Human capital, intellectual property and a secure customer base often drive the value of an acquisition. To secure that value, the buyer of a business may want to retain key employees and prevent the seller from competing with the business for a specified period. The acquisition agreement therefore often includes certain restraints. Buyers and sellers may later disagree on the interpretation and enforceability of these terms. Various immediate dispute resolution steps must be taken to protect the value of the acquired business. Our commercial litigation team regularly acts for clients involved in this type of dispute.
Typical restraints in an acquisition agreement apply for a specified period after the sale is complete and restrict a seller from competing with the business within a defined geographic area (a non-compete clause), from soliciting or dealing with existing customers or suppliers of the business (a non-solicitation or non-dealing clause), and from soliciting or employing existing employees of the business (a non-poaching clause). There is also usually a confidentiality clause to protect trade secrets and sensitive information.
These restrictive covenants are like those often found in the employment contracts of executives and other key employees. The restrictions in both acquisition agreements and employment contracts are only enforceable if they are reasonable and do not go beyond what is necessary to protect the legitimate interests of the business in their scope, duration, and geographical reach.
If a restriction is in dispute, courts take a more permissive approach to assessing reasonableness in an acquisition agreement, usually allowing restrictive covenants that are broader in scope and longer in duration than those considered enforceable in an employment contract. Parties in the acquisition of a business are presumed to have similar bargaining power, and to have been able to judge what was reasonable when concluding the sale. While a restriction of more than 12 months is difficult to justify in an employment contract, allowing restraints for 2 or 3 years is common in acquisition agreements.
But there are limits to the restrictions which are enforceable in an acquisition agreement. The business interests which may be protected are only those at the date of the sale and cannot relate to other products or services that the business may become involved with after that time. Worldwide restrictions have historically not been considered reasonable, especially in relation a small, local businesses. However, developments in technology may mean that such restraints will be regarded as fair and reasonable to protect the value in certain types of acquisitions.
The solicitors in our Commercial Litigation team who have specialist experience with disputes relating to all types of restrictive covenants are Rhys, Iain, Luke, Rebecca and Emily. Please contact us if you have any concern about protecting the value of your acquisition. We would be happy to assist you.
