POST TAKEOVER/ACQUISITION IMPACT ON NEGATIVE COVENANTS

INTRODUCTION

For every organization their employees and key executives are their most valuable assets with respect to the value they bring in to the organization. The organizations attempt to safeguard these key personals and employees from the competitors in order to strengthen their stand in the competitive market and negative covenants are used as one of the strategy to retain the employee as well as to reduce the expense and cost incurred on the training of employees. Nevertheless, negative covenants are relevant from the perspective of safeguarding the technical know-how, confidential strategy and in certain cases to protect and defend the intellectual property.

KEY INFO ABOUT NON-COMPETE & NON- SOLICITAION:

ENFORCIABILITY OF COVENANTS POST TAKE-OVER/ACQUISITION:

Here comes the answer – “IT DEPENDS” … It certainly depends on many circumstances as to:

• RESTRICTIVE COVENANTS ARE NOT ASSIGNABLE.

Restrictive covenants are not to be assigned as mentioned in ALL-PAK, INC. V. BARRY JOHNSTON[1] in this case it was held that the employment relationship is a personal matter between the employee and the company who hired him and for whom he chose to work. Unless, an employee explicitly agreed to an assignability provision, an employer may not treat him as some chattel to be conveyed, like a filing cabinet, to a successor firm. Hence the Pennsylvania Superior court has made it very clear with its judgement as to whether the employee wishes to work for the new employee he can and if not, he cannot be forced to do so.

• COVENANT MAY VARY PERTAINING TO TERM OF ACQUISITION/TAKEOVER:

It has been very well stated in the case of Siemens Medical Solutions Health Service Corp. v. Brian J. Carmelengo[2] and Joyner Sports Medicine Institute Inc., V. Stejbech[3] that acquisition terminates the contract between the old employer and employee and the term of agreement was setup with the old employer but not with new employer pertaining to which the employee is free of the bindingness of agreement of non-solicitation/non-compete.

• COVENANT REMAINS UNAFFECTED IF COMPANY MAINTAINS ITS VERY EXISTANCE.

As there has been no change in the ownership of the company which has been acquired then in that scenario the work-force shall not be subjected to any alterations. In addition to this there has not been any updates as to which the agreements signed between the employee and the employer should be tampered with so in this case the non-compete and non-solicitation clauses holds their Suo-moto existence as they used to pre- merger/take-over/ acquisition.

ADDITION OF CLAUSES IN THE CONTRACT:

Certain clauses can be entered in a contract to avoid the foreseen and unforeseen events that may cause trouble in mere future with regard to the restrictive and negative covenants:

NON-ASSIGNMENT CLAUSE:

A non-assignment clause in an agreement, states that the same contract cannot be assigned to a new party and thus, cannot enforce the provisions with regard to the restrictive covenants against the employees and the new employer shall re-negotiate the terms and conditions of the employment with the existing employees of the company.

SURVIVAL CLAUSE:

A survival clause in an agreement, states that which terms and conditions of the contract would still be in motion after the termination of this very contract. It is pertinent to mention that no clause shall outlive the sale of the particular business.

INDIAN LEGAL POSITION

In India, Companies act 2013, specifically states that with merger, if there is no objection on merger or acquisition, in such cases all obligations and liabilities stands transferred into the Transferee entity, unless and until specifically restricted in original agreement. However, Indian contract act states that any agreement in restraint of trade is void although the development of economy and ecosystem of service business has seen a development on negative covenants jurisprudence, wherein, court has stated that reasonable restriction can be implied and non-compete as well as non-solicitation clauses are valid when there is any violation during the course of employment. Further, honorable courts in India have also validate the non-solicitation clauses, specifically, when non solicitation is prime condition of any acquisition or agreement, wherein, in the matter of Embee Software Pvt Ltd. v. Samir Kumar Shaw, wherein the Calcutta High Court held that ‘acts of soliciting committed by former employees take such active form that it induces the customers of the former employer to break their contract with the former employer and enter into a contract with the former employee, or prevent other persons from entering into contracts with the former employer cannot be permitted’

CONCLUSION:

Negative covenants during employment are applicable without any restrictions, however, non-compete is in violation of fundamental right to trade provided there are circumstances suggesting that non-compete was a primary condition for any entity sale or acquisition though it depends upon the stipulation scope in agreement. Non-Disclosure and any penalty within it can be specifically enforced before any court and said stipulation is of very much significance when we are experiencing a sharp rise in start-up ecosystem across the country and emergence of India as the export of service center.

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[1] 20^TH MAY 1997

[2] U.S.D.C., ED. Of PA., C.A. 01-816 

[3] 5 Pa. D. & C. 4th 242, 249 (Dauphin Cty. 1999).