Validity of post-acquisition restrictive covenants

In the recent case of Cavendish Square Holdings BV and another v BV Makdessi (2012) the court held that restrictive covenants which had the effect of lasting eight-and-a-half years following completion of a share purchase agreement were not an unreasonable restraint of trade and assessed the validity of penalty clauses by reference to the commercial justification test.

The target company (Team Y&R Holdings Hong Kong Ltd) was a large advertising and marketing communications group in the Middle East. The sellers were two individuals (‘M’ and ‘G’), leading business personalities who had built strong personal relationships with their clients. The Claimant (‘Cavendish’) owned 12.6% of the company and in 2008 agreed to purchase a further 47.4% of the shares. The share purchase agreement (‘SPA’) provided for payment of initial consideration and two tranches of deferred consideration, which would not be paid under certain circumstances. 

In 2010 Cavendish discovered that M had acted in breach of his duties to the company as a director and in breach of his obligations under the restrictive covenants of the SPA by continuing to be involved and interested in a competitor company…

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