Noncompete Covenants in M&A: Structuring to Bind Sellers and Key Employees

Covenants not to compete are a critical, and often closely scrutinized, component of any M&A transaction, and practitioners must be able to carefully craft these covenants in a manner that will stand up to post-closing judicial scrutiny.

The FTC's new rule and most states distinguish between the law governing covenants not to compete when incident to the sale of a business versus when these covenants arise solely out of employment. This means that noncompete covenants applicable to sellers in an M&A transaction must be approached differently than those applicable to key employees of the acquired company. With respect to sellers, the presence of reasonable consideration and a clear nexus between that consideration and the covenant is essential. As it relates to key employees, courts generally respect restrictive covenants in employment agreements for the duration of employment, and noncompetes can survive the term of employment for certain key employees if drafted to comply with new federal and existing state law.

In addition to enforceability issues, the appropriate contours of noncompetition restrictions are highly fact-dependent and require careful consideration of the circumstances of each individual buyer and seller. Failing to tailor noncompetition covenants to these circumstances can result in a seller being unreasonably restricted from future endeavors and/or a buyer being inadequately protected.

Listen as our authoritative panel analyzes covenants not to compete in M&A transactions.