Non-Competition Agreement (Seller) - Enhanced Drafting Prompt

You are an experienced transactional attorney specializing in mergers and acquisitions. Your task is to draft a comprehensive Non-Competition and Non-Solicitation Agreement to be executed by a seller or seller principal in connection with an asset purchase transaction. This agreement is a critical ancillary document that protects the buyer's investment by preventing the seller from competing with the acquired business, soliciting its customers, or poaching its employees.

Document Header and Introductory Provisions

Draft a professional document header that clearly identifies this as a "NON-COMPETITION AND NON-SOLICITATION AGREEMENT." In the opening paragraph, establish the effective date of the agreement and identify the parties with precision. The "Covenantor" should be the individual seller principal or key person associated with the selling entity whose competitive activities pose the greatest risk to the buyer. The "Company" is the buyer or acquiring entity. Ensure that party names match exactly with those used in the underlying Asset Purchase Agreement to maintain consistency across transaction documents.

In the recitals section, provide essential context that establishes the business rationale for this agreement. The first recital should reference the underlying Asset Purchase Agreement, identifying the seller's business being acquired and noting that the acquisition is occurring pursuant to that APA. Include sufficient detail about the nature of the business being acquired to provide context for the restrictive covenants that follow. The second recital must clearly state that the Covenantor's execution of this Non-Competition Agreement is a material inducement and condition precedent to the Company's willingness to consummate the transaction and pay the purchase price. This recital is critical for establishing the consideration supporting the restrictive covenants and demonstrating that the restrictions are ancillary to a legitimate business transaction.

Restrictive Covenants - Non-Competition Provision

Draft a comprehensive non-competition covenant that prohibits the Covenantor from engaging in competitive activities during the Restricted Period within the Restricted Territory. The provision should explicitly prohibit the Covenantor from directly or indirectly owning, managing, operating, controlling, joining, participating in, consulting with, rendering services to, or being connected with any business, individual, partnership, firm, corporation, or other entity that is engaged in or planning to engage in any business competitive with the Company's business. Define "competitive business" with specificity, referencing the actual products, services, or business activities that constitute the acquired business.

Include appropriate carve-outs and exceptions to ensure the covenant is reasonable and enforceable. Typically, passive ownership of less than five percent of the outstanding stock of a publicly traded company should be permitted. Consider whether the Covenantor should be allowed to engage in certain non-competitive business activities or whether a complete prohibition is necessary and reasonable given the circumstances. The provision should make clear that the restriction applies to competition with the business as conducted by the Company following the acquisition, not merely as conducted by the seller prior to closing, to account for reasonable business expansion and evolution.

Restrictive Covenants - Non-Solicitation Provisions

Draft a robust non-solicitation of customers provision that prevents the Covenantor from soliciting, diverting, or attempting to divert any customer, client, or prospective customer of the Company for the purpose of providing products or services competitive with those offered by the Company. The provision should cover actual customers as of the closing date as well as prospective customers with whom the Company or the seller had active business discussions or relationships during a specified period prior to closing. Include language prohibiting both direct solicitation and indirect solicitation through intermediaries or related parties. Consider whether the restriction should apply only to solicitation for competitive purposes or should more broadly restrict business dealings with customers during the restricted period.

Draft a parallel non-solicitation of employees provision that prohibits the Covenantor from soliciting, recruiting, hiring, or encouraging any employee, independent contractor, or consultant of the Company to terminate their relationship with the Company or to accept employment or engagement with any other business. This provision should cover employees who were employed by the seller's business prior to closing and who became employees of the buyer, as well as employees hired by the buyer after closing. Consider including a definition of "solicit" that encompasses both direct recruitment efforts and indirect actions such as making known that the Covenantor is hiring or would consider hiring Company personnel. Some agreements include a carve-out for general solicitations not specifically targeted at Company employees, such as public job postings, though this should be evaluated based on the specific circumstances.

Definitions of Restricted Period and Territory

Define the "Restricted Period" with precision, specifying the exact duration of the restrictions measured from the closing date of the Asset Purchase Agreement or the effective date of this Agreement. The duration must be reasonable in light of industry standards, the nature of the business, the geographic scope of restrictions, and applicable state law. Typical periods range from two to five years, with three years being common for middle-market transactions. Consider whether different restrictions should have different durations—for example, non-solicitation of customers might extend for a longer period than non-competition restrictions. Ensure the period is justified by legitimate business interests such as the time needed to establish customer relationships, develop goodwill, or protect confidential information.

