Mergers and Acquisitions:  What Do They Mean for Your Non-Compete Clause?

Mergers and Acquisitions: What Do They Mean for Your Non-Compete Clause?

Employers implement restrictive covenants, such as non-compete clauses and non-solicitation clauses, in order to protect the hard work they put into building their business, their trade secrets, and customer lists. Generally, it is these very things that make a business attractive to a buyer who wants to acquire or merge with the business.

But what happens if the restrictive covenants are not enforceable? In that case, your business will lose much of what made it attractive to a potential buyer in the first place.

Unfortunately, I came across just this situation recently. The original founders of a business that had been growing by leaps and bounds were ready to cash in on their hard work and sell. A buyer found their company very appealing and was set to purchase. As the deal progressed, it came to light that the restrictive covenants the company’s employees had signed were not going to be enforceable against the acquirer as there was a non-assignment clause but no survival clause.

A non-assignment clause states that the contract cannot be assigned and assumed by a new party. In this case, the purchaser would not be able to “step into the shoes” of the original employer and enforce the provisions of the restrictive covenants against its employees. The purchaser would have to renegotiate brand new employment agreements with all of the employees.

A survival clause identifies which provisions of an agreement will remain in effect after the termination of the agreement. Survival clauses are often included in agreements that contain non-compete provisions and confidentiality provisions. The restrictive covenants, in this case, lacked such a clause, meaning that none of the provisions would outlive the sale of the business.

In this case, many employees decided to leave and start their own competing entity. Key senior employees joined them, and the employees also took several clients with them. This exodus of workforce and clients made the deal significantly less lucrative, and less appealing.

The enforceability of restrictive covenants in a merger or acquisition can depend on a number of factors, including the nature of the transaction and the comprehensiveness of the agreement. A knowledgeable attorney can foresee future problems and draft a forward-looking agreement that addresses potential pitfalls. That way, your business will be in the best position possible from the beginning of negotiations through the close of the deal.

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