Posted Friday 28th April 2023
In the context of a company acquisition, restrictive covenants can be extremely important for the buyer. These restrictive covenants can help to protect the buyer’s investment in the business by preventing key employees from leaving and taking valuable knowledge or clients with them.
When a company is acquired, the acquiring company is essentially buying the existing business and all of its assets, including its employees. These employees often have valuable knowledge, skills, and relationships with clients and customers that the acquiring company wants to preserve.
Employee restrictive covenants can help to protect the acquiring company’s investment by preventing key employees from leaving and taking valuable knowledge or clients with them. For example, a non-competition clause can prevent a key employee from leaving and immediately working for a competitor, which could cause significant harm to the acquiring company’s business.
Restrictive covenants are also significant in company acquisitions because they can help to ensure that the target retains its value. If key employees are allowed to leave and take valuable knowledge or clients with them, the target may lose its competitive edge and its value may decline.
In determining whether to amend or redraft restrictive covenants immediately prior to or post acquisition, there are two fundamental considerations. Firstly, any change to the restrictive covenants would constitute a variation of the employment contract. The employer would therefore have to ensure that adequate consideration (whether this be a financial award or particular benefit) is offered for the introduction of new or amended restrictive covenants. The consideration given may be of nominal value but some courts have however looked to the value of consideration in determining the enforceability of restrictive covenants.
Secondly, when redrafting restrictive covenants, consideration should be given to the heads of legitimate interests of the employer, namely trade relations, confidentiality and trade secrets and stability of the workforce. Restrictive covenants should be tailored specifically to protect the interests of the employer and should also be tailored so as to include restrictions for specific employees. A one size fits all approach will not, in the majority of cases, provide the employer with sufficient cover to protect its legitimate business interests and also reduces the likelihood of enforceability.
This article is for reference purposes only. It does not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking or deciding not to take any action.
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