DealLawyers.com Blog

May 4, 2018

Appraisal: Dissenting Your Way Out of a Non-Compete?

This recent blog from Peter Mahler flags an unusual case from Colorado involving a shareholder-employee who dissented from a merger – and successfully argued that, as a result, the surviving corporation should be barred from enforcing his non-compete with the acquired company.

Crocker v. Greater Colorado Anesthesia (Colo. App; 3/18), involved a physician-shareholder of a medical practice that was acquired in a merger.  The physician was a party to a 2-year non-compete.  He dissented from the merger and obtained employment with another practice in the geographic area covered by the non-compete. He sought an appraisal of his shares under Colorado’s corporate statute, and the buyer sued to enforce the non-compete and obtain liquidated damages.  The trial court concluded that it was unreasonable to enforce the non-compete against a dissenting shareholder “forced out” of employment by the merger.

The Colorado appellate court affirmed the trial court’s ruling.  This excerpt from the blog summarizes the Court’s rationale:

The appellate court affirmed across the board. Its analysis of the statutory and contractual interplay began with the general rule relied upon by New GCA’s argument, that the rights and obligations of the merging entities vest in, and are enforceable by, the surviving entity. But the general rule did not prevail in Crocker, the court went on to hold, because under Dr. Crocker’s agreements with Old GCA his shareholder and employee rights were inextricably interwoven. Here’s what the court wrote:

[W]e do not agree that the district court erred by considering Crocker’s exercise of his dissenter’s rights when determining that Crocker was no longer bound by the Agreement upon the merger. GCA urges a pure contract law analysis, arguing that Crocker’s statutory rights as a dissenter apply only to Crocker’s shareholder rights and not to his rights as an employee. But under the terms of his agreements with old GCA, Crocker’s shareholder rights are wed to his rights as an employee.

Indeed, the Agreement, which incorporates by reference the Corporate Stock Sale Agreement, does not permit Crocker to be an employee and not a shareholder. And the Corporate Stock Sale Agreement, which incorporates by reference the Agreement, does not permit Crocker to be a shareholder and not an employee. Accordingly, when he exercised his dissenter’s rights, Crocker was forced to cease his employment with GCA. Thus, we cannot construe the enforceability of the Agreement without consideration of Crocker’s rights as a dissenter.

The court acknowledged that it was writing on a blank slate, noting that neither the parties nor the court itself found “any authority evaluating the enforceability of a noncompete provision under similar circumstances . . . in this or any other jurisdiction.”

The Court concluded that enforcing the non-compete would be unreasonable, and would “further penalize Crocker’s exercise of his right to dissent, rather than protect him from the conduct of the majority” in pursuing a merger.

John Jenkins