Many companies have a policy that all employees, even seasoned ones need to sign a non-compete agreement. The reason for this is that companies want to protect the resources and time they invested in employees. In other words, companies that ask their employees to sign a non-compete agreement, can be sure that their staff won’t be able to immediately work for one of their competitors.
This whole matter is very clear until company is merging with another company or is being acquired by another company. What happens with a non-compete agreement if your company is in the process of merging or is acquired by another company?
Mergers and acquisitions are two different things and in most cases when one company is acquired by another company, a non-compete agreement can remain in effect. But that is not the case with mergers. If you decide to dissolve a company and to merge with another one, a non-compete agreement that was made in the now dissolved company is not applicable.
If you are an employer whose company is merging or being acquired, get in touch with our corporate lawyers in Toronto, Oakville and London, Ontario. We can protect your interests through strategic usage of non-compete agreements.
Business transactions and the non-compete agreement
Non-compete agreement can protect any business but don’t forget to check all the details before you decide to sell assets or buy a business, merge with another company, restructure the business or incorporate federally. When you are buying a business, you need to check if there are any non-compete agreements applicable and if you can take employees of that business or the former employer can enforce the agreement in their favour. Different effects of non-compete agreements can result in complications during any type of business transaction.
If you need legal advice regarding mergers & acquisitions, the transactional nature of non-compete agreements, or legal issues when buying a business, don’t hesitate to call us today for a free consultation.
Non-compete Agreement and Company Acquisitions
If you are interested in acquiring a business, underlying contracts including non-compete agreements can have some or no value at all. It all depends how agreements are drafted and what are your rights as a purchaser.
So, when you decide to buy a business and that company’s employees have non-compete agreements, make sure that your newly acquired company is totally protected. In some cases, non-compete agreements are drafted in a way that your new company cannot be protected. For instance, an employee signed a non-compete agreement with the company you have just acquired. Now, that is your employee. Are you protected enough, can your new employee just leave and start working for one of your competitors? Well, he can if the non-compete agreement can only be enforced by the company where the employee used to work, the company you acquired.
In many cases, it is recommended to draft new non-compete agreements with the employees from the acquired company. But these type of things definitely require legal advice. Any transaction should include a review of key personnel – and in most cases these key personnel should be subject to a non-compete of some sort.
Limits of non-compete agreements
If a non-compete agreement is drafted properly, it may protect your business. But keep in mind that unlike many standard contracts these agreements aren’t always upheld in court every time. Non-compete agreements have certain limitations, especially in Canadian courts because judges tend to accept only reasonable agreements that will keep the right balance between protecting an employer and putting restrictions on an employee.
Non-compete agreement in the sale of a business
In addition to certain employment contracts, non-compete agreements are often used in situations where a seller transfers all or a substantial amount of the seller’s business to a buyer. In some cases, non-compete agreements that arise from a sale of business are often easier to enforce than those that are contained in an employment agreement.
Another problem that can occur when buying a business, is that a seller starts another, competitor company or starts working for another company. If you want to buy a business, you should draft a non-compete agreement for the seller as well, not just employees. The seller should sign that they won’t start a similar business, at least not in the location or time frame, that can harm your business. You should include a clause in the non-compete agreement that states that a seller is forbidden to share or use the confidential information of the business he sold.
For instance, if you want to buy a clothing store, the seller should sign a non-compete agreement where they clearly states that they won’t operate a similar businesses in the nearby area, or at least not in the near future.
As you can see, buying a business, acquiring a new company or merging with another company can have many risks, and you need to make sure to limit such risks that may happen to your firm. Our Toronto business lawyers can provide you with a free consultation and discuss the possible risks and mitigation strategies for your next business steps. We also have business lawyers in Oakville and London.