If I run a business using my own name, how can a restriction on the future use of my (ahem) … very valuable name…be binding?
Take Fantastically Successful Limited, a fictional business. On a sale of that business, the buyer will wish to protect its investment in the goodwill by preventing the owner from using the name “Fantastically Successful” in future business ventures. Fair enough. But taking the example of a business trading as “John Smith Limited”, owned and sold by John Smith, restrictions look harder to define and enforce.
Hairdressers and fashion houses are frequent visitors to the Courts asking for a resolution to such problems. Recent cases have revisited the characteristics for binding covenants in the context of business sales.
Ms Millen sold her fashion business (Karen Millen Fashions Ltd). She started a new business in homewares (not fashion) and wanted to use her name in that new homewares business. She asked the court whether the restrictive covenants she signed prevented her from doing so. The buyer objected, arguing that a business named (for example) “Karen Millen Homewares” would be too confusing with Karen Millen Fashions. There was a risk of damage to the brand for which the buyer had paid considerable sums of money.
The court agreed with the buyer. An important consideration was the timing of the application of the covenant. Buyers use covenants to protect their legitimate business interests. The court considered the details of the covenant and reached the conclusion that it extended not just to the business interests of the buyer at the time of the purchase, but also to the planned future expansion of the fashion business.
It is not unusual for a seller to use the sale proceeds to start another new venture. Setting up a new company to avoid restrictive covenants will not necessarily provide a solution for a seller. In another recent case, a woman sold her hairdressing business and agreed covenants. After she left, and within the restricted period, she set up a new company, nearby and with employees that she had poached. Naturally the buyer was tearing her hair out. The seller argued that the covenants were personal on her only and therefore not binding on her company. The court took a commercially sensible approach and disagreed.
Covenants are a valuable part of business sales and purchases. They allow purchasers to have a better chance to run the business particularly after the disruption of a sale. Care needs to be taken in agreeing and drafting them.
Gavin Poole is a partner in the corporate team at Stephens Scown. If you have any queries then please do contact Gavin on 01872 265100, or by email solicitors@stephens-scown.co.uk.