The Court of Appeal 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.
The case suggests that a careful approach will be required where a buyer of shares wants to link payment of deferred consideration to the seller's compliance with non-compete or similar covenants following completion of the transaction. 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.
If you would like to know more, please contact Mandy Quinn, Partner and Head of the Corporate Team on 0141 333 6750 or email This email address is being protected from spambots. You need JavaScript enabled to view it.