case study help

[traineeintraining]

Hello if there's an M&A case study and in it an important employee of the target company wants to leave the company etc is it possible for a buyer to add non compete/ non solicit clauses into their employment contract before they leave or are these clauses that must have been included in the initial employment contract?
if it is the latter what would you subsequently advise the buyer?

 

[JKs]

Hello if there's an M&A case study and in it an important employee of the target company wants to leave the company etc is it possible for a buyer to add non compete/ non solicit clauses into their employment contract before they leave or are these clauses that must have been included in the initial employment contract?
if it is the latter what would you subsequently advise the buyer?

Hi there!

My initial thoughts - I think it really depends on the bargaining power of the Buyer and if there is an actual threat of the employee leaving and setting up a competing business to the Target. I think it’s more common for the Buyer to include non-compete clauses in the SPA against the Seller. Whether the Buyer will be able to get the Seller to include a non-compete clause in the Target’s employees’ termination contract will probably depend on the Buyer’s bargaining strength.

 

[Dheepa]

Hello if there's an M&A case study and in it an important employee of the target company wants to leave the company etc is it possible for a buyer to add non compete/ non solicit clauses into their employment contract before they leave or are these clauses that must have been included in the initial employment contract?
if it is the latter what would you subsequently advise the buyer?

Hi Jennifer,

Non-compete/non-solicit clauses are typically part of the original employment contract. Whether or not the clause is enforceable when an employee leaves is a whole other question and depends on various factors, like the time limit for the non-compete, whether the non-compete is protecting the business etc.

If I was advising the Buyer, I'd negotiate or ask for a warranty to be included in the SPA that no key employee can terminate their contract because of the sale (i.e. no employment contracts with those key employees are subject to a change of control clause).

Just to give you some additional context, change of control clauses essentially give employees the right to terminate or renegotiate the employment contract should the ownership of the company change. So advising the Buyer to ask for that warranty I mentioned above will oblige the Seller to ensure that no employee the Buyer might want to keep on post-acquisition can even terminate their employment contracts to begin with.

I think its important to remember that if the employee is so important that the Buyer needs to be concerned about them working for competitors if they were to leave, there is a high chance that the Buyer would actually rather incentivise them to stay with the company and retain that intellectual capital to help with the business post-acquisition. While the warranty may help mitigate the ability of the employee to leave simply because of the sale, I'd also advise the Buyer to sit down and negotiate with said employee to remain in the company.