Explore the complexities of M&A non-solicitation covenants through a compelling California case. Learn how a buyer’s attempt to restrict a seller’s outreach met legal hurdles, highlighting the importance of precision in drafting agreements. Delve into the balance between commercial interests and individual rights in this insightful blog post.
M&A Stories
April 26, 2018
In the realm of M&A, a recent case from California sheds light on the intricacies of enforcing non-solicitation covenants. Let’s delve into how a buyer’s attempt to restrict a seller’s outreach to employees and customers met an unexpected legal roadblock.
In this scenario, the buyer, an established entity with its own loyal clientele and workforce, acquired a business from the seller. The acquisition agreement contained clauses prohibiting the seller from soliciting not only its former employees and customers but also those of the buyer, for a period of one year.
However, as fate would have it, the deal soured, prompting the buyer to seek legal recourse. The buyer sought enforcement of the non-solicitation clause, urging the court to bar the seller from reaching out to its employees and customers. Initially, the trial judge ruled in favor of the buyer, but the decision was appealed to the California Court of Appeals.
The appellate court’s verdict favored the seller. It emphasized that while agreements restricting sellers from soliciting their former clients and workforce are typically enforceable under California law, the specific terms of this case overstepped the boundaries of legality.
Central to the court’s ruling was California’s staunch support for an individual’s right to engage in lawful business activities. Citing relevant statutes, the court underscored the importance of balancing commercial interests with the broader public policy against undue restraints on trade.
Crucially, the court noted that non-solicitation clauses must be reasonably tailored to protect the value of the acquired business without unduly restricting the seller’s ability to compete in the marketplace. While such clauses may prevent sellers from eroding the goodwill they sold, extending their reach to encompass all of the buyer’s employees and customers goes beyond the intended scope.
In this case, the buyer’s concession to limit the non-solicitation clause to the seller’s former employees and clients was rejected by the court. Consequently, the seller retained the freedom to pursue its business interests, including soliciting its former connections.
The key takeaway from this legal saga is clear: When drafting non-competition and non-solicitation agreements, precision is paramount. Parties must ensure that such provisions are meticulously crafted to apply only to the specific business being acquired, lest they risk unintended legal consequences.
Case Reference: Strategix, Ltd. v. Infocrossing West, Inc.,. (2006) 142 Cal.App.4th 1068 and can be found at: https://scholar.google.com/scholar_case?case=11235959082993202913&q=%22asset+purchase+agreement%22&hl=en&as_sdt=4,5,60,72,73,78,79,80,86,88,93,114,129,134,135,141,142,143,149,151,156,258,259,260,261,310,311,321,322,323,324,373,374,383
By John McCauley: I help people start, grow, buy and sell their businesses.
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
Recent Comments