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Are non-competes still enforceable after an acquisition?

On Behalf of | Feb 18, 2020 | Business Law |

Mergers and acquisitions create a lot of confusion and raise a lot of questions during the transition process. Much of that confusion centers around employment contracts of the existing employees of the target company and, more specifically, the clauses within them. One type of clause both the acquiring company and top talent have questions about is the non-compete. Once the M&A is complete, will the acquiring company benefit from non-compete clauses? Or will the employee finally become “free” as a result of the acquisition? According to FindLaw, the answer is not so clear cut. 

If the target company maintains a separate existence after the acquisition, the non-compete is not affected. This is because a company still exists to enforce the agreement. However, the answer becomes less clear when the target company merges with the purchasing company. 

States have their own laws regarding the assignability of non-compete clauses and covenants. For instance, in Pennsylvania, an employer can only assign a non-compete to an acquiring company if the contract contains a specific assignability provision or if the employee consents to the assignment. However, even with such provisions in the law, companies may find it difficult to enforce non-compete agreements drafted by target companies. 

Most states take a strict stance against restrictive covenants. The underlying belief is that employers use non-competes to severely limit workers’ rights to earn a living. Because of this, states construe them narrowly and, absent a specific assignability clause, courts may hesitate to read further into one. These considerations carry particular weight when the target company disappears as a result of an M&A. 

The enforceability of a non-compete post an acquisition further depends on the terms of the contract. One example to which FindLaw points involves the acquiring company presenting new benefits packages, employee handbooks and paychecks to the employees. Though the transaction was a stock acquisition, the old company essentially stepped out of the picture to let the acquiring company take over. However, the old company maintained a separate existence, meaning the non-competes and other contracts remained alive and well during the new company’s tenure as owner.