Mergers & Acquisitions
A Lesson for Buyers . . .
June 30, 2009
An important objective for acquirers of businesses is to protect against losses which could result if existing key employees of a target company terminate their employment and take valued customers of their employer with them at or about the close of the company's acquisition.
In Ivize of Milwaukee, LLC v. Compex Litigation Support, LLC, the failure of the buyer, Ivize, to adequately anticipate this contingency resulted in a substantial loss to the buyer. In that case, a key manager at the target company, Compex, upon being advised that he was not going to be retained by the buyer post-closing, recruited other key employees prior to the closing who, together, successfully solicited their employer's customers and stole company records and equipment. Although the Delaware Chancery Court found that the active steps taken by these key employees prior to the closing constituted a breach of the seller's representation that its business was being operated in the "usual and ordinary course of business", the court nevertheless limited the award of damages to $1.00, on the grounds that the acquirer did not present evidence which established the actual losses suffered (i.e. the difference in value between a clear shot at hiring the target employees that Ivize had negotiated and the limited opportunity to hire the employees following their defection).
The lesson to be learned from this case by acquirers is that, if key employees of the target are not employed by the acquirer or bound by enforceable non-competition agreements at the closing, a substantial part of the damages which may result from the loss of these employees and key customers may end up being borne by the acquirer, even though plans for their departure may have been laid by them prior to the closing. Since, in California, there is only a limited ability to enforce non-competition agreements against employees, acquirers may well be forced to lock up key employees through employment or consulting agreements in order to assure against such adverse results. Of course, if such an approach is adopted by the acquirer (and the closing is actually conditioned upon the employment of key employees), the acquirer is compelled to adopt a more open approach toward informing the target company's employees of a pending sale. Many professionals and CEO's are divided on the efficacy of such an approach. For example, contrast the opinions expressed in our firm's recent M&A video series by CEO's Gary Gist and Bob Brendel, in which they discuss the pros and cons of confidentiality vs. openess in the M&A process.
George P. Shenas