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Sale of a Business – North Carolina Courts May Do More Than Just Use Their Blue Pencils When Considering a Non-Compete Clause

Friday, November 7th, 2014

By:  John N. Fleming

Non-Compete clauses have long been an important part of transactions involving the purchase of a business.  Much of what is often purchased in a business acquisition includes the relationships, contracts and goodwill built-up and established by the seller.  Often, the non-compete restrictions imposed upon and agreed to by the seller and its owner protect and preserve the value of what is being purchased. 

North Carolina courts have held that a non-compete restriction that is part of the sale of a business is valid and enforceable if the written non-compete restriction: (1) is reasonably necessary to protect the legitimate interest of the purchaser; (2) is reasonable with respect to both time and territory; and (3) does not interfere with the interest of the public.  Further, traditionally in North Carolina, when courts have been asked to interpret overly-broad restrictive covenants, they have been limited to applying what is called the strict blue pencil doctrine.  Under the blue pencil doctrine, a court may cross out or choose not to enforce a distinctly separable part of a covenant to render the remainder of the provision reasonable.  However, under this theory, a court may not otherwise revise or rewrite the restrictive covenant to make it reasonable.  

Recently, in the case of Beverage Systems of the Carolinas, LLC  v. Associated Beverage Repair, LLC, Ludine Dotoli and Cheryl Dotoli, the North Carolina Court of Appeals went beyond, the  strict blue pencil doctrine because the buyer and seller had expressly granted the court the power to revise the restrictive covenant in the asset purchase agreement.  More specifically, the non-compete clause in the agreement gave the court the authority to revise the restrictive covenant to cover the maximum period, scope and area permitted by the law.  The North Carolina Court of Appeals found that the trial court had the power to revise the restriction regarding territory to make it reasonable and thus enforceable.  As a result of this decision, and when expressly directed by the buyer and the seller, the court could do more than cross out a distinct provision, but it could now revise or re-write a restrictive covenant to determine reasonableness.  It is important to note that this expansion of a court’s authority from the limitations of the blue pencil doctrine to allowing revisions by the court is limited to the interpretation of restrictive covenants that are part of the sale of a business and in situations where the purchaser and seller expressly grant the court such authority.  At present, the expansion of a court’s authority so that it may revise a restrictive covenant has not been interpreted in the context of an employment agreement.      

Although this expansion of court authority has yet to be interpreted by the North Carolina Supreme Court, it does have implications for buyers and sellers of businesses and their attorneys.  When negotiating the agreement to buy or sell a business, attention should be placed on whether a clause should be included to empower the court to revise an otherwise unenforceable provision of a restrictive covenant.  Including such a provision may result in a court revising an overly-broad restrictive covenant and preserving for the buyer the value of what was purchased.

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John Fleming is a general practitioner in corporate law with an exceptional knowledge of Health Care Law.  For help concerning the sale or purchase of a business, or for more information, contact John Fleming at jfleming@mwbavl.com or (828) 254-8800.

Posted in Business Purchase/Sale Transactions, Mergers & Acquisitions, Non-compete Provisions, Small Business | Comments Off on Sale of a Business – North Carolina Courts May Do More Than Just Use Their Blue Pencils When Considering a Non-Compete Clause

A Few Key Issues In Review and Approval Of Non-Disclosure Agreements

Wednesday, September 17th, 2014

By Thomas C. Grella

The following is not intended to be a comprehensive review of non-disclosure agreement (sometimes also referred to as “confidentiality agreements”), and should not be taken as an indication that these are the only issues to be concerned with in review of such agreements.  Even though it is always recommended that non-disclosure agreements be reviewed by a qualified licensed attorney, to follow are a few common issues or concerns regarding typical non-disclosure agreements that you might consider as you make your preliminary review or analysis.

