​​​​​​​​​​​​Merger and Acquisition Issues re

Executive Compensation and Restrictive Covenants
See specifically: Asset PurchasesDeal-breaking Issues Checklist  /  Retirement Plans /

                        Spin-offs / 409AState-specific M&A Cases / Tax Issues  / WARN Act

  • NEW 2020.03.24  M&A Readiness for Executive Compensation and Benefit Plans. For insights into deal-killers and key precautions, tune to this webinar hosted by Institutional Investment Consulting. Just email Mark for a copy of the PowerPoint, as well as if you have questions. 

General Rules re Different Types of Transaction:  

  1. If the transaction is an asset sale/purchase, then any benefit plans and employment-related agreements with the seller are only assignable from the buyer to the seller if there is an express contractual permission for that. See also: ERISA Pension Cases.
  2. If the transaction is a stock purchase of the seller, then all assets and liabilities transfer to the buyer, and any benefit plans and employment-related agreements should transfer by operation of law (as a liability), subject to any applicable anti-assignment provisions that the employment agreements may contain.
    • ​​CONSIDER A "HALLIBURTON PROVISION" -- If a merger or stock purchase agreement includes provisions relating to a seller's benefit plans, there is a risk that a court would deem the benefit plan to be amended - thereby creating enforceable rights for plan participants even if the merger or sale agreement states that there are no third party beneficiaries.  The 5th Circuit's 2006 decision in the Halliburton case gave credence to this risk, and gave rise to the precaution of including a "Halliburton provision" in merger and sale agreements to affirmatively state that no benefit plans would be deemed amended.
  3. If the transaction involves a merger of the seller into the buyer or another entity, the outcome becomes more murky, but the analysis is essentially a matter of contract interpretation. The absence of an assignability clause is not fatal, because the definition of employer can be open-ended. State law is critical to consider, but courts are inclined to resolve ambiguities against the employer, as drafter.
  4. See, generally:  "Enforceability, By Purchaser Or Successor Of Business, Of Covenant Not To Compete Entered Into By Predecessor And Its Employees" (12 A.L.R. 5th 847, §16).

​[Aside - Wage-Hour Diligence2019.11.15 "Are You Really Protected From Wage-and-Hour Successor Liability in an Asset Purchase?"]

2014.02.03  Earn-outs and Duties of Buyer.  The decision reaffirms that courts will not rewrite earnouts to impose obligations on buyers to maximize payments. On the other hand, buyers cannot take affirmative action to impede the acquired company’s ability to generate earnout revenue. American Capital Acquisition Partners LLC v. LPL Holdings Inc. (Del. Ch.).

2013.Jan.28  Stock Option M&A Cash-outs and Deduction Timing . . .  IRS Advice
The IRS has published generic legal advice (GLAM 2012-010) with respect to stock options and SARs that a target company cashes-out within several days after an acquisition closes (using its own funds or those received from the acquiring company).  The IRS advises that "these deductions are governed by the end-of-the-day rule [under Treas. Reg. 1.1502-76(b)(1)(ii)(A)] and are properly reported on Target's short-year return for the taxable year".

Asset Purchases


  • In general, the surviving company in a merger succeeds to the rights and obligations of the merged company, and thereby becomes entitled to enforce restrictive covenants set forth in employment-related agreements. See, e.g., Aon Consulting Inc., v. Midlands Financial Benefit Inc., 275 Neb. 642, 748 N.W.2d 626 (2008); National Instrument LLC v. Braithwaite; Corporate Express Office Products Inc. v. Phillip, 847 s. 2d 406 (Fla. 2003); Equifax Servs. Inc. v. Hitz, 905 F.2d 1355 (10th Cir. 1990); UARCO Inc. v. Lam, 18 F. Supp. 2d 1116 (D.HA. 1998); Alexander & Alexander Inc. v. Koeltz, 722 S.W.2d 311 (Mo. Ct. App. 1986).

