“M&A in family-owned companies. Non-compete provisions”

The importance of establishing clear non-compete provisions in the transaction agreement was mentioned before in the last article “M&A in family-owned companies: from owners to employees”. These are of great relevance for the buyer since the business could be in risk of detracting its value in case that the previous owner started a new business shortly after the transaction was closed. This is a very realistic concern if we also take into account the deep knowledge and experience, as well as the network the family members have.

On the other side, the family members may feel uncomfortable with the non-compete provisions, since they have probably dedicated most of their lives to the business and they may not feel ready to leave it. There may even be family members who could be particularly affected by these kinds of provisions since some of them may have a long professional career focused specifically on the business.

This is how tension levels rise in the negotiations for the drafting of the company’s transaction agreement. However, the lawyer specialized in mergers and acquisitions will be there to alleviate those tensions. This specialist will be in charge of achieving the perfect balance. How? By making sure that the buyer can take benefit from a certain reasonable period of time without interference to its business while the family has the possibility to continue to participate in certain activities that do not affect the buyer.

This takes us to the next point: what does the non-compete provision may include? Herein listed below are the main points that are highly recommended to be included.

  • • The people involved. Does it include all of the family members? Does it apply to wives?…
  • Does it apply to wives? There may be defined specific exceptions and exclusions in order to, as it was mentioned before, find the necessary margin to avoid affecting the activities of the family members without hurting the business
  • The duration. This point will also dependable on each country’s legislation, however, most Latin American countries allow a duration of between 3 to 5 years.
  • The territory within which the sellers cannot compete. Normally this should match the territorial scope of the business.

Finally, it is worth mentioning the great responsibility that the legal advisor specialized in M&A will have to assure that the provision is enforceable in the jurisdiction under which the agreement will be submitted in case of any dispute. This is because there are countries where these provisions are not even allowed, as was the case in Colombia until 2010, or where these provisions are subject to specific conditions.

Likewise, the M&A specialist will have to be careful with the way the provision in question is built, because if it is not done correctly, there is a possibility that an individual may successfully oppose the clause based on constitutional laws that protect his/her right to freely decide his/her occupation, just to mention an example.


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