BE CAREFUL WHEN DRAFTING ASSET PURCHASE AGREEMENTS: EMPLOYMENT CONTRACTS NOT AUTOMATICALLY ASSIGNABLE

If you are the purchaser of the assets of an existing business, you have to be careful to list all the assets you are actually purchasing in the asset purchase agreement. In one case, a court held that the asset purchase agreement in question did not include employment contracts of top employees. Consequently, a top employee decided to open his own company in direct competition with the purchaser even though his contract with the selling company had a noncompete clause.

The court held that since the asset purchase agreement did not list employment contracts as assets, there was no legal transfer (or assignment) of the contract. The court also addressed the issue of whether the transfer of the employment contract with a noncompete clause without an employee’s consent would be valid against public policy.

In the case, Hedgeye Risk Management, LLC v. Paul Heldeman, et al, (District Court, District of Columbia, 2016), the issue in part was whether the defendent/employee breached a noncompete covenant in a contract he had after the selling employer sold assets to plaintiff/new company. The court held that there was no breach of contract because the asset purchase agreement did not list employment contracts as assets for transfer. Therefore, the plaintiff/acquiring company had no claim for breach of contract.

Plaintiff attempted to claim that the intent of the asset purchase agreement was to include all employment contracts. However, the court held that the terms of the contract itself determine the rights and liabilities unless the language is ambiguous. In this case, the court held that the language of the asset purchase agreement was not ambiguous, did not include employment contracts and was not subject to interpretation of a party’s intent. Moreover, it questioned whether this was the intent in this particular case.

The court stated that an assignment of an employment contract would not be automatic when a company purchases another company’s assets. Moreover, the court stated that contracts with noncompete clauses are suspect in that an employee may have a right to negate the transfer of the employment contract when there are such covenants because of public policy reasons. The court referred to other cases where it was held that a non-compete clause is personal in nature and is not assignable without an employee’s consent. An employer’s successor in interest does not inherent the contract.

In other words, courts have held that an employee may have a right not to approve the assignment of the employment contract to a successor in interest when there is a noncompete clause. The court held there is good reason for the rule in that covenants not to compete should be construed narrowly because they are a constraint on an employee’s right to earn a livelihood. The employee may not be wiling to suffer restraint on his or her employment for the benefit of the new employer.

The court distinguished an asset purchase agreement from a merger. It stated that, among other points, because the original company did not merge into the purchasing company, the purchaser company did not become a party to the employment contract.

What to take from this
When reviewing or drafting asset purchase agreement be sure to include all assets, list them, including employment contracts if the purchaser want to keep them. Moreover, due diligence is necessary on all the employment contract. Whether a contract with a non-compete clause is transferrable could be a public policy issue, negating the transfer, without an employee’s consent.  Feel free to contact me for further discussion at dbosco@boscolegal.com