Court holds that Oklahoma does not permit a buyer to hold the owner of the selling company responsible under a noncompete for the competitive actions of her grandson (a non-owner of the company).
M&A Stories
March 23, 2023
Introduction
In Oklahoma, a recent court ruling clarified that buyers cannot hold the owner of a selling company responsible for the competitive activities of her grandson, who is not an owner of the company.
The deal
In this particular case, a small manufacturing company was being sold, and the buyer required the owner of the selling company to agree not to compete with the business after the sale. The owner also promised to compensate the buyer for any damages if she or certain family members engaged in competitive actions.
The lawsuit
After the sale, the owner’s grandson established a competing company and convinced the former general manager of the sold business to join his company. The buyer filed a lawsuit against the seller’s owner, seeking damages for the grandson’s competitive actions.
The court ruled in favor of the owner, stating that under Oklahoma law, contracts that restrict trade are generally void, with a few exceptions. One exception applies when the goodwill of a business is sold, allowing the selling company and its owner to agree not to compete, as long as the terms are reasonable.
However, the court concluded that this exception does not make the owner liable for the competitive actions of a non-owner. The buyer failed to provide any legal authority supporting the claim that a non-signatory party can be bound by a contract to refrain from engaging in a competing business.
See Aceco Valves, LLC v. Wolf, Case No. CIV-21-368-D, United States District Court, W.D. Oklahoma (March 17, 2023).
Comment
While the owner cannot be held responsible for her grandson’s competitive activities in this case, it is important to note that she may still be accountable for damages resulting from any competitive actions she undertakes personally. The lawsuit continues to determine the outcome of this matter.
By John McCauley: I write about recent legal problems of buyer and sellers of small businesses.
Email: jmccauley@mk-law.com
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