Restrictive covenants in share purchase agreements

It is imperative for the parties involved to appreciate the different kinds of restrictive covenants pertaining to a share purchase. Some of the most common covenants found in an agreement include non-competition clause, non-solicitation or non-dealing clauses, reputation, and stability of the workforce.

  1. Non-competition clause

    • A covenant that essentially prevents the seller from establishing a new operation in the same line of business as the target company and its subordinate entities. Such a covenant is usually warrantable for a certain duration of time, especially if the trade secrets being employed in the sought after business are not adequately protected by, for example, patent or copyright.

  1. Non-solicitation or non-dealing clauses

    • A covenant that precludes the seller for a certain period from soliciting or canvassing the customers of the business that is being purchased. It is perhaps the easiest form of restriction to vindicate. However, such a covenant should be enforceable in limited circumstances, namely, when the seller offers customers goods or services that compete with those of the aforementioned business.

  1. Reputation

    • It is standard practice to have a covenant in place that will stop the seller from using a similar name to the business being sold. Moreover, one can also debar the seller of an owner-managed business from utilising a name or description that trades on their association with the target business.

  1. Stability of the workforce

    • Prohibiting the solicitation of employees can indubitably protect a legitimate business interest in the stability of the workforce. However, protection will only be afforded for poaching employees i.e. soliciting them to hand in their resignation and terminate their employment with the business that is being acquired.

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