Allegations were enough, if true to establish that business sellers breached their noncompetition, nonsolicitation and confidentiality covenants

Buyer is a full-service specialty contract manufacturer of automotive, household, insecticide, and pesticide aerosols, based in St. Clair, Missouri, about 50 miles southwest of St Louis. Target is a specialty chemical contract packager, which manufactures aerosols, liquids, and bag-on-valve products, and is based in the greater Atlanta area.

Sellers, Chris and Maria, were owners of Target. On December 15, 2015, Buyer acquired Target from Sellers for $100 million pursuant to a stock purchase agreement. Sellers, in the stock purchase agreement, represented and warranted that Sellers had not received any bribe, kickback payment or other illegal payment.

Sellers, in the stock purchase agreement also agreed to not compete against Target, through several restrictive covenants, including non-compete, non-solicit, and confidentiality provisions. Buyer and Sellers agreed that specific performance, an injunction, or other equitable relief was necessary to enforce these provisions of the stock purchase agreement.

After the closing, Sellers continued to work at Target, but the relationship soured. Sellers’ employment with Target ended 3 ½ months after the closing.

About 2 months later, Buyer and Target sued Sellers in a Delaware court, in part, seeking damages for breaching the kickback payment representation. Buyer and Target’s complaint also accused Sellers of breaching its confidentiality covenant and claiming that Sellers started a competing business and attempted to solicit employees from Target. Buyer and Target asked the court to order Sellers to stop this competitive behavior.

Sellers asked the court to dismiss these claims, arguing that the factual allegations contained in the complaint, even if true, do not establish that Sellers breached those provisions of the stock purchase agreement. The court did not agree.

It first found that the following allegations against Sellers, if true could establish a breach of the noncompetition and nonsolicitation covenant.

In early January 2016, Chris, asked another Target employee to research whether Target names “First Brands’ and “Best Brands’ were already in use. Then, in a series of emails throughout January, February, and March 2016, Chris emailed multiple financial advisors about acquiring new companies and/or opening investment credit lines, noting, for example, “the truth is I am interested to buy another company.” In addition, in email correspondence throughout February and March 2016, Chris indicated an intention to purchase tanks and/or concrete pads for heptane tanks at some point in the future. Then, days before his departure from Target, Chris directed a Target employee to circulate technical calculations for a heptane concrete pad in order to talk the same language, cautioning “send it from your cell phone and don’t cc me.”

In the summer of 2016, Chris—through a former Target vice president—bid on used aerosol equipment auctioned off by another chemical company. Shortly thereafter, the former Target VP began working for a new company, which, in June 2016, had its principal office in Thomaston, Georgia—one mile from the site of a former Target manufacturing plant which Sellers, through their holding company, owned at that time. On October 5, 2016, this new company’s webpage began indicating that it had a manufacturing plant in Thomaston, Georgia. Shortly thereafter, this new company began leasing equipment for its Thomaston plant.

In late February and early March 2017, Sellers—through their holding company—sold the former Target manufacturing plant in Thomaston to the new company. Sellers financed part of new company’s purchase. Shortly after that sale, the former Target VP, on behalf of his employer, the new company, contacted a major supplier of aerosol propellant tanks about purchasing two 10,000-gallon aerosol tanks.

Over the Easter holiday in April 2017, Chris invited the new company’s Chief Executive Officer, Zach, to his home. Chris also invited the former Target VP and two current Target employees, as well as another Target customer, who all attended. At the Easter dinner, Chris introduced Zach to a current Target executive as his “very dear friend Zach,” and, when discussing the new company’s business with Target’s employees, Chris referred to the new company as “we,” further indicating his involvement with the new company. At the same dinner, Zach told a Target employee about the new company’s plans for the Thomaston site, including that the new company plans to “run’ aerosols and to fill “anything our customers want.” Chris also told a current Target employee to “listen to the new company CEO Zach,” and that if Zach wanted the employee to be his president, then the employee should be his president—even going so far as to shout out salary figures in front of the employee’s family.

The court concluded that all these allegations if true, made it reasonably conceivable that (1) Sellers through the new company was competing with Target in violation of their noncompetition covenant; and (2) Sellers attempted to induce an employee of Target to leave Target in violation of their nonsolicitation covenant.

Also, the court found that the following allegations against Sellers, if true could establish a breach of Seller’s confidentiality covenant.

When Chris departed his employment with Target, he asked a Target employee to send him an investor presentation from Target’s files that contained Target’s confidential information, which he probably never returned to Target, and if true, violated his confidentiality covenant.

Also, in late March 2016 Maria emailed from her Target business email account to a personal email account a host of Target documents containing, among other items, information related to Target’s accounts receivable and accounts payable. And shortly before her separation from Target, Maria instructed a Target IT manager to send her a critical set of documents containing Target’s confidential information. Taking these facts as true and considering them in the context of all the facts, the court concluded that “it is, just barely, reasonably conceivable” that Maria used this confidential information in violation of her confidentiality covenant.

Finally, the court found that Buyer and Target had alleged the following facts that if true could establish Sellers’ breach of their representation in the stock purchase agreement that they had not received any kickback payments.

The complaint alleged that Chris caused Target to enter into a fictitious long-term lease arrangement with a longtime associate, pursuant to which Target paid over $300,000 for copiers that were never delivered to Target. The complaint further alleged that Chris profited personally from the sham arrangement by receiving all or most of the money Target paid for the copiers.

This case is referred to as Plaze, Inc. v. Callas, Civil Action No. 2017-0432-TMR, Court of Chancery of Delaware (Decided: March 29, 2018).

Comment. Buyer is often concerned that a seller of the business will compete with the business after the closing. Part of managing that risk is getting the seller to promise not to compete with the purchased business. That is done through a noncompetition covenant, but also by covenants prohibiting the seller from hiring away the employees, solicitating business customers or using business confidential information.

And those provision have teeth. Here Sellers are facing an expensive and time-consuming litigation that could potentially result in the loss of what may be their post-closing business venture.

By John McCauley: I help people start, grow, buy and sell their 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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Posted in covenant not to compete, hiring seller's employees, no kickback or bribe rep, nondisclosure agreement, trade secret misappropriation

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