Non Compete Agreements and the Sale of a Business in Massachusetts
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The new Massachusetts non compete law that went into effect in 2018 imposes strict requirements for non compete agreements. These requirements provide greater protection for employees burdened by unfair or excessive post-employment restrictions. The law, however, does not apply to non competition agreements in certain situations, including agreements made in connection with the sale of a business. This can get confusing when you are both an employee and a shareholder in a business that is being sold. Below are some things you should know if you are asked to sign a non compete in connection with the sale of a business you have an ownership interest in.
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Need Help With a Non Compete?OR
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The Massachusetts Non Compete Act Exemption
The Massachusetts statute specifically states that it does not apply to a non compete in connection with the sale of a business, if you are a "significant" owner and you receive "significant consideration or benefit" from the sale.
Even before the new law, courts were more liberal in enforcing non competes arising from the sale of a business. The theory is that one of the things you are selling is the goodwill of the business, and a non compete is a logical way to protect that goodwill against the person who was just paid for it. For this reason, courts have enforced restrictions for longer time periods in this kind of situation than they typically did for employment related non competes.
Even before the new law, courts were more liberal in enforcing non competes arising from the sale of a business. The theory is that one of the things you are selling is the goodwill of the business, and a non compete is a logical way to protect that goodwill against the person who was just paid for it. For this reason, courts have enforced restrictions for longer time periods in this kind of situation than they typically did for employment related non competes.
What is "Significant" Ownership Under the Non Compete Act?
What constitutes "significant" under the law has not yet been defined, and probably will not until there have been enough legal disputes arising under this language for courts to issue decisions interpreting it.
If you are the sole owner of a business, it is nearly certain that any non compete you sign in connection with a sale will not be subject to the provisions of the Act. It is also likely the case that if you have a small equity stake as part of an employee incentive program (1% or less), this will not be considered "significant" ownership and your non compete will likely be subject to the provisions of the Act.
In between those two extremes, it becomes more difficult to predict. In the end, it may turn on the extent to which a part owner was or could be associated with the good will that was sold. It may turn on control over the company and the decision to sell, suggesting any minority owner would not be considered "significant." These are all questions that you should discuss with an employment lawyer before signing a non compete in connection with the sale of your business.
If you are the sole owner of a business, it is nearly certain that any non compete you sign in connection with a sale will not be subject to the provisions of the Act. It is also likely the case that if you have a small equity stake as part of an employee incentive program (1% or less), this will not be considered "significant" ownership and your non compete will likely be subject to the provisions of the Act.
In between those two extremes, it becomes more difficult to predict. In the end, it may turn on the extent to which a part owner was or could be associated with the good will that was sold. It may turn on control over the company and the decision to sell, suggesting any minority owner would not be considered "significant." These are all questions that you should discuss with an employment lawyer before signing a non compete in connection with the sale of your business.
What is "Significant Consideration or Benefit" Under the Non Compete Act?
The law exempts significant owners "who will receive significant consideration or benefit" from the sale. As with the discussion about ownership, there is no guidance yet on what constitutes a significant benefit.
For example, is the test whether it is a substantial sum of money by itself, or is this relative to the size of the transaction? If you receive $500,000 from the sale of a business, that is objectively a substantial amount of money, but it may also be a tiny percentage of the sale price as a whole.
A related question is whether the size of the benefit by itself can take you outside of the Non Compete Act even if you only held a small percentage of the company. The language of the statute suggests that you must both be a significant owner and receive a significant benefit to be taken out of the statute. Again, however, this has not been tested in the courts.
For example, is the test whether it is a substantial sum of money by itself, or is this relative to the size of the transaction? If you receive $500,000 from the sale of a business, that is objectively a substantial amount of money, but it may also be a tiny percentage of the sale price as a whole.
A related question is whether the size of the benefit by itself can take you outside of the Non Compete Act even if you only held a small percentage of the company. The language of the statute suggests that you must both be a significant owner and receive a significant benefit to be taken out of the statute. Again, however, this has not been tested in the courts.
What to Do if You Are Presented With a Non Compete as Part of a Sale?
As you can see, there are few clear answers to the fate of a non compete signed by a partial owner of a company in connection with the sale of that company. Your agreement may or may not be subject to the specific terms of the Act. If your agreement is not subject to the Act, it still must be analyzed under the old common law rules to determine whether it is reasonable and enforceable.
If you are asked to sign an agreement under these circumstances, you should consult with an employment lawyer who is familiar with both the new and the old non compete laws in Massachusetts. To the extent that you are in a position to negotiate any of the terms of the agreement, you will want to understand first what is and is not of concern. To the extent that you do not have any opportunity to negotiate, you will need to clearly understand the restrictions in order to make a decision about whether what you are going to receive is worth it.
If you are asked to sign an agreement under these circumstances, you should consult with an employment lawyer who is familiar with both the new and the old non compete laws in Massachusetts. To the extent that you are in a position to negotiate any of the terms of the agreement, you will want to understand first what is and is not of concern. To the extent that you do not have any opportunity to negotiate, you will need to clearly understand the restrictions in order to make a decision about whether what you are going to receive is worth it.
How Our Non Compete Lawyers Can Help
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We can help you get clarity on your non compete agreement and how it might impact what you can and cannot do after the sale of your business, so that you can make an informed decision. 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.
