In this issue, we take a look at the recent Karen Millen case to gain some insight on common boilerplate provisions in share sale agreements, and we briefly review the FCA’s latest Market Watch newsletter on market abuse.
Boilerplate in share purchase agreements – the case of Karen Millen
In Karen Denise Millen v Karen Millen Fashions Limited and Mosaic Fashions US Limited  EWHC 2104 (Ch), the High Court found that clauses containing restrictive covenants by a seller, further assurance obligations, rights of third parties and a choice of jurisdiction were all enforceable.
In 2004, Karen Millen (“KM”) disposed of her fashion business by selling the shares in Karen Millen Holdings Limited (“KMHL”) to an Icelandic consortium under a share sale agreement (the “SPA”).
In 2009, the financial crisis struck and the consortium companies were put into administration. KMHL’s business was then sold to Karen Millen Fashions Limited (“KMFL”) in a pre-pack administration. Part of the business was subsequently carried out in the U.S. by Mosaic Fashions US Limited (“Mosaic”).
In 2011, KM announced her return under the name “Karen”. KMFL and Mosaic claimed that this would breach covenants in the SPA and brought proceedings in the U.S. KM subsequently applied to the English court to halt the U.S. proceedings and for confirmation that her use of the trademarks would not breach the SPA. In response, KMFL and Mosaic sought an injunction requiring KM to consent to applications in the U.S. and China to register the relevant trademarks in their name.
Ultimately, the High Court declined to make the declarations KM sought and found that KFML and Mosaic had breached the SPA by bringing proceedings in the U.S. Of particular interest are the court’s comments on the various relevant provisions of the SPA.
The SPA contained covenants requiring KM not to use, or attempt to use, any “KHML IPR” in the course of any business. It defined “KMHL IPR” by reference to an extensive list of types of intellectual property, including rights to prevent passing-off, but not specifically including goodwill.
Despite this, the court concluded the parties intended the definition to cover goodwill, and this was achieved by the reference to passing-off. Curiously, it found that the covenants applied to intellectual property in use only at the time the SPA was signed, but they applied to goodwill both at the time of the SPA and in the future. This was because the concept of “goodwill” appeared in various clauses of the SPA, which had to be read together, and some of these were forward-looking.
The SPA contained a standard further assurance clause requiring the parties to take action reasonably necessary to give “full effect” to the SPA. The court found that this obliged KM to execute documents in connection with the American and Chinese trademark applications. KMFL’s and Mosaic’s attempts to apply for those registrations were an “important, natural and foreseeable” way of putting the SPA into effect. It would not have full effect if KM hindered that process by withholding her consent.
The SPA also contained a relatively standard clause prohibiting the parties from assigning their rights under the SPA, but also stating that the benefit of the SPA extended to each party’s successors in title. Surprisingly, the court found that KMFL was a successor in title, because it acquired rights under the asset purchase in 2009. The court saw no reason why KMFL could not enforce the SPA as a successor to the owner of the “operating assets of the business”.
Choice of jurisdiction
Finally, the SPA stated that, in relation to any legal action or proceedings to enforce the SPA, the parties irrevocably submitted to the jurisdiction of the English courts. It did not state whether that jurisdiction was exclusive or non-exclusive.
However, the court found that the clause conferred exclusive jurisdiction on the English courts and that KMFL and Mosaic had breached it by bringing proceedings in the U.S.
The judgment throws up numerous drafting points worth noting.
A court will look at related clauses in context to identify the parties’ intentions when they signed the contract. This may result in a single clause having a sort of “dual effect”. It is not a given that the effect of a particular clause will be uniform in all contexts. Here, the same restrictive covenant was “frozen in time” in so far as it related to intellectual property, but extended into the future in relation to goodwill.
The conclusion that KMFL was a successor in title under the SPA is striking. The assets sold under the SPA were the shares in KMHL. Strictly, KMFL did not succeed the original owner to the title to those shares. Rather, it acquired the assets of the business from KMHL. However, the judge was content to interpret the phrase broadly and find that KMFL was the successor in title to the underlying business.
These two examples show how a court may take a purposive approach and interpret terms of a commercial contract in unexpected ways. This usually results from ambiguities or errors in drafting. The solution is to identify which items are to be treated differently, separate them and set out in detail how to deal with them each in turn. This will always need to be balanced against lengthy drafting.
In other respects, the case provides useful comfort that further assurance provisions, the full effect of which is sometimes doubted, should be respected and given a sensible interpretation in context.
Observations from the FCA’s market maker review
The FCA has published issue 50 of Market Watch, including its recent review into systems and controls of market makers in small and mid-cap equities in preventing market abuse. Its key findings include:
- The level of market abuse awareness among senior management and trading teams was inconsistent and generally below the FCA’s expectations.
- Firms that did not conduct regular market risk assessments found it harder to demonstrate that they had effective controls in place.
- While firms demonstrated clear information barriers between corporate finance and investment banking operations, sales staff and senior management were often physically located within close proximity of the market making desk, giving rise to potential conflicts of interest.
- In several cases, details recorded on insider lists were inaccurate or were missing entirely.
- The FCA encourages the practice of periodically monitoring market makers’ trading activity during wallcrossing periods as an important step in mitigating the risk of market abuse.