asset acquisitions - Jackson Walker LLP

interests and the value of the Assets and to prevent any unfair advantage being conferred onSeller.COMMENTCertain information must be provided to complete Section 10.8, including (1) theduration of the restrictive covenants, (2) the geographic scope of the noncompetitionprovisions, (3) a description of the Competing Business, and (4) the percentage of securitiesthat the sellers may own of a publicly-traded company that is engaged in a CompetingBusiness. Before designating the temporal and geographic scope of the restrictive covenants,counsel should review applicable state law to determine if there is a statute which dictates oraffects the scope of noncompetition provisions in the sale of a business context, and, if not,examine state case law to determine the scope of restrictive covenants that state courts arelikely to uphold as reasonable.Care must be taken in drafting language which relates to the scope ofnoncompetition provisions. If the duration of the noncompetition covenant is excessive, thegeographic scope is greater than the scope of the seller’s market, or the definition of“Competing Business” is broader than the Company’s product markets, product lines andtechnology, then the covenant is more likely to be stricken by a court as an unreasonablerestraint on competition. Buyer’s counsel should be alert to the fact that, in somejurisdictions, courts will not revise overreaching restrictive covenants, but will strike themcompletely. From the buyer’s perspective, the objective is to draft a provision which fullyprotects the goodwill the buyer is purchasing, but which also has a high likelihood of beingenforced. Sometimes this means abandoning a geographic restriction and replacing it with aprohibition on soliciting the Company’s customers or suppliers.The activities which constitute a “Competing Business” are usually crafted toprohibit the sellers from competing in each of the Company’s existing lines of business, andin areas of business into which, as of the date of the agreement, the Company has plans toexpand. Drafting this language often requires a thorough understanding of the seller’sbusiness, including, in some cases, an in-depth understanding of the parties’ product lines,markets, technology, and business plans. As a result, drafting this language is frequently acollaborative effort between buyer and its counsel. In some cases, a buyer also will want thesellers to covenant that they will not compete with certain of the buyer’s business lines,regardless of whether, on or before the Closing Date, the Company conducted or planned toconduct business in those areas. This construction is likely to be strongly resisted by sellers,who will argue that they are selling goodwill associated only with the Company’s business,not other lines of business, and that such a provision would unreasonably prohibit them fromearning a living.Noncompetition provisions should not be intended to prohibit sellers fromnon-material, passive ownership in an entity which competes with the buyer. As a result,most restrictive covenants provide an exception which permits the sellers to own up to acertain percentage of a publicly-traded company. Often, a buyer’s first draft will permit thesellers to own up to 1% of a public company. In any case, a buyer should resist the sellers’attempts to increase the percentage over 5%, the threshold at which beneficial owners ofpublic company stock must file a Schedule 13D or 13G with the SEC. Ownership of morethan 5% of a public company’s stock increases the likelihood that a party may control thecompany or be able to change or influence its management, a situation anathema to theintention of the noncompetition covenant. The exception to the noncompetition provision3148166v1- 149 -