  1. Unilateral vs. Bilateral Agreement. There are basically two types of agreements.  The unilateral agreement is one where one party will be providing the information, and the other will be receiving information, and the party providing information is the only party with an interest to be protected in the agreement.  The bilateral (or mutual) agreement is used where both parties may be providing information to each other (such as, for example, in merger negotiations) and therefore both parties have an interest in protection. This type of agreement between parties may come in the form of stand-alone agreements (a document entitled “Non-Disclosure Agreement”, for instance), or they may come as one provision, or a series of provisions, found within a larger contractual agreement (such as an employment agreement or an asset purchase agreement).  The determination of which type of agreement to use (unilateral or bilateral) will depend upon the circumstances, however presentation of a unilateral agreement from the other party in a contract negotiation should not be assumed to be the correct form that is required.  Many situations may seem like circumstances where only one party needs confidentiality protection, however each party should closely examine their interests, and if there is any doubt, this is one type of agreement where the party with a greater interest in obtaining protection is likely to allow an agreement that reciprocates protection.
  2. Description of Confidential Information.  In many cases, the definition of the “confidential information” to be protected can be the longest paragraph in a non-disclosure agreement.  Though it is fair for the party desiring protection to include all of the possible types of information that might be disclosed, those being are asked to sign these types of agreements should be careful to assure that the descriptions are not too broad or vague.  
  3. Covenant of Non-Use.  Each non-disclosure or confidentiality agreement can be expected to have terms where one or both parties agree not to disclose to third parties information obtained, and to return information received once the term of the agreement is terminated or expires.  Agreements among competitors (such as in merger negotiations) should also contain terms where the parties agree that they will not use the information disclosed to them by the other party.  In addition, but related, every non-disclosure agreement should clearly spell out the purpose of the disclosures (ie. merger negotiations, employment negotiations, business sale, etc.); and it should be a narrowly defined purpose.  A properly defined, and very specific, purpose provision might also be the basis for restricting unintended future use of information by a competitor. 
  4. Exclusions from Disclosure Agreement. To follow is a typical provision that is usually found in every agreement:

“Confidential Information shall not include any information which (i) is or becomes available to the public other than as a consequence of a breach of any obligation of confidentiality; (ii) is or becomes known, from a source other than the Party hereto to which it belongs and without breach of any obligation of confidentiality by the other Party hereto prior or subsequent to its receipt from the Party to which it belongs; or (iii) is independently developed by either Party hereto without reference to any information disclosed pursuant to this Agreement.”

 These types of exclusions are very broad. It can be difficult to prove they do not exist. A party to such an agreement might desire to protect its interest by adding one or more conditions to the operation of the exclusions.  Some conditions to consider as requirements to be provided to the party otherwise protected by the terms of the Agreement prior to disclosure are: 1) prior notice of any proposed disclosure, 2) submission of documentary evidence proving a basis for application of the exclusion, and 3) a requirement that the party making a disclosure be able to show that the exclusion was necessary and is defensible upon some elevated evidentiary standard of proof.       

Please feel free to contact any one of our Corporate Practice Group attorneys  if you should be in need of help in interpretation or review of a non-disclosure agreement (or a confidentiality provision within a legal document).  http://www.mwbavl.com/businesscorp.php.

Posted in Business Purchase/Sale Transactions, Intellectual Property, Mergers & Acquisitions, Non-disclosure Agreement, Small Business, Uncategorized | No Comments »

PLANNING FOR THE SALE OF YOUR BUSINESS: LEGAL CONSIDERATIONS

Thursday, January 30th, 2014

By: JOHN N. FLEMING

As an attorney who has assisted clients with the sale of their businesses or the purchase of new businesses, I have observed that the process of selling a business can go more smoothly and can result in more money for the seller if the seller plans for the sale or otherwise considers certain legal issues in advance. I have set forth several areas of pre-sale legal planning that a seller should investigate well in advance of any sale to help maximize the value received.

Advisors: Prior to selling your business, visit with your accountant and attorney to discuss the specifics of your business and a general timeline and deal structure that you can expect. You may also consider visiting with a business valuation advisor, a business broker and an estate planning attorney.

Type of Entity: The type of entity, whether it is a corporation, sole proprietorship, limited liability company, or partnership and the applicable tax-election, whether it be subchapter C, subchapter S or other pass-through classification, will have a great impact on the overall deal structure. You should meet with your advisors to understand the implications of these issues. Does your structure maximize value? Can anything be done to maximize value by planning ahead?

Deal Process: In the typical sale transaction, the following documents and steps are often utilized: (1) The potential buyer often enters into a Nondisclosure Agreement pursuant to which the buyer agrees to keep the information confidential, to return the information when finished and to only utilize the information for the evaluation of the business and the due diligence process; (2) The buyer and seller often enter into a non-binding Letter of Intent pursuant to which the basic deal terms are agreed to and which restricts the seller from talking to other potential buyers during the continuing sale process; (3) The parties negotiate an acquisition agreement such as an Asset Purchase Agreement, which is the critical document containing the terms of the actual transaction; and (4) Ancillary documents such as a Non-Compete Agreement, Promissory Note, Security Agreement, Escrow Agreement and Consulting Agreement may be utilized as well. Review the process with your advisors.

Deal Structure: Typically a business is sold either through the sale of the stock in the company or through the sale of its assets. Often, the buyer prefers an asset purchase transaction to attempt to isolate and leave the unwanted liabilities with the seller and to receive a step-up in the basis of the assets purchased. In an asset purchase, the specific assets that are purchased are identified along with the specific liabilities to be assumed. Alternatively, in a stock sale, unless otherwise stated, the purchaser generally receives everything the company owns including its assets and liabilities. Discuss the types of deal structures with your advisors. What structure would be best to maximize your value? What structure would attract more buyers and what structure is the most realistic to expect?

