Explore the intricacies of M&A legal battles and the crucial role of noncompetition covenants in safeguarding business value. Delve into the Shimon v. Paper Enters., Inc. case, revealing insights into the enforcement of noncompete clauses, potential damages, and legal actions. Uncover the impact on sales and buyer’s recourse when faced with breaches. Stay informed about the legal landscape of mergers and acquisitions with our insightful M&A Stories
M&A Stories
July 12, 2018
In the realm of mergers and acquisitions, a recent legal battle sheds light on the significance of enforcing noncompetition covenants to protect the acquired business’s value.
The narrative unfolds with a comprehensive distributor acquiring a paper products and janitorial supply business across New York, New Jersey, Connecticut, Pennsylvania, Delaware, and Maryland. The seller, not just engaged in a similar business but also specializing in repackaging, entered into an asset purchase agreement in August 2012, agreeing to a noncompetition clause lasting five years within the specified market area.
Post-acquisition, the seller’s owner joined the buyer but departed two years later to establish a new venture named “Great Deal.” Red flags surfaced when the buyer’s representatives noticed identical products, including specialty re-packs, on their customers’ shelves, leading them to Great Deal’s base in Linden, New Jersey. To their surprise, the workers confirmed the seller’s owner’s involvement.
Further investigation uncovered a significant volume of products at Great Deal’s facility identical to those sold by the buyer. Alarming for the buyer was the decline in sales, averaging 40%, from customers acquired during the initial purchase and recent acquisitions.
Taking swift legal action, the buyer sought an injunction to restrain the seller’s owner from competing and claimed damages. The court responded with a preliminary injunction, barring the seller’s owner from soliciting or pursuing business from the acquired customers during the lawsuit.
This case, identified as Shimon v. Paper Enters., Inc., underscores the critical role noncompetition covenants play in safeguarding the value of a purchased business. It highlights the legal recourse available to buyers when faced with breaches of such agreements.
Case Reference:
This case is referred to as Shimon v. Paper Enters., Inc., Docket No. 506923/2015, Mot. Seq. Nos. 1, 2, Supreme Court, Kings County, State of New York (Decided: January 18, 2017) https://scholar.google.com/scholar_case?case=3950158577113196036&q=%22asset+purchase+agreement%22&hl=en&as_sdt=2006&as_ylo=2017.
By John McCauley: I help people start, grow, buy and sell their businesses.
Email: jmccauley@mk-law.com
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Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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