• At Kemp Little, we are known for our ability to serve the very particular needs of a large but diverse technology client base. Our hands-on industry know-how makes us a good fit with many of the world's biggest technology and digital media businesses, yet means we are equally relevant to companies with a technology bias, in sectors such as professional services, financial services, retail, travel and healthcare.
  • Kemp Little specialises in the technology and digital media sectors and provides a range of legal services that are crucial to fast-moving, innovative businesses.Our blend of sector awareness, technical excellence and responsiveness, means we are regularly ranked as a leading firm by directories such as Legal 500, Chambers and PLC Which Lawyer. Our practice areas cover a wide range of legal issues and advice.
  • Our Commercial Technology team has established itself as one of the strongest in the UK. We are ranked in Legal 500, Chambers & Partners and PLC Which Lawyer, with four of our partners recommended.
  • Our team provides practical and commercial advice founded on years of experience and technical know-how to technology and digital media companies that need to be alert to the rules and regulations of competition law.
  • Our Corporate Practice has a reputation for delivering sound legal advice, backed up with extensive industry experience and credentials, to get the best results from technology and digital media transactions.
  • In the fast-changing world of employment law our clients need practical, commercial and cost-effective advice. They get this from our team of employment law professionals.
  • Our team of leading IP advisors deliver cost-effective, strategic and commercial advice to ensure that your IP assets are protected and leveraged to add real value to your business.
  • Our litigation practice advises on all aspects of dispute resolution, with a particular focus on ownership, exploitation and infringement of intellectual property rights and commercial disputes in the technology sector.
  • We have an industry-leading reputation for our outsourcing expertise. Our professionals deliver credible legal advice to providers and acquirers of IT and business process outsourcing (BPO) services.
  • We work alongside companies, many with disruptive technologies, that seek funding, as well as with the venture capital firms, institutional investors and corporate ventures that want to invest in exciting business opportunities.
  • Our regulatory specialists work alongside Kemp Little’s corporate and commercial professionals to help meet their compliance obligations.
  • With a service that is commercial and responsive to our clients’ needs, you will find our tax advice easy to understand, cost-effective and geared towards maximising your tax benefits.
  • At Kemp Little, we advise clients in diverse sectors where technology is fundamental to the ongoing success of their businesses.They include companies that provide technology as a service and businesses where the use of technology is key to their business model, enabling them to bring their product or service to market.
  • We bring our commercial understanding of digital business models, our legal expertise and our reputation for delivering high quality, cost-effective services to this dynamic sector.
  • Acting for market leaders and market changers within the media industry, we combine in-depth knowledge of the structural technology that underpins content delivery and the impact of digitisation on the rights of producers and consumers.
  • We understand the risks facing this sector and work with our clients to conquer those challenges. Testimony to our success is the continued growth in our team of professionals and the clients we serve.
  • We advise at the forefront of the technological intersection between life sciences and healthcare. We advise leading technology and data analytics providers, healthcare institutions as well as manufacturers of medical devices, pharmaceuticals and biotechnological products.
  • For clients operating in the online sector, our teams are structured to meet their commercial, financing, M&A, competition and regulatory, employment and intellectual property legal needs.
  • Our focus on technology makes us especially well positioned to give advice on the legal aspects of digital marketing. We advise on high-profile, multi-channel, cross-border cases and on highly complex campaigns.
  • The mobile and telecoms sector is fast changing and hugely dependent on technology advances. We help mobile and wireless and fixed telecoms clients to tackle the legal challenges that this evolving sector presents.
  • Whether ERP, Linux or Windows; software or infrastructure as a service in the cloud, in a virtualised environment, or as a mobile or service-oriented architecture, we have the experience to resolve legal issues across the spectrum of commercial computer platforms.
  • Our clients trust us to apply our solutions and know-how to help them make the best use of technology in structuring deals, mitigating key risks to their businesses and in achieving their commercial objectives.
  • We have extensive experience of advising customers and suppliers in the retail sector on technology development, licensing and supply projects, and in advising on all aspects of procurement and online operations.
  • Our legal professionals work alongside social media providers and users in relation to the commercial, privacy, data, advertising, intellectual property, employment and corporate issues that arise in this dynamic sector.
  • Our years of working alongside diverse software clients have given us an in-depth understanding of the dynamics of the software marketplace, market practice and alternative negotiating strategies.
  • Working with direct providers of travel services, including aggregators, facilitators and suppliers of transport and technology, our team has developed a unique specialist knowledge of the sector
  • Your life as an entrepreneur is full of daily challenges as you seek to grow your business. One of the key strengths of our firm is that we understand these challenges.
  • Kemp Little is trusted by some of the world’s leading luxury brands and some of the most innovative e-commerce retailers changing the face of the industry.
  • HR Bytes is an exclusive, comprehensive, online service that will provide you with a wide range of practical, insightful and current employment law information. HR Bytes members get priority booking for events, key insight and a range of employment materials for free.
  • FlightDeck is our portal designed especially with start-up and emerging technology businesses in mind to help you get your business up and running in the right way. We provide a free pack of all the things no-one tells you and things they don’t give away to get you started.

