New Massachusetts Noncompetition Law Will Impact PE Investors

Guest post by Richard William Kidd, Edward Holzwanger, and Matthew D. Keiser – Kirkland & Ellis LLP

On October 1, 2018, a new Massachusetts noncompetition statute went into effect that will impact PE investors with offices or portfolio companies located in Massachusetts. The key provisions of the new law are set forth below.

Definition Of “Noncompetition Agreement”

The new law broadly defines “Noncompetition Agreements” as any agreement in which an employee or independent contractor “agrees that he or she will not engage in certain specified activities competitive with his or her employer after the employment relationship has ended.”  

The new law does not apply to:

  • confidentiality and intellectual property protection provisions;
  • employee nonsolicitation and no-hire provisions;
  • covenants not to solicit or transact business with customers, clients or vendors;
  • restrictions during the employment/contracting relationship;
  • sale-of-business noncompetition provisions where the restricted party is a “significant owner of, or member or partner in, the business entity” and will receive “significant consideration or benefit” from the transaction;
  • noncompetition provisions that are outside of an employment relationship, which seems to imply that partnership, limited liability company, stockholder and other similar agreements in which an individual is a partner, member or owner, rather than an employee, may be exempt from the new law under this exception (particularly where employees of one entity (e.g., a management company) are partners in, or members or owners of, a different entity (e.g., a limited partnership)); or
  • covenants negotiated and entered into at the time of a separation from service, so long as the person is expressly given seven business days to rescind acceptance.

Forfeiture-For-Competition Clauses Are Covered Noncompetition Agreements

The new law covers any “agreement that by its terms or through the manner in which it is enforced imposes adverse financial consequences on a former employee as a result of the termination of an employment relationship if the employee engages in competitive activities.”1

Limits on Noncompetition Period

Noncompetition Agreements may not exceed one year, unless the individual breached his or her fiduciary duty or unlawfully obtained or retained property belonging to the company, in which case the duration may not exceed two years.

Must Be Consideration

Noncompetition Agreements entered into at the inception of the relationship must be supported by garden leave (which is simply severance) or “other mutually-agreed upon consideration,” which is not defined (but initial employment may satisfy this requirement).

Noncompetition Agreements entered into during the relationship must be supported by “fair and reasonable consideration independent of continuation of employment,” which is also not defined.

Until there is further clarity regarding what satisfies the alternative consideration requirements under the new law, consideration other than a provision for the payment of garden leave during the restricted period runs some risk of being deemed to be insufficient.

Garden Leave

Under the new law, a “garden leave” clause is sufficient consideration so long as it requires a company to pay the individual during the restricted period at least 50% of the individual’s highest annualized base salary within the preceding two years.

If garden leave is provided as consideration, it should be paid for the length of the noncompetition period, up to one year.

Individuals Terminated  Without Cause or Laid Off and Nonexempt Employees Cannot Be Bound to Noncompetition Agreements

Any individual who is either (i) a nonexempt employee under the Fair Labor Standards Act or (ii) terminated “without cause” or “laid off” (with both terms being undefined in the law) cannot be subject to a Noncompetition Agreement. The new law is unclear regarding whether a company can still have noncompetition provisions with these individuals so long as the company is providing garden leave.

Alternatively, it may still be possible to secure noncompetition provisions from these employees either by structuring an employment agreement where an employee must give six months or a year of notice prior to terminating his or her employment or as negotiated at the end of the relationship, as both of these situations are not “Noncompetition Agreements” under the new law.

The Law Is Not Retroactive

The new law only applies to agreements entered into on or after October 1, 2018. However, the new law does not address whether amended agreements or evergreen renewals on or after October 1, 2018, trigger the law.

Very Technical Requirements Must Be Satisfied To Have A Valid Noncompetition Agreement

If entered into at the inception of the employment relationship, the employer must provide the candidate with the Noncompetition Agreement either at the time of a formal offer of employment or 10 business days prior to the commencement of employment, whichever is earlier.

If entered into during the employment relationship, the employee must have 10 business days to review the agreement before it becomes effective.

The Noncompetition Agreement must be in writing and signed by the employer and the individual.

The Noncompetition Agreement must explicitly state that the individual has the right to consult with counsel prior to signing.

The Law Covers Employees and Independent Contractors

The new law covers employees and independent contractors who are employed or engaged in Massachusetts — but does not explicitly cover partners, members or owners.

