2021 and beyond: A wave of M&A litigation?
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Until the two recent decisions of Morris J in Create Financial Management LLP-v-Lee & Anor  EWHC 1933 (QB) and  EWHC 2046 (QB), springboard injunctions had only been granted to applicants who complained that a respondent had embarked on ‘positive’ acts, in breach of a relevant duty, which afforded them an unlawful competitive head start or ‘springboard’.
In Create Financial Management LLP, the acts relied upon were alleged failures to take proactive steps on behalf of the applicant, rather than positive acts to benefit the respondents. Flint Bishop’s commercial litigation partner, Nick Wells and Gideon Roseman of Ten Old Square, who acted for the respondents, discuss the decision below.
The respondents were the former owners of a firm of independent financial advisers who sold their interest in the firm to a third party. Following non-payment of deferred consideration, the parties entered into a settlement agreement, which varied the original agreement to the effect that, if the firm failed to pay the entirety of the c£3m deferred consideration to the respondents by 30 April 2020, the respondents would be released from the restrictive covenants and free to immediately start competing from 01 May 2020.
Payment was not made, and the restrictive covenants were automatically discharged, and from 01 May 2020, the respondents started competing. The firm applied for an interim springboard injunction. The basis of the application was, not that the respondents had proactively breached any duty owed to the applicant, on the contrary, it was based on the allegation the respondents had ‘omitted’ to thoroughly handover clients to the firm, which, it was alleged, would make it easier for the respondents to ‘solicit’ the clients going forwards.
In the typical scenario of an employer applying for an interim injunction to enforce a 12-month post-termination restrictive covenant, the position is simple; the applicant can point to the clause in the employment contract that provides for the 12-month restrictive covenant and will ascertain from the court’s listing office when an expedited trial will be listed. If the trial will be listed on or around the date on which the 12-month restrictive covenant expires, the grant of the interim injunction will award part or all of the ultimate relief sought by the applicant. In these circumstances, the applicable test for the grant of the injunction is not the low threshold of ‘serious question to be tried’ from American Cyanamid-v-Ethicon Ltd  AC 396 (HL), but the test set out in Lansing Linde-v-Kerr  1 WLR 251 (CA), which requires the court to consider the merits of the underlying case to see if the applicant would likely succeed at trial.
Unlike the typical employer/restrictive covenant case, an applicant seeking an interim springboard injunction cannot just point to a post-termination restrictive covenant; they have to rely on a combination of evidence and submissions to persuade the court as to the length of the alleged springboard obtained by the respondents that the court is being asked to neutralise.
In MPT Group Limited-v-Peel  EWHC 1222 (Ch), Edward Pepperall QC (as he then was) held that, in a springboard application, an applicant could not simply make the bare assertion as to the length of the alleged springboard, and that the court would “first need to form some view upon the evidence as to the likely length of any final springboard injunction and then as to the likely date when judgment might be handed down after a speedy trial”.
However, in Create Financial Management LLP, Morris J held, purportedly relying on Sir Terence Etherton MR’s decision in Forse-v-Secarma Ltd  EWCA Civ 215, that, if the gap between the date of the application and an expedited trial was “insignificant”, this, without more, engaged the ‘serious question to be tried’ threshold, with the consequence that the court would ignore the actual merits of the applicant’s case and accept, without question, the applicant’s bare assertion as to the length of the springboard. This was notwithstanding Morris J going on to rule that the applicant’s case “at best, its case is one of ephemeral and short term advantage and that is not sufficient” and was “very weak”.
Not only does this appear to considerably lower the bar for obtaining interim springboard relief, but it also leaves two conflicting first instance High Court decisions, one stating that an applicant’s pleaded advantage cannot be accepted without scrutiny and another stating that it can. In this regard, the test for interim relief can now be considered to be potentially both less stringent and even less clear than it was before.
Nick Wells commented:
“This latest springboard injunction case does little to clarify the emerging law in this area and creates more conflicting authority to add to the leading cases.
“We had sought permission to appeal on this point, but ultimately the second judgment meant that the respondents succeeded on two of the three grounds for the injunctive relief sought – the most important grounds. In addition, after being found to have misled some third parties on the effect of the interim injunction, the claimants were forced to write to a number of their own clients to inform them that they were free to transfer their business to the respondents. The injunction that remained after the second judgment was therefore of little practical benefit and shortly after this judgment, the proceedings settled with the injunction discharged in full.
“Accordingly, whilst a great result was achieved for the respondents, the law has been left somewhat in a state of flux.”
Gideon Roseman added:
“For obvious reasons, Morris J’s judgment will be welcomed by applicants with weak cases and who are only making the application as a tactical ploy to bring a respondent to the negotiating table.
“Although one will no doubt seek to rely on Morris J’s judgment if they are acting for an applicant with a very weak case, it is unlikely this judgment will be followed and, Edward Pepperall QC’s (as he then was) judgment in MPT Group Limited will be preferred. This judgment is undoubtedly more consistent with Sir Terence Etherton MR’s judgment in Forse v Secarma Ltd; the latter decision making it clear that the higher threshold of Lansing Linde applies to all cases where the interim application delivers to an applicant all or part of the substantive relief they are seeking at trial. I can only hope that, if I do seek to rely on Morris J’s judgment in the future, my opponent has not read this article!”
For further information or any queries relating to this case, please contact us on 01332 226 480 or complete the form below.
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