N.C. Business Court Weighs In On Enforcement of Restrictive Covenants Following Aquisition of a Company

by Womble Carlyle Sandridge & Rice, LLP
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Your company acquires another company through merger or stock purchase.  You require the key employees of the acquired company to sign new employment agreements which provide for similar pay, benefits and job duties  – but the new agreement also imposes new non-compete obligations.  A recent decision by the North Carolina Business Court reminds companies that after a stock or equity purchase such clauses may not be enforceable because they lack consideration.  If you make an acquisition through merger or a stock purchase, there must be additional consideration to support any restrictive covenants entered into concurrently with the acquisition.

In Amerigas Propane, LP v. Coffey, 2014 N.C.B.C. 4, the Plaintiffs sought a preliminary injunction to enforce the confidentiality and non-compete provisions in an employment agreement signed by Ermon Coffey, a Defendant.

Coffey signed the employment agreement in conjunction with the Plaintiffs’ acquisition of Heritage Operating, LP, which had employed Coffey for eleven years.  Before the sale, Coffey had not been subject to any non-competition or non-solicitation agreements with Heritage.  The new employment agreement stated that consideration for the new restrictions included “initial employment . . . continued employment . . . promotion . . . incentive compensation payment; and/or . . . increase in compensation.”  Just over a year after the acquisition, Plaintiff fired Coffey, who then went to work for a competitor.

The Court denied the Plaintiffs’ motion for a preliminary injunction, finding there was insufficient consideration to support the employment agreement Coffey signed at the time of the purchase.  As the Court stated,

“Signing a contract in exchange for continuing an employment relationship, without more, will not suffice as consideration. . . .As sch, an employment contract signed at the time of a business acquisition may only use employment with the acquiring company as consideration if the old employment relationship is deemed terminated as a result of the transaction.”

Here, because the acquisition occurred through purchase of equity (akin to a stock purchase), no “new” employment had been provided as consideration.

In contrast, the Court noted that an acquisition structured as an asset purchase will act to terminate existing employment relationships. In that scenario existing employees of the acquired company don’t necessarily become employees of the acquiring company.  Thus, if this had been an asset purchase, and if Coffey had then signed an employment agreement, it appears there would have been adequate consideration.

Knowing this, Plaintiffs contended that Coffey was eligible for new benefits and raises under his employment agreement.  The Court was unpersuaded, and instead found that Coffey’s benefits were not materially different from those to which he had been entitled under his previous employment with Heritage.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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