Explore a notable M&A case where an accounting firm faced challenges enforcing a noncompetition covenant after terminating key employees. Gain insights into the legal nuances of termination for cause and the impact on noncompetition agreements.
M&A Stories
November 12, 2018
In a notable M&A case from November 2014, an accounting firm based in Plymouth, Indiana, acquired another firm in South Bend through an asset purchase agreement. The acquiring firm, referred to as the Buyer, entered into employment agreements with the owners of the selling firm, Greg and John, both accountants.
The employment agreements included a two-year restrictive covenant preventing Greg and John from competing with Buyer if their employment was terminated for cause. Fast forward to February 2016, Buyer discovered several errors in the work performed by Greg and John during the 2015 tax season, including inaccurate deductions, failure to report income, and other accounting discrepancies.
In response to these issues, Buyer notified Greg and John of their termination for cause in May 2016. However, a subsequent legal challenge ensued when Greg and John contested the termination in an Indiana state court, aiming to avoid the two-year noncompetition covenant.
The trial court ruled in favor of Greg and John, stating that their errors were within normal bounds, and no actual harm to Buyer’s clients was demonstrated. The court concluded that Buyer had not terminated their employment for cause as defined in the agreements.
The Indiana Court of Appeals upheld the decision, emphasizing that while errors were acknowledged, they did not significantly impact Buyer’s ability to serve its clients. Consequently, the court ruled that Buyer lacked cause to terminate Greg and John, allowing them to compete freely.
In summary, the case highlights the importance of clearly establishing cause for termination, as defined in employment agreements, to enforce noncompetition covenants in M&A deals.
Case Reference:
Weidner and Company, PC v. Jurgonski & Fredlake CPAS, PC, No. 18A-MI-535, Court of Appeals of Indiana (October 31, 2018).
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