Beware of the basics

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Beware of the basics

Beware of the basics

In the recent legal case of Karen Denise Millen v Karen Millen Fashions Limited and Mosaic Fashions US Limited, the High Court delivered some insight into how the courts will interpret certain standard clauses in share purchase agreements (“SPA”).

In 2004, Karen Millen sold her fashion business, through the sale of the shares in her holding company, Karen Millen Holdings Limited (“KM Holdings”), to an Icelandic buyer (the “Buyer”). In 2009, the Buyer went into administration and KM Holdings was sold to Karen Millen Fashions Limited (“KM Fashions”) as part of a pre-pack administration. After the pre-pack, part of the business was carried out in the USA, by Mosaic Fashions US Limited (“Mosaic”).

In 2011, Karen Millen made a come back under a new brand “Karen”. KM Fashions and Mosaic argued that Karen Millen was breaching the restrictive covenants contained in the 2004 SPA and brought proceedings against her in the USA. Karen Millen applied to the UK courts to stop the proceedings being brought against her in the USA and asked for a declaration from the UK courts that she was not breaching the terms of the SPA by using her own trademark as part of her business “Karen”. As a counterclaim, KM Fashions and Mosaic sought an injunction to force Karen Millen to consent to the use of the acquired trademarks in the USA and China to give effect to the SPA as they saw it.

Karen Millen was not entitled to the declarations that use of her trademark “Karen” would not breach the restrictive covenants in the SPA, even if the trademark was used for her future endeavours in homeware and not fashion or fashion accessories.

The most interesting part of the case is not the ruling itself, but the High Court’s comments about various standard clauses of an SPA that are often not negotiated. This decision is a reminder for all that such clauses should not be overlooked.

The SPA contained a "further assurance" clause confirming that the parties would do all that was reasonable and necessary to give full effect to the SPA. The High Court decided that this clause was broad enough to compel Karen Millen to consent to the trademarks sought by KM Fashions and Mosaic in the USA and China. This is a very wide interpretation of what a further assurance clause might be capable of being used for. If possible, companies should try to limit the scope of the further assurance clause to cover only specific matters.

The "jurisdiction" clause in the SPA stated that legal claims should be brought in the English Courts but did not specify whether this was "exclusive" or "non-exclusive". The High Court found that the intention was clearly for the English Courts to have "exclusive" jurisdiction (meaning proceedings must be brought in the English Courts) as a result of which KM Holdings and Mosaic were in breach of the SPA by bringing proceedings in the USA. This distinction should always be made clear in the SPA to avoid confusion and wasted costs.

KM Fashions acquired its interest in KM Holdings as part of the pre-pack administration in 2009, KM Fashions was not party to the 2004 SPA. The High Court considered that there was no reason why KM Fashions should not be classified as a "successor in title" under the "assignment" clause of the SPA and as a result it was entitled to bring proceedings under the SPA. This decision is important because it calls into question the language one often finds in the “assignment” clause of any number of SPAs.

The consequences of failing to focus on these types of standard clauses can be unexpected! For more information contact our Corporate team on 0345 070 6000.