On April 23, 2024, the Federal Trade Commission (“FTC”) voted to issue its final rule prohibiting almost all forms of non-competes with employees, both those entered in the past and those to be entered into in the future.
Under the final rule, a non-compete clause is defined as a term or condition of employment that either prohibits a worker from, penalizes a worker for, or functions to prevent a worker (excluding senior executives) from:
- Seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or
- Operating a business in the United States after the conclusion of the employment that includes the term or condition.
While this is seen largely as a victory for the common worker, the impact on this decision has been left many individuals and companies in the mergers and acquisitions sector (“M&A”) unsettled. Typically, in an M&A deal, the value of a company or asset being sold is determined in part by the existing intangibles it possesses. These would include things such as intellectual property, key employees and their respective expertise, and contacts. In the past, many of these intangibles were protected by employers through agreements such as non-competes, ensuring that the intangible value of their company couldn’t walk out the door with their employees straight into the arms of their competitors.
Now, employers fear that the door has been left wide open for all their key employees to walk out and with them the company’s value at any time. What’s more, employees may view this as an opportunity to hold their employers’ metaphorical feet to the fire to meet demands or risk an employee going next door to their biggest rival. This could lead to a fundamental impact on the ability to create and maintain long-term client relationships for employers along with the company’s pool of knowledge and expertise. With these intangibles in flux, there is sure to be a marketable impact on how companies and assets are valued going forward. Buyers may become wary in transactions where key employees are vital, as there is no guarantee they will stay.
Employers will now need to shift their focus on how to ensure the company’s intangibles are protected going forward. The likelihood is that we will see far more robust non-disclosure agreements put into place, along with an emphasis on transferring the pool of knowledge and expertise throughout the company structure. More than ever, employers will now need to foster an environment that promotes retention of its employees to ensure they remain loyal and dedicated to the company.
There is a safety net for M&A companies who feel like they are free-falling since the FTC ruling. Certain non-competes between sellers and buyers of businesses in bona fide sales has been carved out from the prohibition. The rule does require that such sales are “bona fide” and conducted at arms’ length with the opportunity for sellers to negotiate terms of a sale, along with a requirement to address repurchase rights in the event of any equity granted to employees. It should be noted that there will likely be challenges in court to the FTC’s ruling, so stay tuned as information surrounding non-competes develops.
