Say you plan to buy a business. You’ve completed due diligence and are ready to send the seller an asset purchase agreement (APA) to finalize the deal.
Then a thought occurs: What if the seller takes their old clients or employees with them, scuttling the business they just sold you? They’re just a phone call away, after all.
Thankfully, you can put those worries to bed with a non-solicitation clause.
Non-solicitation clauses in APAs give you the power to prevent the seller from poaching clients and employees – at least for a time. In this blog, you’ll learn how they work, why you should use them, and how courts enforce them in the USA and beyond.
What Is a Non-Solicitation Clause?
A non-solicitation clause is a contractual agreement preventing a signing party from trying to do business with current partners, employees, or contractors of another for a specific period.
While you’re probably familiar with non-solicitation clauses in employment contracts, they’re also common in M&A – especially when you buy a client or vendor-reliant business like an agency, B2B service, or manufacturing company.
APA non-solicitations are also common in industries requiring highly-skilled or well-connected employees, including engineering, consulting, sales, and most technical fields.
Why Do Companies Create Non-Solicitation Clauses?
Non-solicitation clauses in M&A prevent a seller from taking critical employees, contractors, or clients from their recently sold business and devaluing the sale.
For example, imagine you’re acquiring an advertising agency sporting million-dollar contracts with businesses like Coca-Cola, BMW, and Nike. Theoretically, those clients would come with the business, and their value likely contributes to its sale price. But what if your competitor spins up another agency and poaches these clients from you?
Without those big-name clients, that multimillion-dollar agency you acquired might have lost a zero or two on its valuation. This is an extreme example of the rationale behind these clauses.
Non-Solicitation Vs. Non-Competition Clauses
It’s easy to conflate non-solicitation clauses with non-competition clauses. Although non-solicitations are often nested within non-competition clauses, they’re quite different.
Non-solicitation agreements in M&A only require sellers to avoid stealing previous clients or employees of their former company. Non-competitions are much more restrictive. They prevent a seller from working at or operating a competing business during their agreement.
As non-solicitations are considerably less extreme than non-competitions, they tend to hold up much better in court. Asking someone to leave your people and customers alone is much less demanding than asking them to give up their livelihood.
What’s Included in an APA Non-Solicitation Clause?
As non-solicitations are restrictive legal clauses, you must be as specific as possible when creating them. A basic framework most legal teams suggest is to ensure you include the who, what, where, when, and how. For example:
- Who is regulated by the non-solicitation? When the seller in an asset transaction is a company, the non-solicitation may include the company and its owners.
- What are the prohibited activities? The fewer, the better for the seller. As a buyer, you’ll likely want a wide range of activities defined as soliciting.
- Where does the clause apply? Non-solicitations are usually enforced in a specific region, such as a state, the USA, or all of North America. The “where” usually doesn’t need to be as clearly defined in non-solicitations since they only focus on the sold company’s clients and employees. It is much more necessary to define the “where” in a non-compete.
- When will the non-solicitation clause end? Non-solicitations also have a duration period which is commonly one to three years.
- How might solicitation occur? You can draft non-solicitations to prevent indirect solicitation methods such as targeted advertising. Companies trying to poach top talent and clients can concoct devious tricks like setting up employment ads on billboards adjacent to a competitor’s office – it’s not the same as calling up employees personally, but effectively similar.
Here’s an example of a non-solicitation clause (click for page view) within a non-competition agreement in an APA listed by the US securities and exchange commission (SEC). I’ll dissect it for you below.
Takeaways from This APA Non-Solicitation
Let’s go through the who-what-where-when-how test of this non-solicitation clause (Section 3):
Who – This non-competition/non-solicitation defines the “Seller” as the entire selling corporation (Sycamore Networks, Inc.). The APA likely defines the seller more specifically. This non-solicitation clause also specifies the seller must urge any of their subsidiaries not acquired in the transaction to participate in it.
What – This seller may not directly or indirectly, hire, engage or employ (as an employee, consultant, or otherwise) any new or other buyer employee. Interestingly, the buyer provides a specific list of contractors the seller may still solicit.
Where – To get the where of this non-solicitation, we need to look at section 13 (Governing law: jurisdiction). Here it states that all elements of this agreement are under the jurisdiction of Delaware. Delaware, for those unaware, is well known for its leniency on non-competition clauses in M&A. It is also the state out of which both businesses operate.
When – Under Section 2: Noncompetition, this non-competition clause stays active for eighteen months after the signing date. As this is relatively short, the non-solicitation is not specified to terminate sooner.
How – This document broadly blocks solicitation of any type from the seller. The document mentions employees may work for the seller if they came through organic channels and have left their employer without coercion.
This appears to be a balanced and enforceable non-competition/non-solicitation likely negotiated by both the seller and the buyer. It covers a specific and small location, time, and set of actions and doesn’t place undue stress on either party.
