Mergers and acquisitions (M&A) can be complex, and some deals are more complicated than others. Noncompete agreements, while well-known in the context of employee contracts, are also common in many M&A deals and add another layer of complexity. While not every buyout or merger includes noncompetes, understanding how to approach these clauses can be critical to successful deal-making.
How Do Noncompete Agreements Affect M&A?
A noncompete agreement limits a party when they leave a company, so they cannot use proprietary information to directly compete with it. Importantly, that can apply to more than employer-employee relationships. Many M&A deals also cover sellers to ensure they don’t create or join a new venture to compete with their former business.
The law tends to be less strict on the enforcement of noncompetes in M&A than in an employee context. Several states ban them, but most make an exception for selling a business. Similarly, the FTC’s proposed nationwide ban on noncompetes, which ultimately fell through, did not apply to M&As.
Employee noncompete clauses can be a factor in M&As, too. Some mergers result in layoffs, and workers may have existing agreements that the new employer must now manage.
How to Negotiate Noncompetes During M&A
As with any legal consideration, noncompetes require careful research and implementation. Here are a few steps to follow when structuring or negotiating these clauses during an M&A.
Conduct Thorough Due Diligence
Before anything else, leaders must research their local legal environment to understand any applicable restrictions on noncompetes. While just four states ban these agreements, 34 regulate their use, and these requirements vary. Organizations must review what the law says about noncompete enforceability, duration, scope and other related factors.
Similarly, conducting market research can clarify what’s reasonable under an M&A noncompete. That includes competition levels, how fast the sector moves and if other industry players have successfully enforced such clauses.
Be Specific About Scope, Geography and Duration
When detailing a noncompete, be as specific as possible. Courts generally only enforce them if they’re reasonable in scope, geographic area and duration. Any vagueness or excessive restrictions in these categories will make it difficult for an agreement to hold up in court.
The geography should match the business’s footprint — a local store can only reasonably limit competition within the same town. Reasonable duration and scope depend on how quickly the industry moves and how many niches the company operates in. Consult a legal expert to understand what “reasonable” entails in the market and sector.
Review Existing Employee Noncompetes
An M&A is also a good time to review any noncompete clauses in the contracts of existing employees. Ensure these agreements would still be reasonable under new operations after the merger.
Similarly, leaders should review noncompetes for any workers who need to sign new contracts after the M&A. Many lower-level employees may not need such clauses, and enforcing them for everyone would be difficult. However, executives or those in roles where company loyalty is a big concern, such as cybersecurity, which faces a 0% unemployment rate, may need them, as long as they’re reasonable.
Consider Alternative Provisions
Given how challenging noncompetes can be to navigate and enforce in today’s environment, parties entering an M&A should consider alternatives. That could be a nonsolicitation agreement to prevent sellers from bringing their former workers or clients over to a new business after selling their first.
For employees moving under the M&A, consider improved compensation or benefits packages. Career development programs are another good option, as 31% of workers have quit a job because of a lack of such opportunities. When employees stay longer and are happier at the company, there’s less need for a noncompete.
M&A Deals Must Tackle Noncompete Clauses
Noncompete clauses can impact M&A deals through several means. Business leaders must understand these relationships before going into a merger or buyout. While navigating legal issues can be difficult, attention to where these matters fall short and where they succeed can inform better decisions.
