Business Owner Rights
Non-Solicitation & Non-Compete Agreements in Shareholder Disputes
Published Date: February 28, 2022
It is common to include non-compete and non-solicitation provisions in operating, shareholder or partnership agreements. When there is a dispute, these provisions contain limitations on the parties to the relationship in terms of what can and cannot be done in the way of competition if a member or shareholder departs the business.
This prevalence is consistent with a recent study by the Economic Policy Institute. Concluded in December 2019, the report found approximately 36 million private-sector American workers have signed non-compete agreements. These agreements limit their ability to leave their jobs for new ones.
Enforceability of Agreements
Generally, New Jersey law disfavors non-compete agreements. However, their enforcement can happen in the context of a shareholder agreement, LLC agreement, or partnership agreement. This is particularly true during the sale of a business. Especially when significant financial remuneration was exchanged for the restraints.
The strategy for enforcing such provisions varies depending on the facts and circumstances of each case. The same applies to avoid such provisions when representing a party leaving the business who wishes to compete. As a general rule, if you are the party seeking to enforce the agreement against a departing partner, member or shareholder, you cannot violate the underlying agreement yourself. There is an argument that once the shareholder, LLC or partnership repudiates the agreement, the obligations to perform by the departing shareholder end.
And, as in every case dealing with non-compete or non-solicitation agreements, enforceability depends on the restraints contained in the agreement. Both geographic and temporal limitations are important issues. Likewise, whether the business has a legitimate need to restrain a departing employee or is merely seeking to stifle competition.
New Jersey is a blue pencil state. This means that a Judge reviewing the agreement for enforceability can scale it back making it enforceable. It is important that there be no delay in seeking to enforce rights under such an agreement. Additionally, the employer/company must consistently enforce such rights against others with similar agreements.
We have represented numerous physicians leaving a practice. For physicians, dentists and others in a similar situation, the analysis can be quite different. This is due to the public policy considerations involved (the patient’s right to a provider of her choice).
Lastly, a shareholder, member, or partner who departs a business even without such restraints in a written clause of a contract must take care not to violate common law duties that may exist in favor of the company or partnership not to divert opportunities or damage the client base of the company or partnership. All of these factors must be considered carefully when planning to exit a company where you own shares, an interest, or are a partner.
Please contact me if you have any questions about this blog or other shareholder dispute issues.