Executive Pay and Loyalty

Loyalty-related Issues in Business Transactions (M&A)

See also: State-specific M&A Cases re Non-competes and Loyalty Covenants / Asset Purchases

General Rules re Different Types of Transaction:  


(1) If the transaction is an asset sale/purchase, then any employment-related agreements with the seller are only assignable from the buyer to the seller if there is an express contractual permission for that. 

(2) If the transaction is a stock purchase of the seller, then all assets and liabilities transfer to the buyer, and any employment-related agreements should transfer by operation of law (as a liability). 

(3) If the transaction involves a merger of the seller into the buyer or another entity, the outcome becomes more murky, but the analysis is essentially a matter of contract interpretation. The absence of an assignability clause is not fatal, because the definition of employer can be open-ended. State law is critical to consider, but courts are inclined to resolve ambiguities against the employer, as drafter.


See, generally "Enforceability, By Purchaser Or Successor Of Business, Of Covenant Not To Compete Entered Into By Predecessor And Its Employees" (
12 A.L.R. 5th 847, §16).

2012.June.12 General M&A Issues re Benefit Plans and Employment - See Morgan Lewis Article.
    • "RM did not assume the top hat plan's liabilities; nor, so far as appears, did it connive with Rand McNally to deprive participants of their top hat benefits; nor was it (again so far as appears) a mere continuation of Rand McNally under another name. So Feinberg has not made a case for successor liability-at least under the conventional common law principles of successorship liability summarized above. The first [condition for successor liability] is that the successor had notice of the claim before the acquisition . . . . The second condition is that there be substantial continuity in the operation of the business before and after the sale, and is satisfied if no major changes are made in that operation” Feinberg v RM Acquisition, 7th Cir. 1/6/2011.
  • Mergers
    • In general, the surviving company in a merger succeeds to the rights and obligations of the merged company, and thereby becomes entitled to enforce restrictive covenants set forth in employment-related agreements. See, e.g., Aon Consulting Inc., v. Midlands Financial Benefit Inc., 275 Neb. 642, 748 N.W.2d 626 (2008); National Instrument LLC v. Braithwaite; Corporate Express Office Products Inc. v. Phillip, 847 s. 2d 406 (Fla. 2003); Equifax Servs. Inc. v. Hitz, 905 F.2d 1355 (10th Cir. 1990); UARCO Inc. v. Lam, 18 F. Supp. 2d 1116 (D.HA. 1998); Alexander & Alexander Inc. v. Koeltz, 722 S.W.2d 311 (Mo. Ct. App. 1986).
      • 2012.Aug Ohio Sup Ct Reconsidering Acordia Decision. See 2012.May.24  Non-compete Limited on Post-Merger Basis (Ohio Ruling). The closing date of a merger triggered a termination of employment with the target company, for purposes of measuring a non-competition agreement's two year post-employment period. The merged company was accordingly not entitled to enforce the non-competition agreement beyond that two-year period, because the agreement omitted a "successors and assigns" provision and referred to service with "the Company" alone. That was the Ohio court's conclusion in Accordia of Ohio v. Frankel 
    • 2011.Sept.25 Change-in-Control Severance and Non-Compete Insights. Recent 1st and 5th Circuit decisions provide healthy reminders about two often underappreciated M&A issues, namely:
      • For Buyers: Be Careful re Carrying-forward Non-competition Protections. Given judicial skepticism of non-competes, buyers should be careful to take two steps in order to secure non-competition protections that are desired for a seller's key employees. The first involves being sure to identify those key employees of the seller for whom enforceable non-competition agreements are desired. The second involves making pre-closing changes that maximize the buyer's potential to enforce those provisions. The First Circuit's OfficeMax v. Levesque decision provides a classic lesson in buyer actions that left a loose-end that ultimately doomed enforcement of its noncompetition protections.
                        • In a nutshell, the buyer in the OfficeMax case sought to protect itself by having key employees of the seller execute non-competition agreements with the seller on the eve of the closing. Those non-compete agreements went further, by committing the employees to execute a post-closing non-compete with the buyer. When that did not occur due to refusal by the seller's key employees, the court took that as evidence that the non-compete was not intended to bind the buyer, and consequently declined to enforce it.
            • For Sellers: Document when a CIC Occurs. In Young v. Merrill Lynch, the 5th Circuit deferred to an LTIP administrator's determination that an executive's resignation for good reason needed to occur after the merger closing date, rather than after signing of the definitive agreement, in order to trigger the LTIP's change in control protections. The court's decision is not surprising, but it highlights the need for sellers to seek express terms in a merger or sale agreement with respect to CIC protections such as confirmation that the transaction constitutes a CIC for purposes of accelerated vesting and severance under all seller benefit plans and agreements. 
  • Stock Purchases
    • 2012.May.2   French Supreme Court Invalidates Non-Compete related to Share Purchase Transaction.  The buyer of a French company imposed a non-competition requirement on the seller through the share purchase agreement, but not in a separate employment agreement by which the seller because an employee of buyer.  The employee succeeded in invalidating the non-compete for being overly broad in time and geographic scope based on standard French employment law principles. More at France.
  • Damages Generally: See Phelps v. Gilbraith, Arizona Court of Appeals 2nd Div. (10/29/2010) in which an Arizona court addresses the damages payable for the breach of a non-competition provision in a sale of business context, and cites the following authority.
    • Arizona: See, e.g., McNutt Oil & Refining Co. v. D’Ascoli, 79 Ariz.28, 32-33, 281 P.2d 966, 969-70 (1955) (plaintiff may recover “all damages which flowed as a direct and immediate result” of breach); Martin v. La Fon, 55 Ariz. 196, 199, 100 P.2d 182, 183 (1940) (“gains or profits prevented and lost are a proper element from which to estimate plaintiff?s damages” in breach of contract to assign lease).
    • Idaho: Dunn v. Ward, 670 P.2d 59, 61 (Idaho App. 1983) (“The measure of damages is not the amount of profits made by the defendant, rather it is the amount of profit lost to the plaintiff because of the breach [of an anti-competition clause].”).
    • Oregon: N. Pac. Lumber Co. v. Moore, 551 P.2d 431, 435-46 (Or. 1976) (defendant?s sales “which would otherwise have been made by plaintiff . . . are a reasonable basis for estimating plaintiff?s damages).
M&A Loyalty Litigation