Explore the legal implications of the Palmetto Mortuary Transport case where the South Carolina Supreme Court upheld a seller’s noncompetition agreement in an M&A deal. Gain insights into noncompetition covenants, risk mitigation strategies, and the evolving landscape of business acquisitions.
M&A Stories
September 5, 2018
In a recent legal development, the South Carolina Supreme Court rendered a decision regarding a notable M&A deal involving two mortuary transport businesses in the greater Columbia area. The case, Palmetto Mortuary Transport, Inc. v. Knight Systems, Inc., sheds light on the enforcement of a seller’s noncompetition agreement, presenting insights for entrepreneurs, business owners, and professionals involved in M&A transactions.
Established in the 1980s, our seller initially operated as a mortuary transport business but later diversified into manufacturing and selling body bags. In 2006, a strategic decision was made to sell the mortuary transport segment of the business.
On January 5, 2007, the seller and the buyer formalized their agreement through an asset purchase agreement. A key provision of this deal was the seller’s commitment to refrain from offering mortuary transport services within a 150-mile radius of Lexington County for a duration of 10 years. Notably, this noncompetition area exceeded the seller’s existing market territory. The buyer sought this extended radius to align with potential expansion plans over the next decade.
Several years post-closure, a dispute arose as the seller secured a mortuary transport services contract within the 150-mile noncompetition zone and during the restricted 10-year period. In response, the buyer filed a lawsuit, alleging breach of the noncompetition covenant.
The seller contended that the 150-mile radius was unreasonably broad, challenging the enforceability of the noncompetition covenant. However, the South Carolina Supreme Court ruled in favor of the buyer, upholding the expansive noncompetition area.
It’s worth noting that enforcement outcomes can vary across states. In contrast to California, which typically restricts non-competes to the seller’s market area at closing, the South Carolina Supreme Court faced a binary choice. It could either enforce the broad noncompetition covenant or discard it entirely due to its excessive scope.
In some jurisdictions, including California, a third option exists: courts may reform the noncompetition covenant by narrowing the area to the seller’s market territory at the time of closing.
The case highlights the importance of risk mitigation strategies, such as incorporating a step-down provision. This provision allows parties to agree that if a court deems the noncompetition area too expansive, it would be reduced to the seller’s market area at the time of closing.
For those navigating M&A transactions, the Palmetto Mortuary Transport case serves as a valuable reference, emphasizing the significance of carefully crafted noncompetition agreements in the ever-evolving landscape of business acquisitions.
Case Reference:
Palmetto Mortuary Transport, Inc. v. Knight Systems, Inc., Opinion No. 27833, Supreme Court of South Carolina (Filed August 29, 2018).
By John McCauley: I help people start, grow, buy and sell their businesses.
Email: jmccauley@mk-law.com
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