2012.Aug Ohio Sup Ct Reconsidering Acordia Decision. See 2012.May.24  Non-compete Limited on Post-Merger Basis (Ohio Ruling). The closing date of a merger triggered a termination of employment with the target company, for purposes of measuring a non-competition agreement's two year post-employment period. The merged company was accordingly not entitled to enforce the non-competition agreement beyond that two-year period, because the agreement omitted a "successors and assigns" provision and referred to service with "the Company" alone. That was the Ohio court's conclusion in Accordia of Ohio v. Frankel.  

Change-in-Control Severance and Non-Compete Insights. 

Recent 1st and 5th Circuit decisions provide healthy reminders about two often underappreciated M&A issues, namely: 

  • For Buyers: Be Careful re Carrying-forward Non-competition Protections. Given judicial skepticism of non-competes, buyers should be careful to take two steps in order to secure non-competition protections that are desired for a seller's key employees. The first involves being sure to identify those key employees of the seller for whom enforceable non-competition agreements are desired. The second involves making pre-closing changes that maximize the buyer's potential to enforce those provisions. The First Circuit's OfficeMax v. Levesque decision provides a classic lesson in buyer actions that left a loose-end that ultimately doomed enforcement of its noncompetition protections.
  • In a nutshell, the buyer in the OfficeMax case sought to protect itself by having key employees of the seller execute non-competition agreements with the seller on the eve of the closing. Those non-compete agreements went further, by committing the employees to execute a post-closing non-compete with the buyer. When that did not occur due to refusal by the seller's key employees, the court took that as evidence that the non-compete was not intended to bind the buyer, and consequently declined to enforce it.


2016. NY Noncompete Not Enforced in Involuntary Termination, despite Offer from Successor Employer.  In Buchanan Capital Markets, LLC v. DeLucca, 144 A.D.3d 508 (2016), NY's First Department affirmed the denial of a preliminary injunction seeking to enforce non-compete and non-solicitation agreements against four employees whose employment was terminated without cause prior to a corporate merger.  Although the employees were given the opportunity to apply to the successor entity, the absence of a guarantee of future employment caused the appellate court to find insufficient continued willingness to employ the employees, thereby resulting in a finding that they suffered an involuntary termination, which under NY law merited the denial of injunctive relief to enforce noncompete covenants.


2013.Oct.25  Equity Issues in Spin-offs. See this PowerPoint titled "A Tale of Two Spin-offs" by Global Equity. 

2012.Mar.12   Motorola's Split-up of Equity Awards. See page 12-13 of MOT's 2012 proxy statement for a description of the equitable adjustment for equity awards that adjusted them to reflect the common stock of each award holder's employer after the split-up. 

Stock Purchases

Damages Generally

See Phelps v. Gilbraith, Arizona Court of Appeals 2nd Div. (10/29/2010) in which an Arizona court addresses the damages payable for the breach of a non-competition provision in a sale of business context, and cites the following authority.

  • Arizona: See, e.g., McNutt Oil & Refining Co. v. D’Ascoli, 79 Ariz.28, 32-33, 281 P.2d 966, 969-70 (1955) (plaintiff may recover “all damages which flowed as a direct and immediate result” of breach); Martin v. La Fon, 55 Ariz. 196, 199, 100 P.2d 182, 183 (1940) (“gains or profits prevented and lost are a proper element from which to estimate plaintiff?s damages” in breach of contract to assign lease).
  • Idaho: Dunn v. Ward, 670 P.2d 59, 61 (Idaho App. 1983) (“The measure of damages is not the amount of profits made by the defendant, rather it is the amount of profit lost to the plaintiff because of the breach [of an anti-competition clause].”).
  • Oregon: N. Pac. Lumber Co. v. Moore, 551 P.2d 431, 435-46 (Or. 1976) (defendant?s sales “which would otherwise have been made by plaintiff . . . are a reasonable basis for estimating plaintiff?s damages”).

Geography-specific Laws and Rulings

Retirement Plans in M&A  

Shareholders vs Boards and Executives