Non-competition, Non-solicitation and Confidentiality Agreement

Summary

This template Non-competition, Non-solicitation and Confidentiality Agreement can be used by an acquiring company that intends to hire or retain employees of the target company in connection with an acquisition. This template can be included in a written employment agreement or in a standalone agreement. This template includes practical guidance and drafting notes. The buyer in an M&A transaction may, following the transaction, hire former employees of the seller to work for the newly acquired target. In an effort to ensure the success of the target, the buyer may seek to include various protective measures to limit a hired employee from competing with or otherwise disrupting the target business once the transaction has closed. Such measures, which may be addressed in an ancillary agreement such as the one below, include: (1) non-competition, which prevents an employee from competing with the business of the target; (2) non-solicitation, which prevents an employee from hiring key target personnel in order to establish a competing business; (3) non-disparagement, which prevents an employee from harming the target's reputation; and (4) confidentiality, which prevents an employee from disclosing sensitive information acquired during its employment at the target's business and prohibits the use of such information in a competing business. This type of multipart agreement is often referred to in practice as a "non-compete agreement," due in part to the relative importance of that particular measure. This template contemplates an employment relationship arising from the acquisition of all or substantially all of the business and assets of the target company, in which the buyer will operate the acquired business and the employee will be involved only with the acquired business. Counsel should craft this template in accordance with the specific laws of the states involved, particularly the state law applicable to the agreement, and consider any state or federal regulations that may impose confidentiality obligations on the parties due to the nature of the business or confidential information involved. Practitioners should also note that the U.S. Federal Trade Commission (FTC) announced the issuance of a final rule banning the use of non-compete clauses between employers and workers. The final rule will be effective 120 days following its publication in the Federal Register, but is available on the FTC's website until then. Whereas the proposed rule published on January 19, 2023 contemplated only a narrow, limited exception for non-compete covenants entered into by sellers in M&A deals that were "substantial" owners or partners (i.e., owners of at least 25% of the target business), the final rule provides a broader exception for any non-compete entered into pursuant to a bona fide sale of a business entity. Compare Non-Compete Clause Rule, 88 Fed. Reg. 3482 (proposed January 19, 2023) (to be codified at 16 C.F.R. pt. 910) with the final rule text to be codified at 16 C.F.R. § 910.3(a). Notably, the final rule does not exempt executives and other highly compensated employees (i.e., senior executives with policy-making authority and total annual compensation of at least $151,164) from the non-compete ban, though it does permit the enforcement of existing non-competes with such individuals. See the final rule text to be codified at 16 C.F.R. § 910.2(a)(2). For a full listing of related ancillary agreement content, see Ancillary Agreements in M&A Transactions Resource Kit. For more information, see Non-Competition, Non-Solicitation, Non-Disparagement, and Confidentiality Agreements in M&A Deals. For a template non-competition agreement that includes non-circumvention provisions, see Confidentiality, Non-Disclosure, and Non-Circumvention Agreement (Unilateral, Pro-Disclosing Party). The following map identifies in orange the states that mostly prohibit employee non-competition agreements and in green the states that prohibit non-competition agreements for low-wage workers: Visualization of Employee Noncompete: State Limitations (current as of September 1, 2023).