We regularly field questions from companies in the process of an asset purchase, asking whether they can obtain an assignment of the seller’s non-competition agreements with its employees. While this question has never been conclusively determined in North Carolina, state courts have indicated that the asset purchaser will need to obtain new agreements with the seller’s employees in order to have enforceable non-compete restrictions.
Unlike a stock purchase, when a company buys assets, it generally uses a new legal entity to conduct business going forward. The asset seller’s employees are typically terminated by the seller and immediately hired by the new entity upon closing. While many of the selling business’ contracts are assignable to the purchaser, a 2007 decision from the North Carolina business court (a division of the Superior Court level) casts doubt on the assignability of employment agreements in this context.
In Better Business Forms and Products, Inc. v. Craver, the business court concluded that the assignment of the sellers’ employee non-compete agreements was unenforceable because their application to the purchaser’s new business could have resulted in a significant expansion of their terms. Therefore upon closing, the non-competes began running, but only to the benefit of the selling company. The purchaser needed to obtain new employment agreements with the seller’s employees to obtain enforceable non-competes.
This case did not address a factual situation where the purchaser simply continues the seller’s business in a manner that would not result in expansion of the scope of the non-competes. This decision also is not precedential in North Carolina, meaning it does not bind other courts considering similar legal questions. No appellate court in the state has considered this question since the Craver decision. However, the business court’s opinions are often respected by other North Carolina judges, and the court’s reasoning could be accepted in future disputes. Based on this degree of uncertainty, companies contemplating asset transactions in North Carolina should plan on executing new employment agreements with the seller’s employees if they want to preserve non-competes and similar post-employment restrictive covenants.