Explore the legal intricacies of enforcing noncompetition agreements in M&A transactions. Delve into a recent case where a buyer’s right to enforce a non-compete clause was contested after the sale of business assets. Gain valuable insights into contract acquisition, potential limitations on assignment, and state-specific nuances affecting noncompetition agreements.
M&A Stories
October 29, 2018
In the realm of M&A, a recent case sheds light on the enforceability of noncompetition agreements after the sale of business assets. The focus was on a Boston-based company specializing in computer peripheral equipment, acquired in 2014 by a Tucson-based buyer engaged in manufacturing cable assemblies, wire harnesses, and electro-mechanical assemblies.
The crux of the matter lies in a long-serving employee, who, since 1982, climbed the ranks to become the sales department’s program manager. In 1997, he signed a non-compete and non-solicitation agreement.
Fast forward to 2014, the company entered into an asset purchase agreement with the buyer, involving the sale of assets, including the trade name, to a buyer subsidiary.
In 2016, the employee left the buyer’s employ and joined a competitor as a general manager. Subsequently, the buyer sued him for breaching the noncompetition agreement. The trial court initially sided with the employee, arguing that the buyer lacked the right to enforce the agreement since it wasn’t explicitly acquired.
However, the New Hampshire Supreme Court overturned this decision, asserting that the buyer indeed purchased the noncompetition agreement. This ruling hinged on the asset purchase agreement, which included the sale of all contracts, granting the buyer the right to enforce them.
This outcome underscores a common understanding in M&A: a buyer can acquire a seller’s contracts. Yet, it serves as a reminder that buyers should scrutinize each contract for potential limitations on assignment or requirements for consent from the other party. Intellectual property licenses may necessitate consent even if not explicitly stated in the contract.
Furthermore, it’s crucial to be aware of state-specific nuances, such as California’s stance on noncompetition agreements, which may only be enforceable when part of a business sale.
Case Reference:
This case is referred to as Atronix, Inc. v. Morris, No. 2017-0318, Supreme Court of New Hampshire (Opinion Issued: October 23, 2018).
By John McCauley: I help people start, grow, buy and sell their businesses.
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