Buying a business: share purchase agreements

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.