Learn about the recent ruling by the Alabama Supreme Court on noncompete payments in M&A deals after the death of the seller. Discover the importance of clear terms in noncompete agreements to avoid disputes.
M&A Stories
May 12, 2021
Introduction:
In mergers and acquisitions (M&A) deals, a noncompete agreement is often included to safeguard the acquired business’s goodwill. These agreements involve significant payments made to the seller over time. Recently, the Alabama Supreme Court ruled in favor of a seller’s estate in a case where the buyer attempted to stop noncompete payments following the seller’s death.
The Deal:
In this particular case, a wholesale distributor of construction and highway-industry products was sold through a stock sale. The buyer, who was also the target company’s president, paid over $2 million to the seller/founder for a noncompete agreement. The payments were to be made in 120 monthly installments after the deal’s closing.
The Lawsuit:
Seven years after the deal’s closure, the seller passed away, and the buyer stopped making the noncompete payments. The seller’s estate sued the buyer for the outstanding balance of $641,000, leading to a legal battle that reached the Alabama Supreme Court.
The Argument:
The buyer claimed that the noncompete was a personal service contract, terminating upon the seller’s death. However, the Alabama Supreme Court disagreed with this interpretation. Instead, the court ruled that the primary purpose of the noncompete was to protect the acquired business’s goodwill, rather than solely relying on the seller’s expertise. Therefore, the buyer was still obligated to make the noncompete payments, and the agreement continued to be enforceable after the seller’s death.
This case is referred to as Boyd v. Mills, No. 1190615, Supreme Court of Alabama, (April 23, 2021).
Comment:
The dispute arose due to the lack of clarity in the noncompete agreement regarding whether the payments would cease upon the seller’s death. To avoid such disputes, it is essential to include specific terms in the noncompete agreement, clearly outlining the parties’ obligations in various scenarios.
Overall, this case serves as a reminder that noncompete agreements should be drafted carefully to ensure that both parties understand their rights and obligations, especially in the unfortunate event of the seller’s death.
By John McCauley: I help people manage M&A legal risks.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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