Many pre-acquisition agreements include a non-compete or non-solicit covenant. This is basically a promise by both buyer and target companies that, for a certain period of time after closing, they will each refrain from:
- Engaging in a business activity that is competitive with the other’s business activities (non-compete). Depending on the nature of the business, the non-compete may be limited to a specific area, such as a city or region.
- Trying to lure/hire away each other’s customers or employees (non-solicit). This is particularly pertinent when a large company is acquiring a much smaller one, or one in the same industry.
Another type of non-solicit clause is known as a “no-shop” provision. Here, the target company agrees not to solicit, give information to, or seek to negotiate an alternative sale transaction with another potential buyer. A no-shop provision is typically used with privately held companies. Public companies usually include a “fiduciary out” clause that essentially invalidates any non-solicit covenants.