M&A - CA Law
Business and Professions Code section 16601:
- Any person who sells the goodwill of a business, or any owner of a business entity selling or otherwise disposing of all of his or her ownership interest in the business entity, or any owner of a business entity that sells (a) all or substantially all of its operating assets together with the goodwill of the business entity, (b) all or substantially all of the operating assets of a division or a subsidiary of the business entity together with the goodwill of that division or subsidiary, or (c) all of the ownership interest of any subsidiary, may agree with the buyer to refrain from carrying on a similar business within a specified geographic area in which the business so sold, or that of the business entity, division, or subsidiary has been carried on, so long as the buyer, or any person deriving title to the goodwill or ownership interest from the buyer, carries on a like business therein.
Note: see 16601 for definitions of several terms used above - see 16602 for M&A rules
CASELAW:
2012.Aug.29 California Court Upholds M&A Non-compete, but not . . .
Beware in California if the non-competition covenant in a sale of business agreement either differs from the one set forth in an employment agreement with the same person, or has a term measured from termination of employment rather than the business sale date. Those are the main takeaways from Fillpoint v. Maas (2012 LEXIS Cal.App. 914) in which a California court examines and applies the limited non-compete exemption set forth for business transactions in CA Bus. & Prof. Code §16601. The decision invalidates not only the employment agreement's one year post-employment non-compete, but also its non-solicitation covenant (the latter for being overly-broad).
Non-competition Provisions
Alliant Ins. Services v. Gaddy, 159 Cal.App.4th 1292 (2009):
- Although defendant agreed to a noncompetition covenant which expressly defined the restricted territory as "the 58 counties in the State of California," he argues the covenant is invalid as an illegal restraint on trade because the geographic scope exceeds the territory where GWC did business. We shall conclude the covenant is not invalid on this record.
- "It was the policy of the [common] law, within reasonable limits, to protect the purchaser in the enjoyment of the good will which he had purchased and paid for." (Kaplan v. Nalpak Corp. (1958) 158 Cal.App.2d 197, 200 (Kaplan).) The sold business's goodwill is the 'expectation of . . . that patronage which has become an asset of the business.' " (Strategix, supra, 142 Cal.App.4th at p. 1073.)
- The geographic scope of a noncompetition covenant must be limited to the area where the sold company carried on business because "[o]therwise, a seller could be barred from engaging in its business in places where it poses little threat of undercutting the company it sold to the buyer." (Ibid.)
- [Held:] Ward's supplemental declaration provides substantial evidence that GWC "carried on" its business in all 58 counties of the state of California within the meaning of section 16601. Accordingly, we conclude defendant fails to show the noncompetition covenant is an illegal restraint on trade.
Non-Solicitation Provisions
Alliant Ins. Services v. Gaddy, 159 Cal.App.4th 1292 (2009):
- As to the nonsolicitation covenant, defendant argues it is illegal because it prohibits defendant from soliciting not only clients of the business defendant sold (GWC) but also Alliant's other customers. We shall conclude defendant's argument is without merit.... Here, however, defendant not only sold his business to plaintiffs, he then became an employee of plaintiffs. The nonsolicitation covenant in both the Stock Purchase Agreement and the Senior Management Agreement limited the scope of the nonsolicitation covenant, stating defendant (Seller) would not solicit the clients of GWC or any other Alliant Company "(provided in the latter case [any other Alliant Company], that such Seller had substantial contact or became familiar with such Client or Active Prospective Client during his employment with the Company) . . . ." Thus, the covenant prohibiting solicitation of Alliant's other customers related only to defendant's employment by Alliant, not his sale of GWC.
Strategix v. Infocrossing West, 142 Cal.App.4th 1068 (2006):
- By extension, we conclude courts may enforce nonsolicitation covenants barring the seller from soliciting the sold business'semployees and customers. ... These covenants prevent the seller from unfairly depriving the buyer of the full value of its acquisition, including its goodwill. (See Monogram, supra, 64 Cal.App.3d at p. 701; Hilb, supra, 33 Cal.App.4th at p. 1825.) ... A covenant not to solicit the sold business's employees and customers prevents the seller from eroding the very goodwill it sold, while allowing the seller otherwise to pursue its chosen business with whatever employees and customers it can attract. (Cf. ? 16600.)'
