Non-competition agreements are commonly used in business transactions to prevent a seller from competing with the buyer after the sale. This is especially important when it comes to shareholders of a seller. These agreements ensure that the seller`s shareholders cannot form a new company or join a competing firm that would pose a threat to the buyer`s business.
A non-competition agreement is a legal document that outlines the terms and conditions of the agreement between the seller and buyer. It includes clauses that define the scope, duration, and geographic range of the non-compete agreement. For shareholders of a seller, the agreement may include additional clauses that restrict them from soliciting clients or employees of the seller.
In a sale of a company, the non-competition agreement is typically negotiated between the seller`s representative and the buyer`s representative. The agreement is usually signed by both parties before the conclusion of the transaction. A non-competition agreement can be a standalone agreement or incorporated into the sale and purchase agreement.
The duration of a non-competition agreement is typically limited to a certain period of time. The length of time is negotiated between the buyer and seller, but it is usually between one and three years. The geographic scope is also limited to a specific region or area. This is to prevent the seller`s shareholders from opening a competing business in the same area as the buyer`s business.
The non-competition agreement also includes provisions for penalties if any of the shareholders violate the terms of the agreement. The penalties may include monetary damages or injunctions to prevent the shareholder from competing with the buyer`s business. The agreement also typically includes a provision that allows the buyer to terminate the agreement if the seller`s shareholders breach the non-compete agreement.
In conclusion, non-competition agreements are critical in protecting the buyer`s investment in a business transaction. For shareholders of a seller, the non-compete agreement ensures that they cannot form a new company or join a competing firm that would pose a threat to the buyer`s business. The agreement should be negotiated carefully between the buyer and seller and should include clear provisions for penalties and termination.