Choice-of-Law Clauses

The new law severely limits the parties’ ability to circumvent its application by choosing another state’s law to govern the agreement.2

*          *          *

Companies with employees in Massachusetts should review and update their form Noncompetition Agreements in light of the new law.  


1. In many states, such as New York, court will not scrutinize the reasonableness of a noncompetition provision so long as the only result of a breach is the loss of some benefit. Massachusetts appears to have foreclosed this legal construct by holding that such forfeiture clauses also need to conform to the parameters of the new law. 


2. All civil actions relating to Noncompetition Agreements must be brought in the Massachusetts county where the individual resides (the new law does not specify that this must be in state court) or, if mutually agreed upon, in Suffolk County in Massachusetts (in the superior court or the business litigation session of the superior court).


Richard William Kidd, Partner, New York

Richard Kidd primarily practices transactional labor and employment law by assisting clients on national and international corporate transactions, negotiating and drafting complex employment-related agreements, onboarding executives, conducting reductions-in-force, and managing executive separations. Read More…

Edward Holzwanger, Partner, Washington, D.C.

Edward Holzwanger concentrates his practice in the areas of employment and labor counseling and transactional due diligence. Read More…

Matthew D. Keiser, Partner, Washington, D.C.

Matthew Keiser is a partner in Kirkland’s Washington, D.C. office. He concentrates his practice in employment law counseling and compliance training, investigations, employment litigation, and employment law aspects of corporate transactions and private equity. Read More…

Kirkland & Ellis LLC

We are a law firm that serves a broad range of clients around the world in private equity, M&A and other corporate transactions, litigation, white collar and government disputes, restructurings and intellectual property matters. We offer the highest quality legal advice coupled with extraordinary, tailored service to deliver exceptional results to our clients and help their businesses succeed. Read More…

OCIE 2019 Examination Priorities

Guest post by Pillsbury’s Investment Fund Law Team

In a press release issued by the Securities and Exchange Commission on December 20, 2018, the SEC’s Office of Compliance Inspections and Examinations (OCIE) announced its 2019 Examination Priorities.

This year’s examination priorities, although not exhaustive, are divided into 6 categories:

  1. Compliance and risk at registrants responsible for critical market infrastructure;
  2. Matters of importance to retail investors, including seniors and those saving for retirement;
  3. FINRA and MSRB;
  4. Digital assets;
  5. Cybersecurity; and
  6. Anti-money laundering programs.

Read the OCIE 2019 Examination Priorities in full HERE.


Pillsbury Winthrop Shaw Pittman LLP

Pillsbury is an international law firm with a particular focus on the technology & media, energy, financial services, real estate & construction, and travel & hospitality sectors. Recognized by legal research firm BTI Consulting as one of the top 20 firms for client service, Pillsbury and its lawyers are highly regarded for their forward-thinking approach, their enthusiasm for collaborating across disciplines and their unsurpassed commercial awareness. That’s how we have achieved the 12th-highest percentage of Chambers-ranked lawyers among all AmLaw 100 firms.

Litigating Blockchain: Not So Simple

Guest post by Derek Borchardt & Alejandro H. Cruz of Patterson Belknap Webb & Tyler LLP

Many believe that blockchain technology will revolutionize the way humans interact, in business and beyond. Though cryptocurrency is the topic du jour, blockchains can do much more than just enable digital currencies: they can be used to transform the way we store and manage many kinds of data, from real property and voting records to intellectual property licenses and medical information, and more. If blockchain is mainstreamed, courts will inevitably be faced with disputes arising out of the differences between blockchain and current methods of managing transactional data.

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CFIUS Reform: How Private Equity Funds Are Affected

Guest post by Rod Hunter, Sylwia A. Lis, and Karl Paulson Egbert, Partners at Baker McKenzie LLP

With the signature of President Trump on August 13, 2018, the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) became law. FIRRMA represents the most significant changes to the law governing the Committee on Foreign Investment in the United States (CFIUS or Committee) since the creation of the U.S. foreign investment regime in 1988. Although prompted primarily by national security concerns with Chinese investments, the legislation will affect investments by all non-U.S. investors, including investors in private equity and other funds. The changes reflect a trend across advanced markets for greater scrutiny of investments made via fund vehicles.

