Parties to contracts with non-competition covenants should take note of the effects that a stock purchase, merger, or asset purchase has on the enforceability of those non-competition covenants. A company’s ability to enforce a non-competition covenant can be determined by several factors including how the non-competition covenant was acquired by the company seeking to enforce it.
Generally, when a corporation’s stock is sold, the only change is in the corporation’s ownership. A change in ownership does not, as a matter of law, affect the existence of the corporation or its rights and liabilities. Furthermore, when a corporation merges with another, both corporations essentially unite into a single corporate existence. The surviving corporation therefore assumes the rights and liabilities of the merging corporation. In both scenarios, the surviving corporation generally assumes the right to enforce any preexisting non-competition covenant.
On the other hand, when a corporation’s assets are sold, the buying corporation does not assume the liabilities of the selling corporation unless such assumption is provided for in the parties’ purchasing agreement. In this scenario, the buying corporation does not, as a matter of law, assume the selling corporation’s non-competition covenants.
The Supreme Court of Florida examined this distinction in Corporate Express Office Products, Inc. v. Phillips, 847 So. 2d 406, 411 (Fla. 2003). In that case, Corporate Express was attempting to enforce non-competition covenants against former employees. Corporate Express’ ability to enforce those covenants, however, was determined by how it acquired the covenants. Corporate Express acquired most of those non-competition covenants by purchasing the stock of another corporation and later merging with that corporation. However, one of the covenants was acquired by purchasing the assets of a third corporation.
The Court found that, as a matter of law, Corporate Express assumed the right to enforce the non-competition covenants that it acquired through the stock purchase and merger. However, Corporate Express could not enforce the covenant acquired through an asset purchase unless the employee subject to that covenant consented to assigning the covenant to Corporate Express.
Peter T. Mavrick has successfully represented many businesses in trade secret and non-competition covenant litigation. This article is not a substitute for legal advice tailored to a particular situation. Peter T. Mavrick can be reached at: Website: www.mavricklaw.com; Telephone: 954-564-2246; Address: 1620 West Oakland Park Boulevard, Suite 300, Fort Lauderdale, Florida 33311; Email: email@example.com.