Noncompetition restrictions as terms in initial offers under buy/sell provisions - a monkey wrench?

• Author: Jackson, Hank
• Position: Florida

The business with two principals sharing equal ownership rights has an inherent problem from its inception--how eventually to part ways. Two commonly used strategies in managing a separation are buy/sell provisions and noncompetition restrictions. A buy/sell provision creates a method to determine which of the two principals will continue with the business, as well as the consideration to be paid for the other's interest. A noncompetition restriction enables the principal continuing with the business to retain the customers and goodwill that may be the most important asset of the business, especially in the increasingly predominant service sector in our economy.

These two legal tools have been around for some time, and their use in combination would appear to be ideal. But the inclusion of a noncompetition restriction in an offer under a buy/sell provision has proven to cause uncertainty and unintended consequences--the proverbial throwing in a monkey wrench.

Background of Buy/Sell Provisions

A buy/sell provision as used in this article refers to the principals' agreement entered into at the inception of the business that either principal may initiate an offer to purchase the interest of the other principal during the course of the venture. Additionally, upon receiving an offer from the initiating principal (offeror), the receiving principal (offeree) has only two options: 1) accept the offer and, thus, sell to the offeror, or 2) purchase the offeror's interest on precisely the same terms as the initial offer--a mirror or symmetrical offer. Typically, the parties agree in the buy/sell provision to a strict deadline (commonly 30 days) for the offeree to accept the initial offer or make a symmetrical offer. If the offeree fails to act timely, the buy/sell provision provides that the offeree accepts the initial offer by default.

The rationale behind a buy/sell provision's symmetrical aspect and severe deadline is to prevent the offeror from making a low-ball offer to the other principal and to complete the separating transaction quickly. A strong incentive is created for the offeror to make carefully the initial offer on terms that are fair. Indeed, the offeror will become either the buyer or seller on those terms at the sole option of the offeree. Since there are no negotiations or multiple offers and counteroffers, this procedure prevents delay and transfer of the business occurs quickly.

Background of Noncompetition Restrictions

Noncompetition restrictions are contractual arrangements in which one party agrees not to compete with another party for a specific period of time. Such agreements are often used in employment agreements to prevent employees from competing with their employers, as well as to protect a buyer of a business from competition from the seller after the purchase.

In most jurisdictions, including Florida, noncompetition agreements have historically been subject to attack for being void as against public policy--an improper restraint of trade. However, Florida, along with most other states, has enacted statutes explicitly authorizing noncompetition restrictions and setting forth the requirements of such agreements. (1) Florida's most recent noncompetition statute provides that such agreements must be supported by a "legitimate business interest," (2) as well as the requested restrictions must be reasonably necessary to protect those interests. (3) The legitimate business interests that are commonly used to justify noncompetition restrictions relating to the sale of a business are 1) trade secret information; 2) confidential information; 3) customer relationships; and 4) goodwill. (4)

Despite the considerable specificity of Florida's noncompetition statute, there is substantial litigation regarding the enforceability of noncompetition restrictions. What factual evidence is sufficient to prove a legitimate business interest and the degree of restraint that is reasonably necessary is inherently fact specific to the...