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SEC Divisions’ Issue Public Statement on Digital Assets and ICOs, Echoing Recent Enforcement Actions

Guest post by  – Cleary Gottlieb Steen & Hamilton LLP

On November 16, 2018, the U.S. Securities and Exchange Commission (“SEC”) Division of Corporation Finance (“Corp. Fin.”), Division of Investment Management, and Division of Trading and Markets issued a joint public statement on “Digital Asset Securities Issuance and Trading.”  The public statement is the latest in the Divisions’—and the Commission’s—steady efforts to publicly outline and develop its analysis on the application of the federal securities laws to initial coin offerings (“ICOs”) and certain digital tokens.  These efforts have combined a series of enforcement proceedings with public statements by Chairman Jay Clayton and staff, including a more detailed statement of the SEC’s analytical approach in Corp. Fin. Director William Hinman’s speech on digital assets in June 2018.

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Materiality and Efforts Qualifiers – Some Distinctions, Some Without Differences

Guest post by Daniel E. Wolf and Eric L. Schiele, Kirkland & Ellis LLP

Much deserved attention has been paid to the first finding of a “material adverse change” (MAC) by a Delaware court in the recent Akorn decision. Of perhaps equal practical importance to dealmakers is the court’s guidance on a question that has long occupied draftspersons — whether or not there is, and the extent of, any legal difference between the many shades of qualifiers used in deal agreements on two key terms: materiality modifiers and efforts covenants. Building on earlier Delaware decisions, the court reached a clear split decision on this question.

In the case of efforts covenants, the court noted that qualifiers like “best efforts”, “reasonable best efforts”, “commercially reasonable efforts” and shades in between are used to define “how hard the parties have to try” to satisfy a commitment in the agreement such as obtaining regulatory approvals. VC Laster cited an ABA publication that purports to set a hierarchy among these clauses, with each prescribing a slightly different level of required efforts. However, he pointed to a string of recent cases, including the decision in Williams v. ETE, which view these standards — even when they appear in the same agreement — as largely interchangeable despite clearly seeming to suggest the parties intended a difference. In the Williams case, the court found that the “commercially reason- able efforts” and “reasonable best efforts” standards both “impose[d] obligations to take all reasonable steps to solve problems and consummate the transaction”. In another case (Alliance Data), the Delaware court said that even a flat “best efforts”, typically considered the most demanding standard, “is implicitly qualified by a reasonableness test”. A recent New York decision (Holland Loader) suggests that New York law will similarly imply a reasonableness standard regardless of which modifier is used.

By contrast, the Akorn decision confirms a sharp, and perhaps larger than expected, distinction between the two most common materiality qualifiers used to modify representations, covenants and closing conditions — “material adverse change/effect” and “in all material respects”. In the case of a MAC, VC Laster closely followed Delaware precedent (including Hexion and IBP) in holding that a buyer asserting a MAC “faces a heavy burden” and the relevant effect must “substantially threaten the overall earnings potential of the target in a durationally significant manner”. But in interpreting the similar-sounding “in all material respects” standard, the court articulated a much lower burden, stating that this qualifier merely “seeks to exclude small, de minimis, and nitpicky issues” and to limit the operation of the representation, covenant or condition to “issues that are significant in the context of the parties’ contract”.

The Akorn decision is a useful reminder that there sometimes is a gap between practitioners’ expectations about theoretical formulations and real-world outcomes when those expectations are judicially tested. While we do not necessarily expect the deal community suddenly to abandon negotiations around efforts formulations or to depart significantly from market practice for materiality qualifiers, parties can use an informed understanding of the case law to more effectively deploy negotiating leverage and goodwill where it matters most.


Daniel E. Wolf, Partner

www.kirkland.com/dwolf

Daniel Wolf’s practice focuses on mergers and acquisitions where he represents public and private companies, as well as private equity firms, in a variety of domestic and international transactions. His transactional experience spans the range of M&A activity including many significant cross-border and contested transactions. He also counsels public company clients on governance, finance, securities and other general corporate matters.

Eric L. Schiele, Partner

www.kirkland.com/eschiele

Eric Schiele is a corporate partner in the New York office of Kirkland & Ellis LLP. His practice primarily encompasses public and private mergers and acquisitions and board advisory work, including hedge fund activism defense.

Kirkland & Ellis LLP

www.kirkland.com

For more than 100 years, Kirkland has provided exceptional service to clients around the world in complex litigation, corporate and tax, intellectual property, restructuring and counseling matters. The groundwork has been established for another century of superior legal work and client service.

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