Non-Compete Covenants in M&A: Structuring to Bind Sellers and Key Employees

Description

Covenants not to compete are a critical piece of any M&A transaction. Most states distinguish between the law governing covenants not to compete when incident to the sale of a business, and the law governing non-competition agreements arising solely out of employment. Practitioners should craft covenants not to compete that will stand up to post-closing judicial scrutiny.

The presence of reasonable consideration is essential to the enforceability of non-competition covenants. However, even when reasonable consideration appears to be present, a court may invalidate a non-competition covenant if the nexus between such covenant and the consideration is not sufficiently clear. A merger agreement should incorporate the particular terms of any non-competition covenant --either directly in the text of the contract or by attaching a form letter of transmittal.

Acquirers should include non-competition covenants in employment agreements for key employees who will continue with the surviving entity following the acquisition. The courts generally respect restrictive covenants in employment agreements for the duration of employment, and non-competes can survive the term of employment if drafted to comply with state law.

Where large shareholders and/or founders will be entering into support agreements at the signing of the merger agreement, acquirers should attempt to include in such support agreements a non-competition covenant that will become effective upon the closing. Such an approach not only locks up shareholder support for the transaction but also eliminates the competition risk posed by those that are presumably most able to compete.

Listen as our authoritative panel analyzes covenants not to compete in M&A transactions. The panel discussion will include a comparison of New York, Delaware, and California case law relating to non-competes, and non-competes as they pertain to sellers and key employees.