M&A Vocabulary – Understanding Experts: “Contractual Non-Compete and Non-Solicitation Clauses in M&A Transactions”

In a company acquisition, the buyer acquires either shares in a company (share deal), individual assets of a company, or the company as a whole (asset deal). In each of these cases, the buyer typically has a legitimate interest in continuing to operate the acquired company or assets in the future and will want to ensure that this is indeed possible.

The seller, in turn, may have an interest in continuing to use their know-how for earning or profit purposes even after the sale of the company. They may also be tempted to use this expertise together with the employees of the recently sold company or business.

These conflicts of interest can lead the seller to decide to use their know-how in a competing business immediately after the sale or to poach former employees for this purpose. This can affect the value of the acquired company or business. To prevent this, non-compete and non-solicitation clauses are usually agreed upon between the parties in M&A transactions.

Through a non-compete clause, the seller undertakes not to compete with the company they have just sold to the buyer. This can occur on several levels: at the level of the legal entity selling the company, but also at the level of key individuals behind the sold company/business or the seller. This provides the buyer with the assurance that they will not face immediate competition from the seller regarding the recently acquired business. In a non-solicitation clause, the seller undertakes not to poach employees of the sold company for a specified period. This can help the buyer retain key employees of the acquired company.

Depending on the structure of the transaction, these clauses can be part of the Share Purchase Agreement or Asset Purchase Agreement, or they can be part of separate undertakings with the affected individuals behind the sold company.

The drafting of these clauses requires high professional expertise, as their enforceability depends on the respective legal system. In some legal systems, such clauses can be freely agreed upon by the parties, and the courts respect this agreement. In other legal systems, the principle applies that no one should be contractually deprived of the opportunity to earn a living, and such clauses are classified as unenforceable. In yet other legal systems, such clauses are only accepted if adequate additional compensation is provided. Non-compete clauses can also be unenforceable if they are so broadly drafted that they violate antitrust regulations.

As a result, non-compete and non-solicitation clauses represent an important instrument for the buyer to secure the economic value of the acquired assets or company and to adequately protect them from undesirable and unfair competition. Such clauses must be drafted with care, depending on the intent, scope, and legal system. A carelessly drafted clause can render it ineffective, thereby depriving the buyer of the protection they can reasonably demand.

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