Restrictive Covenants
Contractual restrictions preventing sellers from competing with, soliciting from, or interfering with the sold business.
Full Definition
Restrictive covenants are contractual provisions that limit the seller's activities after completion to protect the value of the business being sold. They prevent the seller from undermining the acquisition.
Common restrictive covenants: 1. Non-compete: Cannot engage in competing business 2. Non-solicitation: Cannot solicit customers or suppliers 3. Non-poaching: Cannot recruit employees 4. Non-dealing: Cannot do business with customers 5. Confidentiality: Cannot use or disclose confidential information
Typical terms:
- Duration: 2-3 years (longer may be unenforceable)
- Geographic scope: Relevant markets/territories
- Activity scope: Specific competing activities
- Named individuals: Key sellers and managers
UK enforceability requirements: Restrictive covenants must be:
- Protecting a legitimate business interest
- Reasonable in scope, duration, and geography
- Not against public interest
Narrowly drafted covenants are more likely enforceable. Courts may strike down excessive restrictions entirely rather than modify them.
Negotiation points:
- Scope of restricted activities
- Territory definitions
- Duration (often linked to earn-out period)
- Carve-outs (existing investments, passive investments)
- Garden leave set-off
Related Terms
Share Purchase Agreement (SPA)
The definitive legal contract governing the sale and purchase of shares in a company.
Completion
The legal transfer of ownership when all conditions are satisfied and the transaction formally closes.
Earn-out
Contingent payments to the seller based on the business achieving specified future performance targets.
Warranties
Contractual statements by the seller about the business, breach of which may entitle the buyer to damages.