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Business Law

5 Tips for Drafting Non-Compete and Non-Solicit Provisions

Oct 3rd, 2013

By Seth B. Abbey

The recent decision by the Supreme Court of Canada in Payette v. Guay inc.  provides insightful guidance for non-compete and non-solicit provisions in a contract for the sale of a business where the principle will continue to be involved in the operations.

Click here  for a summary of the Supreme Court’s decision and the facts of the case.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances and contract drafting.

5 Drafting Tips Include:

  1.  It should be clear that the non-compete and non-solicit provisions are connected with the sale of the business and not to future employment or consulting services to be done after the completion of the sale.
  2.  The wording of the contract confirms that the existence of the restrictive covenants is closely related to the conditions for the sale of the business, which were negotiated and accepted by the sellor as a vendor and not as an “employee”. Sample language includes: In consideration of the sale that is the subject of this offer…

     …acknowledges that the covenants of non‑competition and non‑solicitation provided for in this article are reasonable…having regard to the consideration provided for herein

     

  3.  A direct causal connection should be made between the restrictive covenants and the sale of the assets – it should be clear that the transaction would never have taken place if the purchaser would not have obtained the protection in question.
  4.  The non-compete and non-solicit clauses should only appear in the contract for the sale of the business. An employment agreement with new non-compete or non-solicit clauses entered into after the sale could undermine the clauses in the contract for the sale of a business and the absence of such a clause in the employment agreement shows that such covenants did not form an essential aspect of the negotiations that resulted in the contract of employment.
  5. When setting a starting date in which the non-compete and non-solicit provisions will kick-in, care should be used when using the term, “termination of employment” as a start date. It should be clear that the term is being used to mark a date in time in contrast to the term being used in a more substantive way that could lead a court to find the clause is connected to the terms of employment.

Seth B. Abbey, a corporate lawyer at Spiegel Sohmer with a focus on mergers and acquisitions, private equity financing and tax-driven reorganizations, is available to answer your questions about this and other topics.