Explore the intricate world of mergers and acquisitions with our latest blog post, “The Limits of Noncompetition: A Case Study in M&A.” Delve into the complexities of noncompetition agreements through a captivating case study, highlighting the challenges faced by both buyers and sellers in the M&A landscape. Gain insights into legal nuances, industry-specific scenarios, and essential considerations for navigating noncompetition clauses. Join us on a journey through the CSI Group, LLP v. Harper case, shedding light on the limitations of such agreements in the M&A realm.
M&A Stories
July 27, 2018
In the intricate world of mergers and acquisitions, a recent case sheds light on the limitations of noncompetition agreements. The scenario unfolded on October 16, 2007, when a seller in Hicksville, Long Island, New York, parted with his tax, accounting, and financial management practice, including the client list, trade name, and an office lease, in a deal with a buyer.
The purchase agreement meticulously allocated 90% of the total purchase price to the client list and the remaining 10% to goodwill. The closing date, as defined in the agreement, was the day of signing – October 16, 2007. As part of the deal, the seller committed to work for the buyer for five years, abiding by restrictive covenants not to compete or solicit any “tax client” for the same duration from the closing date.
For the subsequent five years, the seller diligently worked for the buyer from his familiar Hicksville office. However, on October 16, 2012, the association came to an end. In January 2013, the seller, now with a new firm, started reaching out to and serving some of his former clients in the same office building.
The buyer responded with legal action, claiming the seller had breached the noncompetition agreement. Not surprisingly, the court ruled in favor of the seller, stating that he did not solicit his former clients or provide tax, financial, or accounting services outside of his employment with the buyer before the noncompetition term’s expiration on October 16, 2012.
This case prompts a crucial reflection: even with a five-year noncompetition covenant in place, the buyer found limitations in preventing the seller from approaching old clients. The court’s decision emphasizes that, despite the agreement, the buyer couldn’t legally restrain the seller post noncompetition term.
The buyer could have enforced a post employment noncompetition agreement contained in an employment agreement. In New York and some other jurisdictions, buyers can include noncompetition clauses in employment contracts between the buyer and seller, restricting the seller from soliciting old clients for a specified period post-employment. It’s noteworthy that in certain states, like California, noncompetition covenants in employment agreements are not permitted.
For those navigating the complex terrain of M&A, this case serves as a reminder of the intricacies involved in enforcing noncompetition agreements. Understanding the legal landscape is paramount, as demonstrated in this case.
Case Reference:
CSI Group, LLP v. Harper, 2015-11292, Index No. 100146/13, Appellate Division of the Supreme Court of New York, Second Department, (Decided September 20, 2017). https://scholar.google.com/scholar_case?case=14160778932334160919&q=%22purchase+agreement%22&hl=en&as_sdt=2006&as_ylo=2017
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