Review Documents: Meet with your professional advisors and review sample documents that would govern a potential transaction. For example, in an asset purchase agreement, the seller will be expected to make certain representations to the buyer relating to the business such as litigation, taxes, compliance with law, financial statements and ownership of assets. Do your answers maximize value or communicate complexity, disorganization, and problems and issues that lower value? Discuss what you would need to disclose. In addition, are you willing to be subject to restrictive covenants, including a non-compete, non-piracy or non-solicitation agreements? These agreements add or preserve value for a potential buyer and are often expected.

Taxes: Discuss with your attorney or accountant the tax consequences of the transaction so that you can maximize what you receive. Once again, the type of entity and the applicable tax election will both impact the deal structure, deal flexibility, taxes due upon sale and how much the seller receives and keeps. Additional tax issues, among others, include the amounts allocated to the assets being purchased and the estate taxes that apply with respect to the seller’s plans for his or her family.

Company Cleanup: To attract and keep potential buyers interested, review your corporate records and minute book to make sure that they are complete and accurate. Sloppy or incomplete records communicate the wrong message. Consider separating your personal items, if any, from the company. Are there personal assets that have become intertwined with the business? Perhaps the company owns a house or boat or artwork that needs to be segregated from what will be sold or otherwise impacts the operational performance of the company. Should land be separated from the business and held in a separate entity which leases the property back to the company? Conduct a lien search on yourself and the company to see what is on file. Perhaps a financing statement relating to an old paid-off loan hasn’t been terminated. Have your advisors review your records with you.

Contracts: Inventory all of your material relationships and contracts. As part of the due diligence process that the buyer will require, the buyer will expect lists and copies of these documents. Review your business to see if you can formalize personal relationships that can be valuable to the buyer. Do you have written contracts with your customers or are they based on course of dealing and history? Can these important contracts be assigned to a buyer or do you need the consent of a third party? Consider the use of employment contracts with non-compete clauses and restrictive covenants for key employees if they are appropriate and add value. Analyze your customer base and supply chain and whether the relationships are reflected in contracts that can be assumed by a buyer.

Estate Planning: Is your estate planning in order and what are the implications of the transaction on your estate planning? Can your estate planning goals be achieved with pre-sale estate planning efforts?

 Business Valuation: What are your expectations regarding how much you should receive in a sale? Discuss with your accountant and attorney the value of seeking a rough or more specific business valuation. A business may be valued a number of ways including the value of the assets, use of benchmarks and multiples related to sales or revenue and the use of earnings multiples. Your advisors may also have worked with business brokers that have successfully assisted their clients in sale or purchase transactions.

Shareholder/Owner Issues: How many owners are there? Are all of the owners or a majority in agreement that the sale should occur? Are their shareholder agreements that are in place? State law may provide that the sale of substantially all of the assets will trigger appraisal or dissenter’s rights for the shareholders of the company. Your attorney should be consulted regarding these issues.

Approval Process: What approvals are necessary to sell your business? In the case of a typical corporation, the applicable state statutes along with the Articles of Incorporation and Bylaws set forth the framework for approval. Generally, in the context of the sale of a business, a sale of assets would be characterized by state law as a sale of “all, or substantially all” of the assets “other than in the usual and regular course of business” and approval must be obtained from the Board of Directors and Shareholders of a selling company. Also, have you entered into agreements or loans or mortgages that are implicated by a sale, restrict a sale or require a third party to approve the sale? Speak with your attorney regarding the approval process necessary to complete the sale transaction.

Conclusion: As with most things, a little planning can help a seller maximize the value received and otherwise make easier what is often a difficult experience. If selling your business is a possibility or a goal, then planning ahead is a wise investment. When forming an entity and starting a business, it is not unwise to even ask at that time what your exit strategy will be. Often it is the sale of the business. While the aforementioned list is not exhaustive, consideration of these issues ahead of time will help you when it comes time to sell.

For help concerning the sale or purchase of a business, contact John at (828) 254-8800, or for more information, please visit http://www.mwbavl.com/attorney?id=13#details.

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John Fleming is a general practitioner in corporate law with an exceptional knowledge of Health Care Law.  John has been named to the 2014 Business North Carolina magazine’s Legal Elite list of the top lawyers in North Carolina and was named in the in Corporate Counsel category. The Legal Elite recognizes the top lawyers in the state in specific business-related practice areas as voted by their peers, and only about 3% of the state’s attorneys are awarded the distinction.

 

 

 

Posted in Business Purchase/Sale Transactions, Estate Planning, Limited Liability Companies, Small Business, Taxation | No Comments »

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