Restrictive Covenants

A negative covenant that restricts the way in which a party can act, for example the way in which land may be used or what an employee can do.  In a business sale context these are usually imposed on the Seller to protect the legitimate interests of the business.  These are non-competition clauses and advice should be taken as to the legitimacy of their enforceability as they are usually construed very strictly by the courts.

In the context of Business sales and purchase these are designed to preserve, the buyer’s benefit of acquiring (or investing in) a business that will not, for a given period following closing, lose part of its value as a result of sellers’ competition.

In a number of transactions, the greatest asset is the staff behind the target company, either in the founding shareholders or in certain key employees. In these cases, keeping those strategic players out of the competing market is essential for the project’s success and is reflective of the amount that the buyer is willing to pay for the business. It is reasonable to expect, then, that, after completion of the sale or purchase, the sellers, and possibly their key staff, will not engage in, or conduct, a parallel business or activity that competes with the acquired company, nor solicit other employees of the company. In order to prevent sellers and staff from doing so, it is essential to include restrictive covenants in the transaction documents.

Our Corporate team’s objective is to create value for our clients by understandings our client’s business and its objectives and offering clear legal solutions.

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