Lexpert magazine features articles and columns on developments in legal practice management, deals and lawsuits of interest in Canada, the law and business issues of interest to legal professionals and businesses that purchase legal services.
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84 LEXPERT MAGAZINE | NOVEMBER/DECEMBER 2017 TECHNOLOGY | COLUMNS | George Takach is a senior partner at McCarthy Tétrault LLP and the author of Computer Law. For instance, if aer the deal closes a third party appears and argues (success- fully) that they own a portion of the so- ware code used by the Target, then it will be up to the sellers to pay some amount of the purchase price to this third party to settle their ownership claim. In short, the overall result of the Reps and the indemni- ty regime is that the sellers are responsible for any problems with the Target's business that arose prior to the time you purchased it. at would include claims related to the title to the soware (as in the example giv- en above), but it would also cover any tax or errors in the Target's financial statements. In short, the sellers are responsible for all problems or issues that arose in the Target company prior to the date you purchased the Target, while your responsibility com- mences on the closing date. e PA there- fore keeps the sellers responsible for adverse matters that arose while they ran the Target. CRAFTING A REASONABLE NON-COMPETE PROVISION It is very typical that the sellers — or at least those who are active in the management of the Target — agree to a covenant in the PA not to compete with the Target aer the sale for a specified period of time (the "non-compete period"). e rationale for this non-compete clause is fairly straight- forward: buyers wouldn't pay good money for the shares or assets of another company if the persons receiving the purchase price proceeds could simply turn around the day aer closing and start a competing com- pany. In other words, by paying the seller a bunch of money, the buyer is purchasing a period of exclusivity during which it can expect the seller not to show up in the mar- ketplace competing against the buyer. Courts generally uphold these sale-of- business non-competes as long as they are craed within reasonable constraints, in- cluding the restriction's scope not extend- ing beyond the business of the Target at closing — in terms of type of activities and geographic scope of the Target's customers — and that the duration of the non-com- pete is in the range of two to five years. Draing enforceable sale-of-business non-compete clauses in the digital era is getting trickier. Say, for example, you are buying a Target that is in the fintech (short for "financial technology") space, and so your initial inclination in the non-compete clause is to have the sellers not compete in the fintech space for a certain period of time. In popular usage, fintech refers to a broad range of activities that financial in- stitutions and others engage in digitally. You may therefore be advised to get quite granular in your specific definition of the particular restricted submarket within fintech, in order to increase the likelihood that your non-compete will stand up in court if it is ever challenged. As for duration of the non-compete, it can make sense for differently placed sell- ers to agree to different terms of duration: namely, shareholders who get more pur- chase price proceeds would sign up for lon- ger non-competes. So, a shareholder who gets only $500,000 of the purchase price signs a non-compete of a shorter duration than one who gets $5 million. In effect, one size doesn't necessar- ily fit all. FROM STICKS TO CARROTS While a non-compete clause may keep a particular selling shareholder who joins your organization from pulling up stakes to go to the competition for a certain pe- riod of time aer the closing, it won't stop them from leaving you altogether (and thereaer engaging in some sort of non- competitive activity). In other words, in or- der to keep high-performance people gain- fully engaged aer the closing, you have to create a very attractive work environment for them (and I don't just mean by offering lots of perks at the office). at means that the quality of work and nature of the proj- ects they work on have to be sufficiently ex- citing to ensure that they will stick around. is is true of just about everybody who joins your organization nowadays who has impressive digital credentials, because they have so many employment options in Can- ada and around the world (especially in the United States). But this scenario is ampli- fied aer you have just paid several million dollars to someone because you bought their business; now they are able to become quite selective about where and with whom they work. is means you must create an environ- ment for these soware engineers and data scientists that is both engaging and reward- ing financially. ey need to be constantly working on state-of-the-art projects that are leading edge — projects that give them significant "psychic income." But then don't forget to give them financial incen- tives that are appropriate for people of their stature and potential impact. If they can drive very significant increases in value for your organization, you have to figure out how they can share in a meaningful way in that increase in value. In short, buying the tech tuck-in com- pany is the easy part in many respects. As with all acquisitions, the challenging part is keeping and motivating the key staff who came along with the deal to ensure that they drive value to your organization long aer the closing of the initial transaction. COURTS generally uphold these sale-of-business non-competes as long as they are crafted within reasonable constraints, including the restriction's scope not extending beyond the business of the Target at closing