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Non-solicitation clauses in M&A transactions

11 October 2023 | Knowledge, News, The Right Focus

Every manager and business owner knows the importance of people and talent in an organisation. In M&A (mergers & acquisitions), the human factor also plays a crucial role. One of the main motivations for M&A transactions is to gain value from the acquisition. And behind this are usually the people who are guaranteed to further enhance the performance and value of the business.

People: the most valuable asset in business

Among the risks that can arise in an M&A transaction is the risk of poaching key employees and other individuals critical to the operation of the acquired business. This risk is all the greater as the deal may ultimately fail and the potential buyer, having access to the critical personnel of the divested business, may seek to persuade them to consider cooperation, thereby inducing them to leave the current business.

The seller, left with an unsold business that has lost its most valuable employees, may therefore have a very serious problem. Both in running the business and in attracting new buyers.

What you need to know about non-solicitation clauses

One way to mitigate this risk is via a non-solicitation clause, which provides that the buyer will not solicit or encourage the employees and associates of the divested business to terminate their relationship with the seller. For such clauses to be effective, they must be properly incorporated into the contract and properly secured, e.g. via liquidated damages for any breach.

Non-solicitation clauses should be carefully drafted, with their manner of incorporation in the contract depending on which party has more influence over the final content.

From the seller’s point of view, a non-solicitation clause should have a broad scope, i.e. it should restrict the potential solicitation of employees and associates of the seller’s business to join the buyer or its related parties.

On the other hand, from the buyer’s perspective, it is important that any non-solicitation clauses do not prohibit instances where the employees of the divested business themselves terminate their existing relationship with the business on their own initiative and either approach the buyer for employment or respond to a general recruitment advertisement.

Non-solicitation & non-compete

Non-solicitation clauses may also include a prohibition on soliciting customers, suppliers and other business partners of the divested business or the seller and in this respect are closely related to non-compete clauses concerning the non-competition of the buyer.

In the case of non-compete clauses, it is important to draft the relevant contractual provisions carefully and to ensure that they are respected.

Any questions? Contact us

Paweł Mardas

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