Tag: buy-sell agreements

Non-Competition Agreements Finally Demystified

Greg HarrisLeave a comment

On October 1, 2018 a new law was enacted that will have extensive legal as well as every-day consequences for all companies with employees and contractors in Massachusetts. This new law governing non-competition agreements puts employers in a complex place, forcing them to examine the way their non-compete agreements are now executed, and potentially needing to revamp their older ones to make sure they are compliant.

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Simply put, a non-competition agreement is an agreement between two parties under which one of the parties agrees that he or it will not engage in certain specified activities competitive with the other party.  Non-competition arrangements may typically be found when two parties enter into a supply agreement, an acquisition, or in the employer-employee context, which is the focus of the new law.  With this new Act, employers are much more limited in what and when they can impose on their Massachusetts workers and independent contractors, and the cost to them.

For a non-competition agreement to be effective, the non-compete must now protect a legitimate business interest, not exceed one year, and be reasonable in geographic scope and prohibited activities.  Some exceptions still exist, such as non-compete agreements stemming from the sale of a business; non-compete agreements stemming from

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separation of employment (provided the employee is given seven business days to rescind acceptance); employee non-solicitation covenants; customer/client/vendor non-solicitation covenants; and non-disclosure of confidential information agreements.

 

The new law also differentiates between non-compete agreements entered into prior to the start of employment versus those that are drawn up during the course of employment.  Prior to the commencement of employment, the agreement terms must:

  • be in writing;
  • be signed by both the employer and employee;
  • expressly affirm the employee’s right to consult with counsel prior to signing; and
  • be provided to the employee before a formal offer is made

Alternatively, if a non-compete agreement is produced during the course of employment, though not related to the employee’s separation from the company, the agreement must

  • be supported by fair and reasonable consideration;
  • be provided at least 10 days prior to the effective date;
  • be in writing;
  • be signed by both the employer and employee; and
  • state that employee has the right to consult with counsel before signing.

If a non-compete is found to be in violation of this new law, courts will either reform an overly broad agreement or otherwise void the provision altogether.

As a result of the enactment of the new non-competition law, all employers who maintain non-competes for Massachusetts employees should consult with qualified employment counsel to determine if their current contracts are still operable, and also to draft comprehensive boilerplates for new agreements.  Contact us to find out more on this important subject as this is just a sampling of the requirements of the new laws.

 

 

Partner Agreements – But We’re Getting Along So Well!

Greg HarrisLeave a comment

It doesn’t matter if you’ve formed a corporation, LLC, partnership or some other form of entity.  And it doesn’t matter where you’ve formed your entity or for what reason you’ve formed it.  More likely than not, you have a partner or partners (or members or shareholders).  And whether there are two of you or 20 of you, when the business first starts, everyone is of like mind. Everyone gets along.  But inevitably, the business is successful or unsuccessful, and the result is that the partners want more, or they want less. The discussion below outlines legal and business issues that the founders of a new venture may want to consider in structuring relationships with one another.

Partners always want to know who is in charge.  Control of the business entity is sometimes determined by the nature of the partners themselves.  I have one software client with two members.  One member writes the code and one member runs the company and seeks funding. This system works well for them.  On the other hand, I have other clients where the partners are truly equal.  Who’s in charge then?  Even though partners are equal, consideration needs to be given as to whom ultimately makes the decisions.  Deadlock and corporate dissolution is no way to go through a business life cycle.  And the draconian solutions (Dutch Auction, Russian Roulette or Texas Shoot Out) are truly extraordinary solutions that should be avoided at all costs.

One of the other issues that new clients overlook when we talk about their new venture is the outcome of a voluntary or involuntary transfer of ownership interest.  Whether in a Buy-Sell Agreement, a Cross Purchase Agreement or just a good old fashioned shareholders or members agreement, the partners need to decide whether the Company and the other partners have the right to buy out the other partner if they want to (or have to) sell.  What happens if a partner dies, becomes disabled, no longer works full time, gets divorced or goes bankrupt?  The Company and the other partners may decide that that partner’s ownership stake must be repurchased.  And repurchased at some measurable value.  I often counsel my clients through these myriad of decisions.

The final issue that we often discuss at our initial partners’ meeting is the protection of the Company.  I represent the Company and it is just as important to me that the company is protected from the partners themselves.  Protections can take the form of a stock restriction agreement or an employment agreement, but I always recommend that the partners’ ownership interests are subject to vesting and/or repurchase rights based on employment with the Company.  I also want the partners to agree not to compete with the Company, not to solicit its employees or clients to keep all information (IP, business plans and otherwise) confidential and to assign all intellectual property rights to the company.

These are just a few of the considerations that partners should be thinking about.  Of course, every industry is different.  A gym or yoga studio has different needs than a restaurant or software company, but the partners agreeing to work with one another in good faith on issues like these above are universal in every business.  Contact me to discuss your business’s partnering needs.