M&A Diligence: Enforceability of Agreed Remedy Provisions

Contracting parties will often choose to add a degree of certainty to their corporate or commercial contracts by including provisions that stipulate specific remedies for specific contractual events.  For example, when a party breaches a contract, it will typically pay damages to the innocent party in accordance with the common law, however, in some instances, the parties will agree that a specific sum be payable upon a specific or general breach (liquidated damages) or that any advance/deferred payments paid/due to the defaulting party be forfeited upon a specific or general breach.

When negotiating and drafting agreed remedy provisions, careful consideration needs to be given to the doctrine of penalties which bars the enforcement of penalty clauses that compensate beyond the actual loss suffered by the claimant.

Liquidated Damages and Penalties

A comprehensive review of the doctrine of penalties was undertaken by the Court of Appeal in Makdessi v Cavendish Square Holdings [2013] EWCA Civ 1539.  Mr Makdessi sold part of his holding in a company to Cavendish (ultimately).  The sale agreement included various non-compete provisions as regards Makdessi (who remained as a director and continued to hold shares himself) on the basis that the goodwill in the company was considerable and dependent upon Makdessi's prominence in the market.  The sale agreement provided that, in essence, on a breach of any of the various non-compete provisions by Makdessi, he would become a defaulting shareholder: triggering a sale of his remaining shares in the company to Cavendish and forfeiting unpaid portions of the deferred consideration outstanding to him.  The deferred consideration was to be paid in stages, calculated by reference to profit.

The issue before the Court of Appeal was whether the forfeit of the deferred consideration and sale of shares (the “agreed remedy”) amounted to an unenforceable penalty. The Court of Appeal concluded that it did based on the following general principles:

  • the deferred consideration and discount on the shares was “substantial”;
  • the agreed remedy was “extravagant and unconscionable” in comparison with the greatest loss that could conceivably be proved to have followed from the breach (furthermore, the same consequences applied in respect of a wide range of breaches which fell into different categories of seriousness, many of which could not attract anywhere close to the lost value associated with the forfeit and compulsory sale);
  • the agreed remedy was “intended to deter and penalise” rather than compensate for actual loss;
  • the agreed remedy did not represent a “genuine pre-estimate of actual loss” (this should be an objective assessment of what the parties (at the time the contract was made) could reasonably have expected the anticipated loss to be); and
  • the agreed remedy was not otherwise “commercially justifiable” in the circumstances – if the remedy is particularly harsh, there must be more than merely a commercial reason agreed between parties of equal bargaining power even when competent advice has been provided in respect of the same.

Leaver Provisions

Another example of an agreed remedy is the compulsory acquisition of shareholder-employee shares when their employment terminates (leaver provisions).  Good, early and bad leaver provisions in articles of association, shareholder agreements and employee incentive schemes allow a company (or the other shareholders) to compulsorily acquire the shares of a shareholder-employee who leaves the company:

  • “Good leavers” typically comprise employees who leave due to illness or otherwise on good terms.
  • "Early leavers" typically comprise employees who voluntarily leave the company prior to the expiry of a fixed commitment period.
  • "Bad leavers" typically comprise shareholder-employees who are dismissed for gross misconduct, although often "bad leaver" will simply be a catch-all term covering all employees who are not good or early leavers.

Early and bad leaver provisions will generally require a shareholder-employee to give up their shares for a price less than market value. Depending on the discount applied to the market price, such clauses may be considered unenforceable penalty clauses given that the leaver is required to part with its property at less than market value. The following points should be considered in relation to leaver provisions:

  • The doctrine of penalties only applies to clauses triggered by a breach of contractual duty. Therefore, drafting a leaver provision so that it is triggered by an event other than a breach of contractual duty may avoid the application of the doctrine of penalties altogether.  That said, the courts have (in obiter) previously expressed a willingness to look at the substance of a bargain so it is unlikely that such drafting would save a clause that would otherwise be caught by the doctrine of penalties.
  • To avoid a double jeopardy situation, leaver provisions should be drafted so that any discount on fair value is deducted from any other claims (by the company or other shareholders) against the leaving shareholder in respect of the same conduct.  It would also be best practice to provide for a catch-all statement stipulating that there will be no double recovery in any event.
  • The quantum of the discount applied to leaver shares should be commensurate with the nature, degree and legally-recoverable loss caused by the specific breach of the leaving shareholder.  Consideration should be given to whether it is appropriate to provide for different categories of seriousness of breach, each with a proportionate discount rate (a catch-all definition for "bad leaver", coupled with a single price for all bad leavers may fall foul of the doctrine of penalties).
  • The mere commercial reasoning that a leaver provision has been inserted to effect a "clean break" or to provide suitable incentives to employees does not guarantee that the leaver provision will be commercially justified and thus enforceable.

Comment

In order to ensure that an agreed remedy is enforceable, it is necessary to give careful consideration to the following factors when negotiating and drafting agreed remedy provisions:

  • Is the remedy proportionate to the greatest actual loss that could conceivably be suffered as a result of each specific breach that triggers the remedy?

OR

  • Is the remedy otherwise commercially justifiable?

 

For more information, please contact Charles ClaisseHead of Corporate.