Explore a real case where a buyer sued a seller’s key employee over employee departures after an acquisition. Learn about the legal implications and strategies to mitigate such risks in M&A deals.
October 16, 2019
Introduction:
In acquisitions, a company’s employees can be its most valuable asset. However, a significant risk is the departure of key employees after a deal is finalized. This blog discusses a specific case where a buyer sued a seller’s key employee over such departures.
The Deal:
In this case, the seller was an investment research firm, while the buyer specialized in financial and economic research for institutional investors and mass-market newsletters. The buyer acquired the seller’s assets, and a critical component of the seller’s value was its health policy research team, responsible for over 70% of the seller’s annual revenue.
A key employee from the seller managed this team. He briefly worked for the buyer for about five weeks post-sale, during which employment terms were being negotiated. However, they couldn’t reach an agreement, and the key employee left. On the same day, the other two team members also left the buyer, and the key employee, along with one of his co-workers, founded a competing firm. Another former co-worker joined the new firm shortly after.
The Lawsuit:
The buyer filed a lawsuit in a federal D.C. district court, claiming that the key employee breached his fiduciary duties by recruiting his co-workers to join his new business, causing a mass exodus of the health policy research team.
The key employee requested the court to dismiss the buyer’s claim, arguing that he did nothing wrong by hiring his co-workers. The court declined, stating that a jury should determine whether the key employee’s actions amounted to unlawfully inducing his co-workers to leave for his competing firm.
The court recognized the key employee’s duty of loyalty to the buyer during his employment but noted that the boundaries of proper conduct in hiring co-workers for a competing business were not well-defined.
Under the “pied piper” rule, a managerial employee could breach their fiduciary duty if they solicited the departure of their teammates during their employment, potentially destroying the buyer’s business. Whether the key employee merely offered employment opportunities or crossed into solicitation in violation of his fiduciary duty was a matter for the jury to decide. In this case, the court found enough circumstantial evidence to support the buyer’s claim that the key employee acted as a “pied piper” leading his team to resign en masse.
Conclusion:
To mitigate such risks, offering an attractive compensation package tied to successful post-closing performance could be a more effective legal strategy. In this case, the buyer should have negotiated an employment agreement with the key employee before closing the deal.
Case Reference:
Hedgeye Risk Management, LLC v. Heldman, Civil Action No. 16-935 (RDM), United States District Court, District of Columbia (September 29, 2019) https://scholar.google.com/scholar_case?case=7765851825007819022&q=%22asset+purchase+agreement%22&hl=en&scisbd=2&as_sdt=2006&as_ylo=2017
By John McCauley: I help companies and their lawyers minimize legal risk associated with small U.S. business mergers and acquisitions (transaction value less than $50 million
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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