Non-Compete Agreement
A non-compete agreement in M&A restricts the seller or key employees of an acquired business from starting or joining a competing enterprise within a defined geographic area and time period after the transaction closes, protecting the buyer's investment in the acquired business.
Non-compete agreements (NCAs) in M&A serve a different function from employment non-competes. In the acquisition context, when a buyer acquires a business — particularly a closely held company or one where the seller's relationships and expertise are core to the business value — the buyer needs protection against the seller immediately restarting a competing business and drawing away customers, employees, or key relationships that drove the purchase price.
In M&A transactions, non-compete agreements are generally enforced more readily than pure employment non-competes, because they are attached to the sale of goodwill — a recognized legitimate business interest. Courts distinguish between non-competes that protect acquired goodwill (viewed as ancillary to a legitimate business transaction) and non-competes that merely restrict an employee's ability to earn a living. The former receives broader judicial protection.
The Federal Trade Commission (FTC) proposed a rule in 2023 that would have banned most non-compete clauses for workers nationwide, but a federal district court in Texas vacated the rule in August 2024, blocking its implementation pending further legal proceedings. This regulatory uncertainty affects how employment non-competes are drafted but has less bearing on M&A-specific non-competes tied to the sale of a business.
Enforceability of non-competes in M&A varies by state. Delaware generally enforces reasonable M&A non-competes. California, North Dakota, and Minnesota severely restrict non-competes broadly, which can be a deal consideration when a target company is headquartered in those states or the seller resides there.
Key drafting considerations include the scope of restricted activities (how narrowly or broadly competitive activities are defined), the geographic scope (national vs. regional vs. specific markets), the duration (typically two to five years in M&A), and consideration (courts require the seller to receive adequate consideration, which is typically built into the purchase price).