Explore the intricate dynamics of safeguarding key talent in M&A through this cautionary tale of a stock acquisition. Delve into the nuances revealed in a pivotal case from October 9, 2018, shedding light on the impact of stock acquisitions on employment agreements and noncompete clauses.
M&A Stories
October 18, 2018
In the realm of M&A, safeguarding key talent is crucial, and the choice between stock and asset acquisition can significantly impact this dynamic. A case from October 9, 2018, sheds light on the nuances.
A prominent Southern California title and escrow company (the buyer) opted for a stock acquisition when acquiring a smaller counterpart in the Greater Salt Lake City area (the target) between 2003 and February 2009.
Fast forward five years, the target’s COO/general counsel launched a competing venture while still employed. Upon departure, he took 25 employees, including the target’s manager and senior VP of escrow operations.
The buyer, sensing a breach of nonsolicitation and noncompete clauses in the employment agreements signed before acquiring the target, took legal action in a Salt Lake City federal district court. The jury ruled in favor of the buyer, awarding $1.7 million in damages against the former employees, $1 million in compensatory damages against the competitor, and $500K in punitive damages, along with $2.9 million in attorney fees.
The crux of the matter lies in the distinction between stock and asset acquisitions. When buying a company’s stock, employment agreements generally persist unless a “change of ownership” clause dictates otherwise. This stands in contrast to asset deals, where employee consent for contract assignment is typically required under state laws.
Moreover, certain states, like California, only uphold noncompetes linked to the sale of a business by its owner and deem such clauses unenforceable against regular employees.
This case underscores the critical considerations for businesses eyeing acquisitions and emphasizes the need for a nuanced approach in navigating employment agreements within the M&A landscape.
Case Reference:
First American Title Insurance Company v. Northwest Title Insurance Agency, No. 17-4086, United States Court of Appeals, Tenth Circuit (October 9, 2018).
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