Negotiating your non-compete agreement, part III or III.(Mergers, IPOs, and Venture Finance: Equities)(Professional standards)

(We complete our three-part article on negotiating a non-compete agreement as part of an M&A process.)

Dispute Resolution and Enforcement. Disputes can be resolved in courts or through arbitration, and you may be better served by the courts. A buyer may include language whereby disputes will be resolved through mandatory binding arbitration, which generally can be enforced. Buyers will often use this as a tactic to avoid courts in states such as California which do not favor strict enforcement of non-competition agreements.

Some buyers may seek to include language to calculate the amount of damages ahead of time as a way to simplify enforcement in case of a breach. For example, the buyer may want a liquidated damages provision that stipulates a large, fixed amount. However, it will likely be to the seller's advantage to go through a process in which the amount of damage is assessed and a settlement reached.

Multiple Shareholders. When multiple shareholders sign non-compete agreements, make sure you are liable only for your own breach, not for breaches by your fellow shareholders. The Buyer may attempt to include language under which it can sue all shareholders for breach by one shareholder and, if it receives a judgment, collect the entire amount from all shareholders or from any single shareholder, as it chooses. The buyer can accomplish this through covenants not to compete coupled with joint and several indemnification in the purchase agreement or through cross-default language in separate non-compete agreements. As a seller you should qualify the indemnification language or make it "several and not joint", and eliminate cross-default language.

Attorney Fees. Consider including a prevailing party attorney fee provision. This requires the losing party to pay the winner's attorney fees if either party sues for breach of the agreement. This may cause the buyer to be more cautious before pursuing a weak lawsuit and it may permit you to more aggressively defend your case since you would be able to recover costs upon a favorable outcome. The downside is that if you lose, you'll have to pay the buyer's attorney fees as well.

By Mark Reed, Corum Group

Mark Reed, executive vice president, Corum Group, 10500 NE Eighth St., Bellevue, Wash. 98004; 425/455-8281. E-mail: mreed@corumgroup.com.

 Company/Description         Acquired by                    Price/Terms  CorVu (CRVU.OB)             Rocket Software                $19,800,000   * Business                                               Terms: Cash     intelligence     software  Compel Group                2e2 Group                      $97,300,000   * IT services                                            Terms: Cash  RelQ Software               Electronic Data                $40,000,000   * Software testing        Systems (EDS)                  Terms: Cash  WebEx (WEBX)                Cisco (CSCO)                $3,200,000,000   * Online conferencing/                                   Terms: Cash     instant messaging  Company/Description                    Revenues               Multiple  CorVu (CRVU.OB)                     $14,400,000                   1.38   * Business     intelligence     software  Compel Group                        $86,900,000                   1.12   * IT services  RelQ Software                       $22,000,000                   1.82   * Software testing  WebEx (WEBX)                       $380,000,000                   8.42   * Online conferencing/     instant messaging