M&A Vocabulary – Experts explain: Non-Compete and Non-Solicitation clauses in M&A Transactions

The seller on the other hand, may have an interest to use his expertise in operating a certain business acquired, while operating the company or business sold to the buyer. There may also be the desire to use this expertise together with employees of the company or business recently sold. 

These conflicting interests may lead to a situation in which the seller decides to use his expertise in a competing business immediately following the sale process and/or poaches former employees for that purpose. This may have an impact on the value of the company or business purchased, so the parties to the transaction may want to agree to regulate this matter in the transactional documents.

This is where non-compete and non-solicitation clauses may be used in order to mitigate this effect. In a non-compete clause, the seller will commit not to compete with the business, which has just been sold to the buyer. This can be done on multiple level: the legal entity selling the business, but also the key individuals behind  the sold company or business or the selling entity. This provides comfort to the buyer that he will not have to face immediate competition from the seller in respect of the recently acquired business. In a non-solicitation clause, the seller commits not to poach employees working for the business sold for a certain period of time. This may help the buyer in retaining key employees of the purchased business. 

Depending on the structure of the transaction, these clauses may be part of the Share or Asset Purchase Agreement or also be part of separate undertakings with concerned individuals behind the sold business.

Drafting these clauses is a very technical matter, as the enforceability will depend on the jurisdiction. In some jurisdictions, these clauses can be freely agreed between the parties and the courts will respect this agreement. Other jurisdictions follow the principle that no one can be contractually deprived of the opportunity to earn a living and will regard such clauses as unenforceable. Others still, will accept such clauses only if appropriate additional compensation is provided. Non-competition clauses may also be unenforceable, if drafted so widely that they violate legislation to protect competition in the markets. 

Yet again non-compete and non-solicitation clauses provide a key instrument for the buyer to safeguard the commercial value of the purchased assets or company and reasonably protect him from unwanted and unfair competition. Care needs to be taken in respect of drafting such clauses depending on the intent, scope and jurisdiction. A carelessly drafted clause may render such clause invalid and therefore remove the protection, which buyer may reasonably require.