Define the "Restricted Territory" using clear geographic parameters that are reasonable in scope and directly related to the actual market area of the acquired business. The territory may be defined by radius from specific locations, by county or state boundaries, by zip codes, or by reference to the areas where the business actually operates or has established customer relationships. Avoid overly broad geographic restrictions that extend beyond the legitimate business interests being protected. If the business operates in multiple discrete locations or markets, consider defining separate restricted territories for each location. Include language clarifying whether the territory is fixed as of the closing date or may expand if the Company expands its geographic footprint during the restricted period, keeping in mind that courts generally view fixed territories more favorably from an enforceability standpoint.

Enforceability and Remedies Provisions

Include a detailed acknowledgment provision in which the Covenantor expressly acknowledges and agrees that the restrictive covenants contained in the agreement are reasonable in scope, duration, and geographic area, and are necessary to protect the legitimate business interests of the Company, including its goodwill, confidential information, customer relationships, and the value of the acquired business. The Covenantor should acknowledge that they have had the opportunity to consult with legal counsel, that they have carefully read and understand the restrictions, and that they are entering into this agreement voluntarily and with full knowledge of its terms. This acknowledgment should reference the consideration being provided, whether in the form of the purchase price under the APA, continued employment, or other valuable consideration.

Draft a comprehensive injunctive relief provision that recognizes the inadequacy of monetary damages for breach of the restrictive covenants and establishes the Company's right to seek equitable relief. The provision should state that the Covenantor acknowledges and agrees that any breach or threatened breach of this agreement would cause immediate and irreparable harm to the Company for which monetary damages would be an inadequate remedy. Therefore, the Company shall be entitled to seek temporary, preliminary, and permanent injunctive relief, specific performance, and other equitable remedies to prevent or restrain any breach or threatened breach, without the necessity of posting a bond and without proving actual damages. Clarify that the right to seek injunctive relief is in addition to, and not in lieu of, any other remedies available at law or in equity, including the recovery of monetary damages.

Include a severability and reformation provision that addresses potential enforceability concerns. This provision should state that if any court determines that any restriction is unenforceable or unreasonable in scope, duration, or geographic area, the court is authorized and directed to reform and modify the restriction to the maximum extent enforceable under applicable law, rather than invalidating the restriction entirely. This "blue pencil" or reformation language can be critical to preserving some level of protection even if a court finds the original restrictions overly broad. The provision should also include standard severability language stating that if any provision is found invalid or unenforceable, the remaining provisions shall continue in full force and effect.

Additional Protective Provisions and Signature Block

Consider including additional provisions that strengthen the agreement's enforceability and protect the Company's interests. A tolling provision should state that the Restricted Period shall be tolled and extended by any period during which the Covenantor is in breach of the agreement, ensuring that the Company receives the full benefit of the bargained-for restriction period. Include a provision addressing the Covenantor's obligations if they become employed by or associated with another business, requiring them to provide notice of the restrictions to any new employer or business associate. A non-disparagement clause may be appropriate, prohibiting the Covenantor from making negative or disparaging statements about the Company, its business, or its personnel.

Address governing law and jurisdiction, specifying which state's law will govern the interpretation and enforcement of the agreement and establishing the exclusive jurisdiction and venue for any disputes. Choice of law is particularly important for restrictive covenant agreements, as enforceability standards vary significantly by state. Consider including a prevailing party attorneys' fees provision to deter frivolous defenses and provide cost recovery for enforcement actions. Include standard provisions regarding amendments, waivers, assignment, successors and assigns, entire agreement, and counterparts.

Conclude with a signature block that includes the Covenantor's full legal name, signature line, and date. If the Covenantor is signing in a representative capacity, clarify the capacity in which they are signing. Include an acknowledgment or notarization section if required by applicable law or if the agreement will be recorded. Ensure that the signature block format is consistent with the formality of the transaction and the requirements of the jurisdiction.

Throughout the drafting process, maintain a professional and formal tone appropriate for a binding legal agreement. Use clear, unambiguous language while preserving necessary legal precision. Ensure internal consistency in defined terms, cross-references, and party names. The final agreement should be a standalone document that can be understood and enforced without constant reference to the underlying Asset Purchase Agreement, while maintaining appropriate cross-references to that agreement where necessary to establish context and consideration.