How Are Non-Solicitation Agreements Usually Enforced?
Usually, non-solicitations and non-competitions in M&A are enforced through private lawsuits by the buyer in an M&A against the seller. These lawsuits go through the court jurisdiction mentioned in the deal in the hopes of a court order for the seller to cease and desist (an injunction) and/or pay for damages.
It’s important to note that court orders do not always equal enforcement. Even after a court decision, it may be on the buyer to “serve” the seller with documents detailing the decision. If a seller doesn’t comply with the court order or pretends they don’t know about it after being served, a buyer must appeal separately asking for enforcement.
Whether or not a court will enact a court order over your non-solicitation clause or enforce it varies widely from state to state and country to country. This is why you should specify where your agreement is enforceable and research its enforceability.
The US government will usually hear private lawsuits over non-solicitation in M&A, even in California where employee non-solicitations and non-competitions are illegal. That said, since 2022, the Biden administration in the United States has cracked down on non-competition clauses (and, by proxy, non-solicitations) in M&A. However, these measures are likely designed to target large companies acquiring large swaths of their competitors.
Again, you’ll notice in the above example that the buyer and seller both agree to only use Delaware courts to negotiate this deal. In Delaware, where as much as 65 percent of Fortune 500 companies are incorporated, they usually pass court orders for non-solicitation agreements between businesses in M&A.
What to Remember About Non-Solicitation Clauses as a Buyer
Here’s what you need to remember about non-solicitations in M&A:
- They are often included within or in conjunction with a non-competition clause.
- They help retain the value of an acquired asset for a period after purchase.
- They must be specific (covering the who, what, where, when, and how).
- Some states and countries are more likely to enforce non-solicitation clauses than others.
- Courts in the US frequently favor buyers in non-solicitation disputes.
- The US federal government is increasing scrutiny on unfair non-competition and non-solicitation clauses.
To protect the value of the company you’re acquiring, it’s safer to add a non-solicitation clause to your deal than not. You can always negotiate the exact terms with your seller down the line.
You can add a non-solicitation clause to your APA when using our APA Builder. Not only does it provide you with standard legal wording, but also editable non-competition, non-solicitation, and other closing conditions.
We wish you the best of luck in your acquisition and hope this article made you feel more confident when closing your next big deal.
Check back with us for more information on M&A published almost every weekday.
How Long Are Most Non-Solicitation Agreements?
Non-solicitations can range from one year to over ten. It’s on the buyer and seller in an M&A deal to decide a fair length for the agreement. Generally, non-solicitations don’t last as long as non-competitions (even when both are present) and run for about one to three years at a time. As mentioned above, longer non-solicitation agreements may be harder to enforce in court.
Can You Get Out of a Non-Solicitation Clause?
Courts may rule non-competition and non-solicitation agreements unenforceable if they find the terms of the agreement unreasonable. For example, a court may overlook an APA non-solicitation violation claim if its time and location restrictions are too broad. A one-year and 50-mile radius non-solicitation is much easier to enforce than one lasting ten years and covering an entire state.
Your industry and location affect enforceability too. In an area with scarce access to a particular service, a court is less likely to enforce your non-competition or non-solicitation agreement.
Are Non-Solicitation Clauses Enforceable in California?
Although California typically won’t enforce non-solicitation agreements in an employment contract, section 16601 of the California Business and Professions Code (CBPC) allows them to issue court orders for lawsuits over non-competition and non-solicitation clauses when in asset purchase agreements.
As of 2022, the Biden administration is scrutinizing non-solicitations and non-competitions that they believe are anti-competitive.
Are Non-Solicitation Clauses Enforceable in Other Countries?
Countries like the UK and others with modern regulatory environments frequently allow non-solicitation clauses in M&A though their scope can vary. Some will include enforcement in a court order and others will place enforcement on the buyer.
Generally, you’ll find what one country or region considers a “reasonable” agreement to be different from another. As you might also guess, governments in other countries are wary of enforcing non-solicitations or non-competitions that benefit businesses in other nations.
Talk to legal advisors and familiarize yourself with local laws in any other country where you want to enforce a non-solicitation clause. Directly translating a non-solicitation from one country to another rarely works.
Does Acquire.com Have Non-Solicitation Clauses?
When you draft an asset purchase agreement with our APA builder, you can add non-solicitation clauses and edit them as you see fit. For larger transactions, you might want to work with a broker for these as your seller may wish to negotiate.
The content on this site is not intended to provide legal, financial or M&A advice. It is for information purposes only, and any links provided are for your convenience. Please seek the services of an M&A professional before any M&A transaction. It is not Acquire’s intention to solicit or interfere with any established relationship you may have with any M&A professional.
