One of the most overlooked yet critical aspects of any M&A transaction is the restrictive covenants section. These are clauses that can follow you long after the deal is done, sometimes turning a profitable exit into a frustrating limbo.
One of the areas that buyers are most concerned about is protecting the value and the goodwill they are paying for. To prevent you from competing with the business after the sale, buyers often include restrictive covenants in the sale and purchase agreement (SPA). These covenants are promises you make to not engage in certain activities after the deal closes. While they are there to safeguard the buyer’s investment, sellers need to be aware of how these restrictions might impact their future plans.
Here we explore the most common restrictive covenants you might encounter and things you should consider before signing the SPA.
Common types of restrictive covenants
These covenants limit what you can do after the sale, and they generally fall into a few key categories:
- Non-competition: This prevents you from starting or joining a business that directly competes with the target business.
- Non-solicitation/ non-dealing: You are prohibited from reaching out to or engaging with the clients or customers of the target business.
- Non-poaching: You cannot recruit or hire employees from the target business.
- Reputation: You cannot use a name that is similar to the target business name or anything that might confuse others into thinking you still own the business.
What do the courts say?
- In the UAE, restrictive covenants must be reasonable in scope, geography and duration to be enforceable. The UAE, DIFC and ADGM courts lean toward balance – if a clause is too broad or unfairly stifles economic freedom, it might not be enforced.
- That said, don’t rely on court challenges as your safety net. Litigation is expensive, time-consuming and can damage reputations.
