Explore the consequences of employment agreement breaches in M&A transactions. This blog delves into a case where a company’s failure to uphold an employment contract affected its ability to enforce a non-compete clause. Learn valuable lessons for post-closing integration and negotiation strategies.
M&A Stories
November 25, 2018
In M&A transactions, acquiring a company means taking on its contracts, including employment agreements. This story highlights the consequences when such agreements are not upheld.
In 2016, a public company acquired a national provider of outpatient rehabilitation services for $400 million, inheriting employment agreements, including one with a key employee managing clinics in Delaware. The agreement outlined a $200,000 base salary, an incentive bonus plan, and a non-compete clause lasting the employment term plus one year.
Six months after the acquisition, the employee left due to the elimination of his bonus and disagreements with the new owner. He joined a competitor, breaching the non-compete clause. The acquired company sued, but the court ruled in favor of the employee, citing the material breach of the employment agreement by the company.
This case emphasizes a crucial lesson: an employer risks losing the right to enforce a non-compete if it materially breaches the employment agreement, such as failing to pay significant compensation. Employers should consider post-closing integration plans, foreseeing potential risks, and negotiating changes to avoid such pitfalls.
It’s noteworthy that while many states enforce employee non-competes, California does not, except when provided by a business owner selling their business. This case serves as a reminder for strategic negotiations in employment agreements during M&A transactions.
Case Reference:
Physiotherapy Corporation v. Moncure, C.A. No. 2017-0396-TMR, Court of Chancery of Delaware (Decided: March 12, 2018).
By John McCauley: I help people start, grow, buy and sell their businesses.
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