Explore the complexities of employee non-compete agreements in M&A deals and learn how different transaction types can impact their enforceability. Gain insights from the USI Insurance Services National, Inc. v. Ogden, LLC case.
M&A Stories
March 21, 2019
Introduction:
In the realm of mergers and acquisitions, the importance of preserving valuable employee relationships cannot be overstated. Often, these relationships are safeguarded through employment agreements that include post-employment non-solicitation and non-competition clauses.
While the enforceability of such provisions varies across states, a buyer’s interest in retaining key employees and preventing them from competing post-transaction is clear. However, the approach can differ depending on whether the deal involves asset purchase, stock purchase or merger.
Asset Purchase vs. Stock Purchase or Merger: Key Considerations
In cases where the transaction involves acquiring a company’s assets, complications arise if the target company has non-compete agreements with its key employees. In such situations, employees may possess the right to veto the transfer of these restrictive covenants.
Conversely, if the acquisition occurs through a stock purchase or merger, the scenario becomes more manageable. In such instances, there is no need for covenant assignment to the buyer, simplifying the process. The only potential issue could be an agreement provision stating that employee consent is required, or the covenant terminates upon a controlling interest sale, which is uncommon in employee agreements.
The Case at Hand:
This case centers around an employee in the insurance services business, working for a target company acquired through a merger. The buyer merged the target into its operations, with target owners receiving stock in the buyer.
Subsequently, the key employee left the target company to join a competitor, actively soliciting target clients and servicing the former clients. The buyer initiated legal action against the employee for covenant violations in a Seattle federal district court. The employee argued that the covenants pertained to the target company, not the buyer. The court, guided by Washington law, ruled in favor of the buyer, asserting that the buyer, by operation of law, acquired all rights to the key employee’s restrictive covenants when the target merged into the buyer.
Closing Thoughts:
In the realm of asset purchase deals, complications often arise when valuable contracts with suppliers, customers, and landlords form a significant part of the target company’s value. These contracts often necessitate the consent of the other party for assignment to the buyer.
Conversely, structuring the deal as a stock purchase or merger can streamline matters. Many contracts do not mandate the other party’s consent when the target company is acquired through such means. In these scenarios, contracts automatically transfer by operation of law, eliminating the need for additional assignment documentation.
Case References:
USI Insurance Services National, Inc. v. Ogden, LLC, No. C17-1394RSL, United States District Court, W.D. Washington, Seattle, (March 6, 2019).
By John McCauley: I help businesses minimize risk when buying or selling a company.
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
Legal Disclaimer
The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.
Recent Comments