Non Compete Agreements and the Sale of a Business in Massachusetts
Non Compete Agreements in Massachusetts Business SalesThe Massachusetts non-compete law, enacted in 2018, brings stringent regulations to non-compete agreements. These rules provide significant safeguards for employees facing onerous post-employment restrictions.
However, it's important to note that the law does not encompass non-competition agreements in specific scenarios, particularly those associated with the sale of a business. This can become complex when you are both an employee and a shareholder in a business undergoing a sale. Below, we provide valuable insights if you find yourself confronted with a non-compete agreement related to the sale of a business in which you have an ownership interest. Understanding the Massachusetts Non Compete Act ExemptionEven before the new law, courts tended to be more lenient in enforcing non-competes arising from business sales. The rationale is that when you sell a business, you're also selling its goodwill, making a non-compete a logical means to protect that goodwill from the person who just profited from it. Consequently, courts have historically upheld longer restriction periods in these scenarios compared to non-competes tied to employment.
Now, Massachusetts law explicitly states that the new requirements do not pertain to non-compete agreements connected to business sales if you are a "significant" owner and you receive "significant consideration or benefit" from the sale. By implication, those requirements would apply in the absence of significant ownership or benefit. However, what "significant" means in either of those instances remains unclear. Defining "Significant" Ownership Under the Non Compete ActThe exact criteria for what constitutes "significant" ownership have yet to be defined and will likely remain ambiguous until court decisions provide interpretation.
If you are the sole owner of a business, it's highly probable that any non-compete you sign in connection with a sale won't be subject to the Act's provisions. Similarly, if you hold a minimal equity stake, typically 1% or less, as part of an employee incentive program, this is unlikely to be considered "significant" ownership, and your non-compete will likely fall under the Act's provisions. In cases that fall between these extremes, determining significance becomes more challenging. It may depend on the extent to which a partial owner was or could be associated with the goodwill sold. Control over the company and the decision to sell may also be factors, suggesting that a minority owner might not be considered "significant." It's crucial to consult an employment lawyer to assess your specific situation before signing a non-compete in the sale of your business. |
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Interpreting "Significant Consideration or Benefit" Under the Non Compete Act
The law exempts significant owners who receive "significant consideration or benefit" from the sale. What qualifies as a significant benefit remains undefined.
Is it solely based on the amount of money received, or does it consider the benefit's proportion to the total transaction size? For instance, if you receive $500,000 from a business sale, it's objectively a substantial sum, but it may also be a small percentage of the sale price.
Another question pertains to whether a substantial benefit, on its own, can exempt you from the Non Compete Act even if you only held a small stake in the company. While the statute suggests both significant ownership and a significant benefit are required to fall outside the Act's purview, this concept hasn't been tested in the courts.
Is it solely based on the amount of money received, or does it consider the benefit's proportion to the total transaction size? For instance, if you receive $500,000 from a business sale, it's objectively a substantial sum, but it may also be a small percentage of the sale price.
Another question pertains to whether a substantial benefit, on its own, can exempt you from the Non Compete Act even if you only held a small stake in the company. While the statute suggests both significant ownership and a significant benefit are required to fall outside the Act's purview, this concept hasn't been tested in the courts.
What to Do When Confronted With a Non Compete During a Business Sale
Navigating a non-compete agreement signed by a partial owner during a business sale can be intricate, with no straightforward answers. Whether your agreement falls under the Act's terms or not, it must still be evaluated according to the traditional common law rules to assess its reasonableness and enforceability.
When presented with such an agreement, it's advisable to consult an employment lawyer experienced in both the new and old non-compete laws of Massachusetts. If there's room for negotiation, understanding what aspects of the agreement matter most is essential. Even if you lack negotiation options, comprehending the restrictions is crucial to making an informed decision about whether the benefits outweigh the constraints.
When presented with such an agreement, it's advisable to consult an employment lawyer experienced in both the new and old non-compete laws of Massachusetts. If there's room for negotiation, understanding what aspects of the agreement matter most is essential. Even if you lack negotiation options, comprehending the restrictions is crucial to making an informed decision about whether the benefits outweigh the constraints.
How Our Non Compete Lawyers Can Help
Our experienced team of employment lawyers can provide expert guidance when you're faced with a non-compete agreement in the context of a business sale. We'll help you navigate the complexities, assess the implications, and, if possible, negotiate terms that align with your interests and goals. You can use the button below to schedule a call back from a member of our team, or give us a call at 781-784-2322.
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