- On the other hand, nonsolicitation covenants barring the seller from soliciting all employees and customers of the buyer, even those who were not former employees or customers of the sold business, extend their anticompetitive reach beyond "the business so sold." (? 16601.) They do more than ensure the buyer receives the full value of the business it bought, whose goodwill does not include "'the patronage of the general public.'" (Hill, supra, 86 Cal.App.4th at p. 902, fn. 6.)
- Infocrossing instead asks us to modify the preliminary injunction to address only Strategix's [seller's] former customers and employees. Courts have "blue penciled" noncompetition covenants with overbroad or omitted geographic and time restrictions to include reasonable limitations. (See Swenson v. File (1970) 3 Cal.3d 389, 395-396; Mahlstedt v. Fugit (1947)79 Cal.App.2d 562, 566.) But courts will not strike a new bargain for the parties "for the purposes of saving an illegal contract." (Kolani v. Gluska (1998) 64 Cal.App.4th 402, 406 (Kolani).) In Kolani, the court declined to "rewrite the broad covenant not to compete into a narrow bar on theft of confidential information." fn. 4 (Id. at p. 408.) We decline to rewrite overbroad covenants not to solicit Infocrossing's employees and customers into narrow bars against soliciting Strategix's former employees and customers. Had the parties intended to reach such limited -- and enforceable -- covenants, they could have negotiated for them. We will not do so for the parties now. [142 Cal.App.4th 1075]
2001 Stock Redemption - M&A Rule Not Applicable. Hill Medical Corp v Wycoff (Cal App 2nd), recognizing that --
- "When sellers transfer all of their corporate shares, which constitutes only a fraction of the corporate shares, the concerns are the same-did the transaction take into account corporate goodwill? The sale of the corporate fractional interest must involve “a substantial interest in the corporation so that the owner, in transferring ‘all’ of his [or her] shares, can be said to transfer the goodwill of the corporation.” (Bosley Medical Group v. Abramson, supra, 161 Cal.App.3d at p. 290, 207 Cal.Rptr. 477.) Simply selling shares to an individual vendee or back to the corporation does not necessarily demonstrate that goodwill is part of the agreement."
1992 Enforced re 3% Selling Shareholder. Vacco Industries v Van Den Berg (Cal App 4th), rejecting the argument that "Van Den Berg argues that this exception to the general rule should not apply to him because he was not a "substantial shareholder." He stresses that he owned less than 3 percent of Vacco's stock and received only $500,000 of the $23 million purchase price."
- "Under the terms of the noncompetition agreement Van Den Berg acknowledged that he was selling all of his shares of Vacco stock to Emerson and he agreed that he would not carry on any business competitive with the business of Vacco for the lesser of (1) five years from the date of the agreement or (2) "so long as Vacco conducts the Business within the territory." fn. 5 Contemporaneously with his execution of this agreement, Van Den Berg sold all of his shares to Emerson and was paid the sum of $500,000."
- "However, one of the statutory exceptions to this rule is set forth in Business and Professions Code section 16601. fn. 12That section permits agreements not to compete made by a party selling the goodwill of a business or all of the shares of stock in a corporation. That, of course, is just what Van Den Berg did here. He sold all of his stock in Vacco and was paid $500,000."
- HELD -- "We therefore conclude that the noncompetition agreement is not prohibited by Business and Professions Code section 16600 and is fully enforceable in spite of Vacco's prior wrongful termination of Van Den Berg."
Articles
California Non-Compete Agreements - 11/21/2002, which includes the following quotations:
- "In Vacco Industries, Inc. v. Van Den Berg (1992) 5 Cal.App.4th 34, the court upheld the enforceability of a non-compete agreement that lasted as long as the employer conducted business in the area. There, an officer held three percent of his employer's stock. When the employer was being acquired by another company, he agreed to sell the stock to the acquirer and as part of the agreement there was the non-compete provision. Because the non-compete provision was part of the stock sale, it was held enforceable."
- "Section 16601 also applies when substantially all of the assets are sold. Unlike the provision for stock sales, in which all stock must be sold, only a substantial amount of the assets need to be transferred to make a non-compete agreement enforceable pursuant to this statute. (Fleming v. Ray-Suzuki, Inc. (1990) 225 Cal.App.3d 574.)"