DealLawyers.com Blog

A recent Mayer Brown memo discusses the advisability of considering forfeiture for competition (FFC) clauses in acquisition transactions in lieu of the more traditional non-compete agreements. Here’s an excerpt:

Under recent Delaware decisions, numerous non-competition provisions have failed to pass reasonableness muster. Given this uncertainty, we noted in a previous Legal Update . . . that buyers should consider using FFC provisions alongside or in place of traditional non-competition provisions.

Upheld only recently by the Delaware Supreme Court, FFC provisions provide that the buyer will deliver to a party a supplemental benefit (i.e., something distinct from the purchase price, such as the payment of an additional sum of cash), that can be revoked or clawed back if the party chooses to compete against the acquired company. Because FFC provisions provide an incentive not to compete and are not an absolute bar on competition enforced by an injunction, they generally are not subject to judicial reasonableness review.

If your reaction to this is “well, what if we just limit our remedy under the non-compete to damages?” instead of using a FFC provision, it looks like that’s probably not going to work. The memo points to Vice Chancellor Zurn’s letter ruling in Fortiline v. McCall, (Del. Ch; 6/25), in which she held that, because reasonableness review of non-competes is based on the restrictions to which an individual is subject and not the remedy, this kind of workaround would not avoid that kind of review.  The Delaware Supreme Court subsequently issued an order affirming the Vice Chancellor’s decision.

– John Jenkins