While there are questions about the legal validity of non-competition agreements generally, there are no such questions concerning executive-level non-compete agreements that are signed and that are attendant to the sale of a business (whether as a stock sale or asset purchase transaction). As such, it is useful to examine some of the features that are commonly found in such agreements. Note that these non-compete agreements and/or provisions are often coupled with and found alongside nondisclosure and non-solicitation agreements. Those will be excluded from the discussion below.
The four basic parts of a non-compete agreement
Non-compete agreements can be called various things depending on the local jurisdiction, including various formulations that use the term “covenant” (such as “covenants against competition”). Whatever the phrasing used, there are four principal parts of a non-compete agreement.
First, there is the part about not competing. In these sentences or clauses, the seller agrees not to compete with the buyer. But, as with all contractual language, careful attention is needed. Consider this sample language where the seller agrees not to “… directly or indirectly engage in any business or activity which is the same or similar to the business of Buyer, or that competes in any manner with the business conducted by Buyer.”
Upon thoughtful consideration, this language seems too broad, particularly if the transaction is an asset purchase transaction and the seller is going to continue operating. Is the seller 100% that there is no part of the seller’s continuing business the competes “in any manner” with any of the “business conducted by the Buyer?” Often, the language is more tailored to require non-competition with the business of the seller that is being sold.
Second, a non-compete has a term. Two years is common, but a legally valid term can vary depending on the case circumstances.
Next, there is an “area of restriction” that is often a geographic area — such as “… within a 100-mile radius of seller’s (or buyer’s) principal business address” — but can be an intangible area such as “on the internet.”
Finally, a non-compete agreement must identify who is bound by the agreement. This is often a long provision, since there are many methods for a person to compete without it necessarily appearing that there is competition. Thus, a short example might look like this. “Seller, its officers, board of directors and/or owners, whether as partner, investor, stockholder, officer, director or as any type of principal whatever (whether an interest is active or beneficial), or as any type of employee or acting as an independent contractor or agent for or advisor or consultant to any individual or entity that exists or is about to exist, shall not …” compete.
Three more essential provisions
Aside from these basic provisions, there are three more essential provisions. The first is a provision that allows a court to impose an injunction. In the past, courts were generally rather stingy about granting injunctions. This is less true today, but it is still important that courts see explicitly that the parties have agreed that injunctive relief is allowed. This allows the court to order the seller to stop engaging in whatever activity has been determined to be in violation of the non-compete provisions.
In addition, there must be a severability clause. This means that if the court deems one part of the agreement to be void for some reason, the court is still empowered to enforce the remaining parts. Finally, there must be a provision — often called “blue-penciling” — allowing the court to modify the language of the agreement to conform to what the court deems fair and just. Thus, if a two-year term is deemed too long, the court will “blue-pencil” the contract to reduce the term to one year, for example. Without the “blue-penciling” language, the court would only have the power to strike out and nullify the term provisions entirely.
Contact the Business Attorneys at Revision Legal
For more information, contact the experienced Business Lawyers at Revision Legal. You can contact us through the form on this page or call (855) 473-8474.
