The FTC’s New Non-Compete Rule: Implications for M&A and Internal Ownership Transitions

The Federal Trade Commission’s (FTC) recent ruling on non-compete clauses has significant implications for businesses, particularly those engaged in mergers and acquisitions (M&A) or internal ownership transitions. This blog post provides a concise analysis of the ruling’s impact on these scenarios.

The FTC’s Non-Compete Rule: A Recap

The FTC’s new rule restricts employers from enforcing non-compete agreements with most employees. This represents a major shift in the legal landscape surrounding non-competes. However, the rule includes an exemption for non-competes associated with the sale of a business.

Impact on M&A Transactions

For businesses involved in M&A transactions, the FTC’s ruling offers some clarity. Non-compete clauses included in such agreements are likely to remain enforceable. The rationale behind this is that these clauses are considered part of a negotiated agreement between a willing buyer and seller.

Impact on Internal Ownership Transitions

The situation becomes less clear when considering internal ownership transitions, such as a departing owner selling their shares or a buy-sell agreement. The enforceability of non-compete clauses in these scenarios is uncertain under the new rule. The lack of a clear buyer-seller dynamic often present in M&A transactions raises questions about the enforceability of such clauses.

Key Considerations for Businesses

• Review Existing Agreements: Businesses should review all existing employment contracts and agreements containing non-compete clauses to ensure compliance with the FTC’s ruling.
• Consult with Legal Counsel: Given the complexities surrounding the new rule, seeking guidance from qualified legal counsel is crucial. An attorney can help businesses navigate the specifics of the ruling and determine the enforceability of non-compete clauses in their unique situations.
• Alternative Strategies for Employee Retention: With the potential limitations on non-competes, businesses may need to explore alternative methods for retaining talent. This could involve implementing competitive compensation packages, robust professional development opportunities, or attractive bonus structures.

Conclusion

The FTC’s non-compete rule presents both challenges and opportunities for businesses. While the enforceability of non-compete clauses in M&A transactions appears secure, internal ownership transitions raise questions. By seeking legal counsel and exploring alternative talent retention strategies, businesses can effectively adapt to this evolving legal landscape. Proactive planning is critical when it comes to avoiding challenges related to M&A and ownership transition. If you’re considering any of these paths, don’t hesitate to contact us for expert guidance and support.