In this case, the High Court had to consider the meaning and effect of several provisions which are commonly found in this type of agreement, including restrictive covenants.
A buyer will often require a seller to enter into restrictive covenants in the share purchase agreement so as to protect the target company from the damage which the seller could inflict on its business by engaging in competitive behaviour.
For example, a seller will typically be prevented from dealing with particular customers, soliciting certain suppliers or poaching key employees for an agreed period of time. The agreement may also contain more open-ended covenants preventing the seller from engaging in activities such as using the target company's intellectual property rights at any time.
The agreement in question was entered into in 2004 and contained several restrictive covenants, most significantly a restriction preventing the seller of Karen Millen Holdings Limited (KMHL) from 'using' at any time:
In 2011, Karen Millen expressed in an interview her intention to return to women's fashion using the name 'Karen' and to begin selling homewares under the name 'Karen Millen'.
A dispute in the US and Chinese trade mark registries commenced with respect to trade marks containing the words 'Karen', 'Karen Millen' and 'KM' and various court actions were started in the US and England by the ultimate purchaser of the Karen Millen business.
Karen Millen applied to the High Court for a negative declaration to the effect that certain activities, including using the name 'Karen Millen' for homewares (but not women's apparel or women's fashion accessories) and 'Karen' in respect of any goods or services would not breach the restrictive covenants in the share purchase agreement. This was unusual as claims on restrictive covenants are usually brought by a buyer asking for the court to rule on something that a seller has already done.
The court considered various provisions in the share purchase agreement but, as regards the restrictive covenants, took the view that some intellectual property, especially goodwill, may change over time. It decided that, in general, the use of the term 'KMHL IPR' was limited to rights in existence at the date of the share purchase agreement.
As regards the restriction on using 'at any time' the name 'Karen Millen' or any other name 'confusingly similar thereto', the court decided that the restriction looked to the state of the goodwill at the date of Karen Millen's proposed actions rather than as at the date of the share purchase agreement.
Restrictive covenants require careful attention. Consider the time period of the clause and ensure intellectual property rights are clearly defined. In particular, it is important to consider if compliance with restrictive covenants is to be assessed by reference to the target's business as it existed at the date of the share purchase agreement or whether planned future expansion should also be taken into account.