Morgan J Morgan, Head of Corporate Commercial at Dyne Drewett is advising potential buyers of any company to take heed of the recent Court of Appeal decision which has held that clauses in a share purchase agreement providing that, in the event of a breach of the seller’s restrictive covenants, the buyer’s obligation to pay deferred consideration would cease and the buyer would be entitled to acquire the remainder of the seller’s shares at a price based on net asset value (and excluding goodwill), were unenforceable penalties.

“This case suggests that a buyer will have to be cautious when they want to link payment of deferred consideration to the seller’s compliance with restrictive covenants in an agreement preventing, for example, a seller from competing with the business sold, following completion of the transaction.”

After this the Court of Appeal case, clauses in a share purchase agreement which provide that deferred consideration will cease to be payable in the event (and as a consequence) of a breach of the seller’s restrictive covenants will be vulnerable to challenge on the grounds that they constitute an unenforceable penalty.