Partnership buyouts often involve a tense negotiation process. The partner hoping to acquire sole ownership of the company must negotiate a reasonable arrangement with the partner exiting the organization.
They also need to take steps to protect themselves and the company from future competition. A business partner leaving the organization might duplicate the same products or services. They might try to hire the organization’s workers for a new company they start or may try to solicit the company’s clients.
If partners include restrictive covenants in their buyout paperwork, can the partner retaining the business enforce that contract?
Partnership contracts differ from employment contracts
The New York civil courts have become much more skeptical when hearing lawsuits seeking to enforce employment-related restrictive covenants. Companies need to show that restrictive covenants are actually necessary to protect the organization and that they do not create any undue hardship for the workers.
The situation is different when a noncompete, nondisclosure or nonsolicitation agreement is part of a buyout agreement rather than an employment contract. There is an assumption that the partners negotiated the terms on equal footing instead of an employee making concessions to an organization that holds most of the power.
The exiting partner likely received adequate compensation as part of the buyout. Additionally, a partner has access to more information about company operations and more business relationships that could harm the organization they previously formed and operated.
When a partnership dispute results in a buyout scenario, the terms of the agreement between partners can have a profound impact on both the organization and the partner leaving the company. Reviewing the proposed terms of a buyout with a skilled legal team before signing or signs of restrictive covenant violations after a buyout can help people navigate partnership disputes effectively and fairly.