What Private Equity Sponsors Need to Know about an Implied Permanent Nonsolicitation Covenant under the New York Law
Noncompetition and nonsolicitation restrictive covenants are familiar tools often used in mergers and acquisitions to encourage retention of key employees of a sold business and to discourage the seller or key employees from poaching important customers or suppliers post-sale.
Private equity sponsors sometimes resist such restrictive covenants when selling a portfolio company to avoid limiting future investment opportunities.
When a sale agreement is governed by New York law, it might come as a surprise to a private equity seller to learn of an important common law restriction on customer solicitation known as the Mohawk doctrine.
Named after the New York Court of Appeals’ decision in Mohawk Maintenance Co. v. Kessler, the Mohawk doctrine imposes a permanent covenant on the seller of a business not to solicit the seller’s former customers when the sale of the business includes its “good will.”
Because many private equity sponsors buy and sell portfolio companies within the same industry or sector, this doctrine may have significant implications for sponsors.