A company’s customer lists, price lists, marketing strategies, and other trade secrets are vital to its success. A smart business owner will ensure that key employees sign non-disclosure and non-compete agreements to protect the business if the employee leaves and takes a job with a competitor. But what if the company is sold? Does the buyer enjoy the benefits of the restrictive covenants contained in the selling company’s employment agreements? The answer is “it depends.” In Pennsylvania, if the purchase is structured as an asset purchase transaction, the buyer does not receive the benefit of the restrictive covenants contained in the seller’s agreements with its employees unless those agreements specifically state that the covenants are assignable. This is because these covenants are viewed as trade restraints that impair a former employee’s ability to earn a living and therefore are interpreted as narrowly as possible to protect the employer’s legitimate business interest.
On the other hand, if the a Pennsylvania transaction is structured as a stock sale, rather than an asset sale, the buyer would receive the benefits of the restrictive covenants contained in the company’s agreements with its employees even if the employment contract is silent as to assignability. The reason for this is that employer remains the same before and after the transaction even if there has been a change in management. Therefore there is no assignment of the contract and no need to include a consent to assignment in the employment agreement.
The moral of the story is to include clear language in all employment contracts that permits assignment to a third party buyer without the employee’s consent. That way, buyer and seller are protected regardless of how the sale is structured.