January 20, 2023

Non-Competes: More on FTC Proposal’s Implications for M&A

I blogged last week about the FTC’s proposed rules banning most non-compete agreements & the limited exception that it provides for non-competes entered into in connection with the sale of a business.  This Hunton Andrews Kurth memo takes a broader look at the implications for M&A if the FTC adopts the rules in their current form, and summarizes some potential alternatives to standard non-compete arrangements that dealmakers may want to consider. For example, this excerpt discusses how deferred purchase price arrangements might help achieve the buyer’s objectives:

M&A purchasers and sponsors looking to retain the seller equityholders of a target may consider deferring a portion of the total purchase price as a means of retaining key selling equityholders. Deferred payment mechanisms can be structured in a number of ways, including by using seller financed promissory notes, earnouts or other contingent purchase price structures such as conditioning the payment of deferred purchase price upon achievement of certain financial metrics or employment through a certain date.

Although an earnout or deferred purchase price structure may accomplish the purchaser’s retention and competition objectives, sophisticated sellers could be reluctant to defer too much purchase price in a high-interest rate environment and will be aware of the leverage created by the Proposed Rule, if implemented, and may be reluctant to agree to such provisions, particularly if the provisions are tied to the individual’s continued employment post-closing where significant consideration is earned at closing.

In addition to describing various non-compete alternatives, the memo echoes one of the concerns that I raised – the possibility that the expansive language used in the rule could result in the FTC interpreting it broadly enough to cause certain payments that are contingent on continued employment to be de facto non-compete provisions.

John Jenkins