Explore the intricate world of enforcing restrictive covenants in M&A transactions with our latest blog post. Dive into a compelling case study involving a $20 million acquisition in the education and risk management sector. We delve into the legal challenges faced when a seller defies non-compete agreements, and the implications for recovering legal fees. Learn about the pivotal court decisions that shaped this case and gain valuable insights on how to protect your investments and negotiate robust asset purchase agreements. Whether you’re a buyer or a legal professional, this post offers essential takeaways for navigating restrictive covenants in mergers and acquisitions.
M&A Stories
August 14, 2024
In mergers and acquisitions, buyers often seek to protect their investment and goodwill through restrictive covenants. These agreements typically involve the seller and their affiliates agreeing not to compete with the acquired business. However, enforcing these covenants can lead to costly and protracted legal battles.
Consider a case from 2018 involving a $20 million acquisition by a leading education and research provider in the risk management and property-casualty insurance sector. The buyer acquired assets from a company specializing in education for insurance claims resolution and litigation management. As part of the deal, the seller and its affiliates committed to not hosting educational conferences in this niche area.
Despite this agreement, a year after the acquisition, the seller’s group organized two conferences on claims and litigation management, defying the buyer’s demands to cancel. Further events related to this field were held in 2021. In response, the buyer filed a lawsuit in August 2019 in a Delaware federal district court.
The court found that the seller’s actions breached the non-compete agreement and issued an injunction. However, it also ruled that the buyer had not demonstrated compensatory damages. When the buyer sought to recover legal fees and costs, the court denied the request due to the absence of an attorney fee provision in the asset purchase agreement.
The buyer appealed the decision. The appellate court upheld the injunction but also denied the request for legal fees, confirming the trial court’s ruling.
This case highlights a critical lesson for buyers: unless an asset purchase agreement includes a clause specifying the award of legal fees to the prevailing party, each party typically bears its own legal costs. This principle applies under Delaware law and in many other jurisdictions.
Case Reference: American Institute For Chartered Property Casualty Underwriters v. Potter, Nos. 22-2967, 22-3025 & 22-3042 , United States Court of Appeals, Third Circuit, (August 5, 2024).
Thank you for reading this blog. If you have any questions, insights, or if you’d like to engage in a more detailed discussion on this matter, I invite you to reach out directly.
Feel free to send me an email. I value thoughtful discussions and am always open to connecting with business owners, management, as well as professionals who share an interest in the complexities of M&A law.
By John McCauley: I write about recent legal problems of buyers and sellers of small businesses.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
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Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles
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