bank of England’s reassurances that the post-COVID economy is “poised like a coiled spring”, current market conditions are undoubtedly making traditional mergers and acquisitions…
In the Chancellor’s first Budget speech last year, made as COVID-19 started to take hold in the UK, Rishi Sunak promised to do “whatever it takes to support the economy”.…
We use cookies on our website to give you the most relevant experience by remembering your preferences and repeat visits. By clicking “Accept”, you consent to the use of ALL cookies.
This website uses cookies to improve your experience while you navigate through our website. Out of these cookies, the cookies that are categorised as necessary are stored on your browser as they are essential for the working of basic functionalities of the website. We also use third-party cookies that help us analyse and understand how you use our website. These cookies will be stored in your browser only with your consent. You also have the option to opt-out of these cookies but it may affect your browsing experience on our website. You can find our cookie policy here.
Necessary cookies are absolutely essential for our website to function and enable core functionality such as security and accessibility. These cookies do not store any personal information. You can block these cookies by changing your browser settings, but this may affect how the website functions.
We use performance cookies such as Google Analytics to help us count the number of visitors and to see how visitors move around our website when they are using it. This helps us to improve the way our website works, for example, by ensuring that users are finding what they are looking for easily. The cookies collect information in a way that does not directly identify anyone. For more information on how these cookies work, please see our cookie policy.